Thursday, May 14, 2009

Debate Over CVS Caremark’s Tactics Heats Up

The pharmacy lobby scored a major PR victory with a high-profile story in yesterday's Wall Street Journal that will surely attract the attention of legislators and the public. But I think that the article is not balanced because it ignores the economic and competitive realities of today's pharmacy industry.

CVS Appears to Steer Plan Patients to Its Stores states:

CVS Caremark Corp. is apparently steering its pharmacy-benefits patients to its own drugstores by raising co-payments for some who fill their prescriptions at other pharmacies – and competitors are crying foul.

While preferred networks are a certainly a competitive challenge for an independent pharmacy, it's not clear that CVS Caremark's actions are anti-competitive in the sense of raising costs for consumers or payers – the customers of a Pharmacy Benefit Manager (PBM). The criticism seems to be more about profit levels at independent pharmacies.

Nevertheless, I'll be watching closely to see if the Federal Trade Commission (FTC) decides to make an example of CVS Caremark as part of a more activist antitrust strategy.

Other People's Money

You may not like the logic of preferred networks, but it's the reality of most American health care – and now it's coming to pharmacy.

If you pay cash for your prescriptions, then feel free to shop anywhere. You'll probably look for the best deal, which may not be the same as the lowest price.

But once you ask someone else to pay, then why is it controversial for the payer to influence your decision? There are no financial incentives for consumers to choose one store-based pharmacy over another when co-pays are equal. A consumer with third-party coverage via a PBM has no incentive to shop at the pharmacy with the lowest cost per prescription for the organization that's actually paying.

So why aren't pharmacies targeting Wal-Mart? Their deal with Caterpillar is not economically different. (See New Details on WMT-CAT Pharmacy Deal.) Caterpillar beneficiaries have no co-pay at Wal-Mart for generic drugs, but can choose to fill their prescriptions at other retail pharmacies for a $5 generic co-pay.

Maintenance Choice has admittedly gone one step further by limiting the consumer's ability to go outside the network – a "restricted network." But I see it as just one more point along the continuum:

  • Go anywhere – You can choose any pharmacy. (Example: cash pay customers)

  • Go almost anywhere – You can choose any pharmacy that participates in your plan's network. (Example: Many third-party plans.)

  • Preferred network – You have a financial incentive to choose the option that reduces the payer's costs. (Example: the WMT-CAT direct-to-payer deal)

  • Restricted network – You must use only pharmacies in the network. (Example: some Maintenance Choice arrangements)

Yes, we all like choice, but I don't understand why we expect to be free to choose if someone else is footing the bill. (Oddly, this argument does not get much traction when it comes to my daughter's choice of clothing, but that's a whole different blog!)

Three final questions to ponder:

Why do we like stores more than mail? The WSJ article did not comment on the general strategy of creating a channel-neutral option (mail vs. store) for consumers. If a Caremark client chooses to offer Maintenance Choice, then there is no out-of-pocket cost difference for the consumer between mail and retail for certain 90-day prescription. In my opinion, this offer becomes most feasible when there is common ownership of the store-based retailer and the PBM.

Apparently, consumers want to get maintenance scripts filled in a store rather than mail when given a choice between those two options – judging by the following chart from CVS Caremark's 2009 TrendRx report (page 12):

Are payers foolish? The final anecdote in the article highlights the case of a Medicare patient in which it appears that both the consumer and the payer got stuck with higher costs. I know that many Drug Channels readers are skeptical about PBM motives, but I'm skeptical that this situation is occurring on a widespread basis. Ask yourself: Are payers so foolish that 200 of them would sign up for Maintenance Choice if it would make them pay more for drugs? Really?

Will the FTC act? As I point out in Could the FTC undo CVS Caremark?, the National Community Pharmacist's Association (NCPA) is trying to get the Federal Trade Commission (FTC) to retroactively challenge the 2007 merger that formed CVS Caremark. The spokespeople for the National Community Pharmacists Association (NCPA) were "cautiously optimistic" after a meeting with FTC Chairman Jon Leibowitz yesterday. (See Group Targeting CVS Caremark 'Hopeful' After FTC Meeting). Hmmmmm.


So far, the pharmacy lobby is shaping the public debate much more effectively than CVS Caremark. I'm now extra-curious to see what CVS Caremark has to say about Maintenance Choice at its 2009 Annual Analyst/Investor Meeting.


  1. AnonymousMay 14, 2009

    It is not really right to characterize Maintenance Choice as a limited network feature. Rather, its an alternative to mandatory mail. CVS Caremark has said that the plans which first had an interest in Maintenance Choice were those that were considering mandatory mail as a way to save money. CVS Caremark has also not said whether it will allow other pharmacies in its network to participate in Maintenance Choice at some future date. Whether the economics would be attractive given its mail order pricing is a question each pharmacy would have to decide for itself.

  2. Payers have been paying more for mail-service prescriptions for a long-time. When you factor in lower patient pay and higher waste the payer nearly always pays a higher price than at retail. Mail-service also rarely uses maximum allowable cost (MAC) pricing which allows them to charge significantly more than retail pharmacies for generics. (Personal example: a $19 generic at retail was over $200 at mail for the same quantity). Retail maintenance programs can suffer the same problems.

  3. Good post. I obviously agree as pointed on on my blog at

    The other thing your post made me think about is Walgreens recent addition of Walgreens90 (which is just for their stores) versus Advantage90 (a broader 90-day network). This is all a logical progression of solutions to save money.

    Isn't it better to have a benefit but be limited in choice than lose your benefits all together.

  4. scripkillaMay 14, 2009

    Great post Adam. I think the mail order utilization vs. retail issue is straight forward. People still don't trust the mail system. It has not been perfected enough to gain mass appeal. I think it is a pretty good model, but because years ago you heard about "the little old lady who didn't get her BP pills for 3 weeks" its now their biggest barrier to further penetration. Similar to how physicians are slow to adopt e-prescribing vs. paper, people can't get over the physical/tangible aspect of a brick-n-mortar pharmacy. Perhaps this will change as generation X gets into their 40s-50s. Point two is regarding the FTC anti-trust stuff. I don't take issue with the things happening, so much as where it's going to take pharmacy in the future. My vision is Wal-mart/CAT now Walgreens/? then CVS-Caremark/? and at the end of the day most large employers are going to move to this arrangement. If they are wanting to keep their costs low (an Obama initiative) then why would they say no to lower drug costs? With the 'BIG 3' chains, there is little debate for pharmacy access...they have one on virtually every corner. If they don't have one near an employer they are targeting, they'll built it and have it running before the ink gets dry! Where will the independent fit into this? There's good reason to be scared. Don't think for a second this isn't a MAJOR priority at Walgreens and CVS. This is muddy waters, so they are tiptoing into it, which is why it's not happening a lot yet. Once the FTC gives a clear advisory, look out.

  5. AnonymousMay 14, 2009

    You have missed the point. Imagine if Wal-Mart could set the price Target sells its products/services for in the marketplace. Even more egregious, what if through audits Walmart could then data mine consumer information and finanacial trends? That is the CVS/Caremark problem. On a separate note, Alan, would that be the wise payers such as AIG and Bear Stearns?

  6. AnonymousMay 14, 2009

    I couldn't disagree more with the characterization that Maintenance Choice does not limit Patient choice. Because of the enormous market strength of Caremark and the market penetration of CVS, such self-referral activity flies in the face of the FTC's rules for other medical providers, and its “less than 10% market penetration” test to disallow such behavior for other contracting for service collaboration by separate providers. Price is not the only determinant in advantaging the patient or the payer. Proactive clinical pharmacy practice has been proven over and over to save multiples of the drug spend.
    As to whether this is a strategy to save the payer/patient money or to maximize profit for the contracting entity, I am astounded that you can't see how any competitor-offered contract to other members of the same supply channel would not tend to encourage terms that would disadvantage those contracted; nor can I fathom how you've missed how non-transparency in some PBM models has hidden the AWP minus contracting with payers vs. the MAC compensation of pharmacies which enriches the PBM while leaving an opening for a PBM to portray to the payer that traditional fulfillment through brick and mortar pharmacies (except of course their own) is more expensive.

  7. AnonymousMay 14, 2009

    When a company is publicly traded, it's number one goal is for profit. Shareholders are number one. I have no problem with that in a free market, Healthcare is not a free market.

    I've posted many of the questionable practices of the PBM's here before and you never respond to them. If we made the pharmaceutical delivery system transparent it would fix/save many problems/costs. Pbm's can claim "propriety information" to hide their practices, but if Pharmacies talk to each other about contracts its collusion.

    There needs to be checks and balances. PBM's for the most part are unregulated. They take advantage of complicated drug pricing to pull large profits.

    As for mail order:
    1) Most patients are not disciplined enough to utilize it. (They won't call in weeks before they run out)

    2)Delivery can be a large problem with weather/disasters etc.

    Closed networks:
    1)How much of America is rural?

    PBM's are adding to the cost of American's medications. They take advantage of payers and at times flat out rip them off. [I'm covered under my wife's Self-insured Goverment plan, the PBM charges the plan 5 (yes FIVE) times the amount the pharmacy is reimbursed on many generics] Stupid payers? I showed this to the goverment over a year ago and nothing has been we are millions of dollars later.

    It is time for the truth!

  8. WOW! Talk about a hot topic! I'm no expert but help me understand how this action by CVS is different than my choice if medical doctors in/out of network? Specialists, too. I do agree that if the cost is more something needs to be done but isn't that up to the payer? Isn't it their choice to pay more? Who can blame CVS for this? Why do we think they bought Caremark to begin with?

    What I find interesting is how this topic STILL pulls Wal-Mart into the discussion.

  9. AnonymousMay 15, 2009

    You guys are morons. I am a pharmacy owner and know the truth behind all their practices.
    first read this article

    what is going on and how cvs is saving the customer more money is by paying themselves more for the same product. they are repacking the same drugs and assigning higher prices to the repackaged drug and then giving it to the cvs stores to bill caremark so they can legally pay themselves more. its is a way for them to legally scam the system without the consumer knowing and no charging them. Whys is CVS not considered retail? I called them and ask them that question.

  10. AnonymousMay 15, 2009

    Good link,
    How is it possible the PBM's continue to get away with this?

  11. AnonymousMay 16, 2009

    Adam, as an independent pharmacy owner, I would like to hear what you have to say about the article my colleage posted from the Charlotte Observer. Though I am a big fan of your blog, I seem to notice a bias towards Big Box Pharmacies and PBMs/Mail Order.
    Is this story (which, believe me, is not a fluke or a one in a million type of scenario) going to finally change your mind that Bigger is NOT always better?? That big companies will always use their size to muscle their way around and demand the contracts that make them more money.. even when it's tax payers like you and me and all your other readers are footing the bill.. are we forgetting that Medicare is funded by tax dollars??
    When will people wake up and realize that the old proverb is true.. that "Money is the root of all evil". That no one company should be allowed to attain a size that generates more money than SEVERAL small countries put together!!
    I tried to warn fellow independent pharmacy owners BEFORE this merger even happened that this is what CVS would do, and unfortunately I was right and now we're faced with the huge task of trying to reverse it all!!

  12. AnonymousMay 16, 2009

    Mail order is a PITA, especially if 1) you're stuck w/Healthcare Service Corp's captive PBM, Prime, and 2) you are not a Texan. Texas has some odd pharmacy rules. The only way to get mail Rx from Prime in time is to order online as early as your plan allows and pay the extra cost for second day air. My current PBM is WHI, which has 2 major benefits - 90 day fills at retail for about the same price as mail, and the pharmacy network is not limited to Walgreens alone.

  13. Walmart's plan is different from CVS's becuase it lowers the copay at one store -- which is pro-consumer/pro-patient -- rather than RAISING the copay at a competitor's store. The latter is bad for everyone except CVS Caremark, and ONLY CVS has the power to do this -- that's what happens when you have an integrated PBM/retail outlet that controls the prices people pay at its rival locations.

  14. One comment and one question.

    I don't agree with the comment that the PBM is the payer of the drug cost. The patient pays a monthly premium and then at the time of accessing the benefit then pays a copay. Like all insurance, the risk is shared by all.

    The real question is do you see more closed PBM/payer networks in th efuture? I really appreciate everyone's insight on this question.

  15. AnonymousJune 07, 2010

    Looks as if it will get a little hotter after today. Adam I am looking forward to a blog on today's announcement from Walgreens