Tuesday, June 08, 2010

The WAG-CVS Brouhaha: What's Really Going On

Big news yesterday as Walgreen (NYSE:WAG) announced a very public spat with CVS Caremark (NYSE:CVS). See from Walgreen Cuts Ties With CVS Caremark Plans from today’s Wall Street Journal.

Below, I provide a road map to the key issues in this dispute. Although it’s really just about money, there are a lot of moving parts and many players here.

Regardless of the resolution, a Caremark spin-off is now even more likely per my prediction in When will CVS and Caremark split up?.

Rather than just reading what other people said about this news, I strongly encourage you to read the original statements:

Maintenance Choice works…for CVS. Maintenance Choice is having a competitive effect, and Walgreens is drawing a line in the sand to challenge this program. Maintenance Choice pushed CVS’ same-store pharmacy sales growth above Walgreen’s growth starting in early 2008. See the chart in CVS Grows While Legal Storm Clouds Gather. This above-market growth came from a mix of cannibalizing its own mail-order pharmacy and share gains from competing pharmacies. Note that Walgreen is not walking away from current Caremark business, only “new and renewed plans.” Translation: They want CVS Caremark to stop selling Maintenance Choice. Alternatively, they would love a chance to play in the network a la Walgreen's own Advantage90 program.

Walgreen likes to play hardball. CVS stated that “Walgreens has tried this approach several times in the past, targeting employers, health insurers and government entities.” This is actually true. Walgreen has a long history of pushing back against payers when it feels undercompensated. Examples include Washington’s Medicaid program and Michigan HMO Midwest Health Plan.

These titans have clashed before. This isn’t even the first battle between Walgreen and Caremark. Check out More Legal News: Caremark v WAG from the Drug Channels archives. In 2007, Walgreens prematurely cancelled its Provider Agreement to fill prescriptions for four health benefit plans managed by Caremark, claiming that CVS Caremark had unilaterally reduced payments. CVS subsequently sued Walgreen. Everyone eventually made up.

But still, WTF? I’m puzzled as to why Walgreen picked this fight in such a public way. They would ultimately be the loser if they really walked away from new Caremark business. Walgreens mentioned that about 12% of its retail prescription revenue (about 7% of its total revenue) came from claims processed by Caremark’s PBM business, which is surprisingly low. For comparison, about 22% of prescription revenue at CVS pharmacies came from Caremark. (See Maintenance Choice Update: CVS Gain, Caremark Same.)

Walgreen hit ‘em when it hurts. Walgreen timed their maneuver to inflict maximum pain. It’s no coincidence that the announcement hit shortly after happy talk from Caremark about the 2011 Pharmacy Benefit Manager (PBM) selling season. Last week, Tom Ryan said: “We're in a really good position around our business, one for retaining clients, but two, also for new clients on a go-forward basis.” (source) This week, things don't look so rosy.

Surprise! The NCPA is gloating. The National Community Pharmacists Association (NCPA), which lobbies on behalf of independent pharmacies, could barely contain their glee at the news. In typically over-the-top fashion, they said: “Walgreens' momentous decision is an indictment of all that has gone wrong for patients and the practice of pharmacy since the CVS Caremark merger in 2007.” (source) It reminds me of a line from a Neko Case song: “The night I fell into the lion's jaws; To my regret and your delight.”

Pure play PBMs are the real winners. While neither Express Scripts (NASDAQ:ESRX) nor Medco Health Solutions (NYSE:MHS) have weighed in publicly, this news will be positive for the pure-play PBMs in the current selling season. A protracted dispute will create even more momentum for the pure-play PBMs.

Walgreen is being a bit hypocritical. F. Scott Fitzgerald famously said that “the true test of a first-rate mind is the ability to hold two contradictory ideas at the same time.” By this standard, the folks at Walgreen must be geniuses. Walgreen complains that MC “limits patient choice.” Hmmm, doesn’t Walgreen’s arrangement with Caterpillar also use a preferred pharmacy network model? What about the rumored direct-to-payer deal with Delta?

I’ll leave you with one extra-controversial thought:

A Caremark spin-off is even more likely. We now have another example of negative synergy. Even if this dispute is resolved, the damage is already done. Payers will question the wisdom of signing on with a PBM that can’t properly manage its retail network. See When will CVS and Caremark split up? for more on my rationale for a separation.


  1. AnonymousJune 08, 2010

    Thanks for the great analysis, Adam. What will the impact be of this CVS/WAG battle on Rite Aid?

  2. Forgot to mention them. I think neutral to positive. MC has been presumably hurting RAD, too, but they are internally focused on fixing the business. RAD has avoided the PBM battles--perhaps due to their own checkered history owning a PBM!


  3. AnonymousJune 08, 2010

    Best analysis I've seen of this story. Thanks.

  4. The other scenario that I worked on 5 years ago was to look at going aggressively at them. There's probably less than 10 markets which really matter where Walgreens has more access than CVS. CVS could easily buy up some small chains, independents (which they said they would), or partner with a independent group thru Cardinal or McKesson.

    Another aggressive option would be to offer on-site clinics and/or pharmacy kiosks at select locations where their store presence was not built out. That could work in selective geographies (think NY) and/or for key employers making PBM decisions this year.

    I'd love to see how the CVS reimbursement to WAG compares to the WAG PBM reimbursement to CVS along with the WAG 90-day network impact compared to Maintenance Choice.

    I agree with you that the PBMs (not the retailers or the players or the consumers) win in this.

    Playing things out in public is always dangerous as you might have to eat crow at some point.

  5. AnonymousJune 08, 2010

    I think this public fighting will have a chilling effect on direct to employer deals. Why would an employer want to align with just one pharmacy chain if the cost savings come with a bunch of hoops, strings, and baggage? It's safer to let PBMS and retailers battle it out for a while longer before choosing sides.

  6. AnonymousJune 08, 2010

    "The National Community Pharmacists Association (NCPA), which lobbies on behalf of independent pharmacies, could barely contain their glee at the news."

    Here is my question, Did NCPA ever instruct any independent pharmacies to drop the plan? Could they legally? If the independents were smart, they would.

  7. In response to Anonymous-
    NCPA can't and won't "ever instruct" such behavior.
    Is this a trick question?
    Though, I am not containing my glee either..

  8. AnonymousJune 09, 2010

    Either way, it seems almost gratifying to see at least one player if this pharmacy supply chain flea circus show a little backbone. How did we ever manage to get by before the advent of the PBM's?

  9. AnonymousJune 09, 2010

    In response to Mr. Antwert

    Those contracts already exist with Access Health and GNNP. I think the WAG action is to bring the Federal Trade Commission back into the merger of CVS and Carmark.

    Rergarding the comment about "showing a little backbone"- everyone knows pharmacists have no backbone! That is why the profession is where it is today........

  10. AnonymousJune 09, 2010

    Walgreen is showing backbone because CVS can't afford to lose them even if they think they can. Most independents (like me) are forced into take it or leave it contracts. I guess Walgreens thinks they can leave it, or that CVS will be forced to take it. About time, too!

    Just A Pharmacist

  11. AnonymousJune 09, 2010

    Dr. Fein - What's next after today's CVS announcement? Thanks.

    CVS Caremark Announces Plan To Remove Walgreens From PBM Pharmacy Network and Transition Pharmacy Care To Participating Providers
    Walgreens' Demands Would Have Increased Pharmacy Costs For Payors and Plan Members


  12. AnonymousJune 09, 2010

    Loved your blog, as usual, and appreciated you including a link to the actual statements from both players. Let the games...continue!

  13. I personally do not think the reimbursement is the issue here. The issue is the unfair practice CVS-Caremark forces on its patients! Did CVS mention the PATIENT in the response? I would like a poll of how satisfied Caremark patients were with benefits. Patients are FORCED to use mail or CVS on maintenance meds. That is why 22% at CVS vs.12% at WAG. I have personally spoke with patients who have been told they have to wait 2 weeks to receive meds or drive 100 miles round trip to nearest CVS! My main problem with CVS-CAremark is "or CVS retail store". I see it every day patients forced to use mail. That is part of life now! But CVS is given an unfair advantage with "or nearest CVS retail store"!