Tuesday, October 25, 2016

Walgreens Plays to Win: Our Exclusive Analysis of 2017's Part D Preferred Pharmacy Networks

In a previous exclusive analysis (Preferred Pharmacy Networks Are Back in 85% of the 2017 Medicare Part D Plans), I highlighted how preferred pharmacy networks will dominate next year’s Medicare Part D prescription drug plans (PDP).

Today, I examine pharmacy participation in the 2017 Part D preferred networks. Our analysis shows some pharmacies getting more selective about plan participation.
  • For the first time, Walgreens is the most active participant in the major preferred networks. Walmart has pulled back, and CVS and Rite Aid are barely participating as preferred pharmacies.
  • The pharmacy services administration organizations (PSAOs), which represent independent pharmacies, appear to be engaged selectively with some plans. Independents are completely absent from almost half of the major plans.
I knocked on more than a few doors to collect this bagful of sweet data. Read on as we empty it to see which plans look sweet—and which might be tricks.


Preferred network models have grown rapidly within the Medicare Part D program. The Centers for Medicare & Medicaid Services (CMS) now calls these networks preferred cost sharing networks. CMS refers to the pharmacies in such a network as preferred cost-sharing pharmacies. For more complete background on narrow network models, see Chapter 7 of our 2016 Economic Report on Retail, Mail, and Specialty Pharmacies.

For 2016, 57 plans will have preferred cost-sharing networks. These plans will operate 633 regional PDPs and will account for 85% of the total regional PDPs for 2017. Note that a few plans don’t offer preferred cost sharing in every region.

We examined the 17 major multi-regional Part D plans with preferred cost sharing pharmacies. These larger plans will operate 561 regional PDPs, or 89% of regional PDPs with a preferred cost sharing network.

We then identified preferred pharmacies for each plan. Large pharmacies interact and negotiate directly with the plans. By contrast, smaller pharmacies participate in pharmacy services administration organizations (PSAOs) to leverage their influence in contract negotiations with the plans. We reviewed the largest eight retail chains and the four largest PSAOs. Our analysis therefore includes more than three-quarters of all U.S. retail pharmacy locations.

The plans and pharmacies don’t always make it easy to identify which chains are preferred. Send me an email if you think we got something wrong.


The first table below summarizes retail chain participation in the 17 major multi-regional Part D plans with preferred cost-sharing pharmacies. These eight retail chains operate about 33,000 locations, or about 70% of all retail chain locations.

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The next table summarizes PSAO participation in the same 17 major multi-regional Part D plans with preferred cost sharing pharmacies. These four PSAOs contract for more than 16,000 independent pharmacy locations, or about 75% of all independent retail pharmacy locations.

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  • Walgreens wants to be preferred. In 2016, Walgreens was preferred in 13 major Part D plans. For 2017, Walgreens will be preferred in 15 plans—more than any other retail chain. As I discuss in Walgreens’ TRICARE Win: Tracking WBA’s Aggressive Preferred Network Deal Strategy, Walgreens has been lining up a broad range of preferred network agreements throughout the industry. This includes UnitedHealthcare’s new AARP MedicareRx Walgreens Medicare Part D plan. The plan will include only the 8,000 Walgreens and Duane Reade stores as preferred pharmacies.
  • Walmart sees a ghost. Walmart has historically been more willing than any other pharmacy to compete on price. For 2017, the company seems to be rethinking its approach. Walmart is a preferred pharmacy in only 12 of the 17 major preferred cost-sharing networks. It is non-preferred in the plans owned by CVS Health (SilverScript Plus) and Rite Aid (EnvisionRxPlus), the two Express Scripts plans, and the AARP MedicareRx Walgreens plan. Recall that Walmart and Humana launched the first Part D preferred network plan in October 2010. At the time, I referred to it as An Inevitable Surprise for Pharmacies and PBMs.
  • CVS fears the profit reaper. Last December, the CFO of CVS Health stated: “Our analysis shows that the amount of share we would gain would not make up for the margin we would give up so we chose not to participate.” So it’s not shocking that CVS retail pharmacies are preferred in only two major plans. These plans include its own SilverScript Plus plan and the Magellan Rx Medicare Basic. CVS is also preferred in some of the Anthem Blues plans, which are not shown in the table above.
  • Rite Aid hides under the covers. This year, Rite Aid did not participate as a preferred pharmacy with any of the major multi-regional plans. For 2017, it is participating only in the plan sponsored by EnvisionRx, the PBM that it acquired in 2015. Recall that Rite Aid recently launched the new Rx90 narrow network program for commercial customers. (See my August news roundup.)
  • Supermarkets are not spooked. Kroger, Albertsons/Safeway, and Publix all remain active participants in the 2017 preferred networks. These three chains operates nearly 5,000 retail pharmacies.
  • Independent pharmacies are a little bit spooked. Smaller pharmacies are represented in a subset of the major 2017 preferred networks. Many pharmacy owners’ PSAOs apparently decided that participation at reduced margins is better than having members excluded. But as far as I can tell, eight major plans from three major insurers—Aetna, Humana, and UnitedHealthcare—do not have any independents participating as preferred pharmacies. 

The reduction in pharmacy profits is the biggest source of cost savings from these narrow networks. That’s why pharmacies find preferred networks so scary.

Medicare Part D plans rely on post-point-of-sale price concessions paid by pharmacies to the PDP sponsor. These price concessions, which are collected from pharmacies after claim adjudication, are the dreaded direct and indirect remuneration (DIR) fees that generate so many pharmacy complaints. A DIR fee directly reduces the pharmacy’s margins and the plan’s costs.

By not participating in a preferred network, a chain or PSAO avoids DIR fees. But they also miss out on the prescriptions from patients who aren’t willing to pay a higher copayment to use a non-preferred pharmacy.

Professor M.J. Jackson analyzed preferred networks and DIR fees. Check out his conclusion:
"You hear the door slam and realize there's nowhere left to run. You feel the cold hand and wonder if you'll ever see the sun. You close your eyes and hope that this is just imagination. But all the while you hear the DIR creepin' up behind. You're out of profit.”
Here’s a video in which he delivers this message. Boo!

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