Friday, November 09, 2007

More Legal News: Caremark v WAG

One of the friendly tipsters who read Drug Channels pointed me to a just-filed lawsuit between Caremark (CVS) and Walgreens (WAG). (Read the legal complaint.)

This case highlights the power of competition in the marketplace and provides an intriguing counterpoint to H.R. 971: The Community Pharmacy Fairness Act of 2007.

Today's Legal News

Caremark claims that Walgreens prematurely cancelled its Provider Agreement to fill prescriptions for four health benefit plans. Walgreens fills prescriptions for 70,000 of the 380,000 participants in these plans. A Walgreen spokesman said that CVS Caremark had unilaterally reduced the amount of payments to Walgreen "to a level that impacts our ability to provide a high level of pharmacy service to those plan members." (Source: CVS sues rival over pharmacy pact.)

While I have no opinion on the factual or contract matters in this complaint, this dispute looks like more fallout from the CVS-Caremark merger. The complaint focuses on 2007 amendments to Walgreens’ Provider Agreement following the merger of Caremark Rx CVS Corporation.

The Power of Competition

This dispute also reminded me of my ninth post to Drug Channels in June 2006. (You are now reading post #156.)

Back in a June 2006 post, I presciently speculated on the likelihood of a merger between a large pharmacy chain and a PBM. At the time, I was motivated by Walgreens' decision not to fill prescriptions for Midwest Health Plan, a small HMO based in Michigan. I noted:

“Walgreens continues to signal a willingness to rumble. GM and Walgreens parted ways last year when GM removed Walgreens from the pharmacy network for its 1 million employees and retirees. Recall that the UAW and GM moved its members into mandatory mail order for chronic meds in 2004. Walgreens also won't fill prescriptions for state employees in Ohio.”

Walgreens has rejected the terms of a PBM contract before. And in our competitive healthcare system, any pharmacy can make a business decision to reject the terms of any contract. Disputes between PBMs and pharmacies reflect the ongoing workings of competitive markets.

Yes, big chains are much larger than an independent pharmacy, but that merely reflects the need for scale and countervailing power to compete. The economic reality of differences in bargaining power do not justify throwing out U.S. antitrust laws.

Thus, this case also highlights the controversy around H.R. 971: The Community Pharmacy Fairness Act of 2007. The House Judiciary Committee just approved this bill, which exempts independent pharmacists from antitrust laws so they can "collaborate in contract negotiations" with health insurers and pharmacy benefit managers.

The FTC testified in opposition to the bill (in this FTC Statement), arguing:

  • “At the end of the day, unless a health plan can assemble a network of pharmacies willing to contract with the plan, and attractive to consumers and employers, the plan will have nothing to sell in the marketplace.”
  • “Excessive buying power, known as ‘monopsony,’ enables buyers to depress prices below competitive levels. In response, sellers may reduce sales or stop selling altogether, ultimately leading to higher consumer prices, lower quality, or substitution of less efficient alternative products. It is important, however, to distinguish between this type of buyer power, which can harm competition and consumers, and disparities in bargaining power, which are common throughout the economy and can result in lower input costs and lower prices for consumers.”
Walgreens appears to be showing us how today's market works. Perhaps only economists like me appreciate this example. But as disputes between retail pharmacies and PBM become more common, we’ll see the market working its sometimes painful magic on behalf of our health care system. And like all things in our capitalist economy, your mileage will vary.


Alas, legal training now seems crucial for following the retail pharmacy industry. Perhaps I should have paid more attention to L.A. Law in the 1980s, when Corbin Bernsen and I both had hair!

(Updated on 11/9/07 at 2:00 PM with quote from Boston Globe article.)


  1. Wow, the self proclaimed free market guy is now advocating government antitrust laws? H.R. 971 states that independents could not have more than 25% of the bargaining power in a region so don't argue monopoly theory. The last I looked Walgreens is not a independent pharmacy, the case actually supports the passage of H.R. 971 so independents can enter the marketplace like a Walgreens and by your own admission bring competition to the market. How much bargaining power does one independent pharmacy have with a PBM or Health Plan today? The answer is none.

  2. The irony of this complaint is that PBMs have frequently required independent pharmacies to sign take-it or leave-it contract addendums within days of receiving notice. I am not debating the merits of this case, but find it interesting that a long standing coercive tactic relied on by PBMs is now being argued as unfair.

  3. Mark - I think you misread me. I am suggesting that we do *not* need HR971. I am agreeing with the FTC that the competitive market, which currently favors larger chains with bargaining power, is better for consumers than allowing collusive behavior by independent pharmacies. Reread the second FTC quote. Adam

  4. Check out this quote from the Boston Globe:

    Walgreen spokesman Michael Polzin said yesterday that CVS Caremark had unilaterally reduced the amount of payments it made to Walgreen for drugs covered by certain employer-sponsored plans "to a level that impacts our ability to provide a high level of pharmacy service to those plan members."

    Source: CVS sues rival over pharmacy pact