Wednesday, April 25, 2012

Decoding the Clues to Express Scripts' Strategy

As a follow-up to Insights from the 2011 Express Scripts Drug Trend Report, let's delve into what’s said—and unsaid—in the report about Express Scripts' strategy.

Going beyond the numbers, the report tells us a lot about the company's industry view and the now-biggest PBM’s future business model. Below, I consider four key topics:
  • The post-2015 showdown in generic launches
  • The specialty boom
  • Pharmacy network design
  • Personalized medicine
I picked these topics because they spotlight emerging opportunities for Express Scripts along with the risks associated with the PBM business model evolution. See if you agree.


A big chunk of Express Scripts’ drug trend report focuses on such topics as “New Insights Into Nonadherence” and “Innovative Solutions for Enhanced Patient Care.” These sections are more than PR puffery because they highlight a fundamental transition facing the largest PBMs.

The generic wave peters out by 2015-16, which will put profits under pressure. For a typical large PBM in 2011, generic drugs from mail pharmacies (excluding specialty drugs) accounted for only 16% of equivalent prescriptions but 51% of per-prescription profits. (See Exhibit 49 of the 2011-12 Economic Report on Retail and Specialty Pharmacies.) Plus, mail dispensing and profits are under pressure from the retail pharmacy industry, as outlined in The Great Mail Pharmacy Slowdown and via preferred networks (see below).

In a world of low-cost generics, the quality of care—adherence, compliance, appropriate utilization—becomes more important than the unit price per pill. Hence, PBMs need to offer programs to payers that emphasize clinical and health care services intended to improve patient outcomes and lower the client’s total health care costs.

How valuable will plan sponsors find these services? Or, to put it less delicately, will Express Scripts be able to make the same level of profit on these services as it does with its current business model?


Specialty is poised to be 40-45% of pharmaceutical manufacturer sales by 2016. About half of the specialty spend occurs in a provider’s locations and is covered by a patient’s medical benefit. Express Scripts has long seen this spending as a major market growth opportunity, as I pointed out last year in Express Scripts' Disruptive Specialty Strategy.

This year’s drug trend report further clarifies Express Scripts’ vision, noting:
Another important element of a comprehensive set of specialty solutions is the ability to manage patients regardless of where they receive medications: home, doctor’s office, hospital, clinic or any other location. Providing consistent, coordinated care across all treatment locations allows us to treat the specialty patient, not just the pharmacy drug utilizer. Patients benefit through better coordination of care. Plan sponsors benefit through better visibility to the most clinically sound and cost-effective channels.” (page 31)
Cancer care is the biggest target, since 78% of cancer specialty spending occurs in the medical benefit. (See the table on page 40.) The Medco acquisition brings some important capabilities, as I discuss in Cancer Care and the Future of PBMs.

Part of this solution involves white-bagging (per New Data on Specialty Pharmacy’s Challenge to Buy-and-Bill), while another part involves distribution to providers via CuraScript Specialty Distribution (SD). I estimate that Curascript SD is the third-largest specialty distributor behind AmerisourceBergen’s subsidiaries and McKesson Specialty. (See Exhibit 4 of the 2011-12 Economic Report on Pharmaceutical Wholesalers and Specialty Distributors.)

Some providers will discount this grand vision, but Express Scripts is also telling plan sponsors that PBM management will benefit providers. See the discussion on page 33 regarding “Supporting Specialty Providers.” At least one survey found that almost half of oncology practice managers want buy-and-bill to end for infused cancer therapies. See The Future of Buy-and-Bill According to Payers and Oncology Practices.

There is a compelling story, but it’s certainly no slam dunk given how entrenched interests—physicians, health systems, and distributors—may prefer maintain the status quo.


This year's report contains a brief but fascinating discussion of “The Future of Retail Pharmacy Networks,” a.k.a., the Walgreen kerfuffle. Express Scripts clearly states its intention to offer more preferred (but not restricted) network designs, stating:
For release in early 2013, Express Advantage NetworkSM is a new choice-based solution that combines tiered retail networks with member engagement and cost sharing to achieve greater savings for plan sponsors with minimal member noise. With Express Advantage Network, members will still have access to an open network of pharmacies but at higher copayments.” (page 29)
These network models fit comfortably within the Express Scripts “consumerology” framework. Preferred networks use consumer incentives to shift prescription volume into the pharmacies that provide lower costs for the payer. Consumers retain the ability to choose their pharmacy, while being partially exposed to the costs of this choice. Presumably, a consumer is more likely to maintain higher adherence and compliance to medication therapy given this (incentivized) choice.

Medicare Part D has been the leading indicator for preferred networks because consumer preferences get expressed clearly. Part D beneficiaries annually choose a new plan for themselves, rather than having a benefit administrator or HR department make the choice on the beneficiaries’ behalf. The data clearly show that seniors are selecting these models (per See Humana-Walmart Preferred Network Plan Wins Big in Part D).

Express Scripts will be jumping on this bandwagon for its commercial clients. However, they do face the risk that payers could save so much from narrower retail networks that mail becomes even less attractive. Perhaps it’s no coincidence that narrow networks have been most aggressively marketed by PBMs that lack mail-order fulfillment capabilities. Consider Restat and the economic estimates in Pharmacy Profits in Preferred Networks with PBM Transparency.

There's also an open question about the upcoming selling season. A small number of plan sponsors have been switching away from Express Scripts to keep Walgreens in their network, but most appear to have accepted the change...for now.


Express Scripts cautiously frames pharmacogenomics as just one component of personalized medicine:
Personalized medicine is typically considered to be the application of genomic and molecular data to better target healthcare delivery. One aspect of personalized medicine, pharmacogenomics, examines the influence of genetic variations on drug response in individual patients. The field holds great promise, but it also comes with associated costs and many unanswered questions.” (page 8)
On pharmacogenomics, Express Scripts has always taken a more nuanced, skeptical position than Medco. You know what I mean if you’ve ever spoken to the respective Chief Medical Officers of the formerly separate companies. As a comparison, see May 2010's Medco's Pharmacogenomic Future.

Again, the economic value of these programs is still unproven, as the quote above illustrates. Look for a dramatic scaling-back of David Snow’s vision.


Even if you think my interpretation is a shot in the dark, I encourage you to read the report yourself and make up your own mind. Feel free to highlight anything that I missed in the comments below.


  1. Thanks for the insights as always.  I agree that the model will change (as posted last night -  I also think they are pushing Walgreens into a corner so I expect to see more changes be driven from them in a collaborative model with the independents over time.

    I do think that David's (Medco) vision of personalized medicine is very different than how ESI thinks about the topic.  It will be interesting to see what happens with DNA Direct and some of the other unique assets that Medco has. 

  2. Adam,

    Not sure if you have reviewed the RxTec proposal...  Was wondering how this proposal really does anything.  If products are not tracked at unit level how do we know if the ADR's are not buying product from secondary sources and passing it off as product sourced directly from manufacturer.  Seems like a lot of holes.

  3. "In a world of low-cost generics, the quality of care—adherence, compliance, appropriate utilization—becomes more important than the unit price per pill."

    It is hard to comprehend, in the face of spread pricing, whether or not this statement is made from a lack of understanding or  just plain support of a system that charges more for a prescription than what is paid to the pharmacy.
    Unquestionably, to the average worker, paying $45 for a Rx that is reimbursed to the pharmacy at $13 is very detrimental to compliance and quality of care. ($500/yr vs. $160/yr).

    As opposed to the nebulous statements of value from PBM-based clinical program (rarely are they independently verified or peer-reviewed...and the metrics are often subjective) the value of eliminating spread pricing, in terms of real world quality of care and outcome improvement, is enormous and warranting focus.
    As long as spread pricing continues, and in some situations escalates, talk of "value" in clinical programs is disingenuous. For a hypertensive diabetic, spread pricing can increase Rx costs by as much as $3000 per year. Not for care value or services, just margin kept by the claim adjudicator. A reduction in patient cost of $3000 (particularly in this world of HSAs) is likely to greatly enhance compliance, care quality, and lower medical costs..
    The problem is that plan sponsors do not have the knowledge or strategic partner to eliminate spread pricing once and for all...and dramatically lower costs for their plan and members.

  4. "The generic wave peters out by 2015-16, which will put profits under pressure."

    Sorry, I had to come back to this statement.  If anything, with the level of spread pricing within the generic spend that is being retained by PBM's how does this impact profits in a negative manner? 

    I get the concept of without a new wave of brands going to generic that there will not be as much increase in profits.  However, the level of overall profit from the spread pricing within generics is providing substantial profit to the PBM.

    Am I missing something here?  My sense is that as the number of brands moving to generics slows down, the level of spread pricing will become even more eggregious that it current is.  The PBM's will then blame ingredient cost trend as the culprit as they raise what they charge Plan Sponsors but continue to pay pharmacies the same amount they do today.