Thursday, October 19, 2017

CVS Bets Big: Our Exclusive Analysis of Pharmacy Chain Participation in 2018's Part D Preferred Pharmacy Networks

In a previous analysis (Preferred Pharmacy Networks Will Dominate 2018 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 chain pharmacies’ participation in 22 major 2018 Part D preferred networks. Our analysis shows significant changes from last year:
  • CVS has changed strategy and will go all in as a preferred pharmacy in many 2018 networks. It's also the exclusive chain in some plans. 
  • Walgreens remains an active participant, but CVS has displaced it in some plans.
  • Kroger has raised its bet on being a preferred pharmacy. Walmart has held steady, maintaining a position similar to that of 2017.
  • Rite Aid continues to play a losing hand. It will be a preferred pharmacy only in the single plan offered by its EnvisionRx subsidiary.
Our 2018 Part D analysis demonstrates the pharmacy industry’s new period of hypercompetition. Seniors are willing to switch pharmacies to reduce out-of-pocket expenses. Chains must therefore reduce their prescription profit margins to compete for a spot in narrow networks. Expect the dominance of preferred networks to the wild card for pharmacies’ 2018 profits.


Preferred network models have grown rapidly within the Medicare Part D program. The Centers for Medicare & Medicaid Services (CMS) calls them preferred cost sharing networks. CMS calls the pharmacies in such a network preferred cost sharing pharmacies.

Preferred networks use consumer incentives to shift prescription volume into the pharmacies that provide lower costs for the payer or better care to the patient. In the Medicare Part D program, seniors choose their pharmacy while being partially exposed to the costs of this choice. For a detailed primer on narrow network models, see Chapter 7 of our 2017 Economic Report on U.S. Pharmacies and Pharmacy Benefit Managers.

For 2018, 65 plans will have preferred cost sharing networks. These plans will operate 772 regional PDPs and will account for 99% of the total regional PDPs for 2018.

We examined the 22 major multi-regional Part D plans with preferred cost sharing pharmacies. These larger plans will operate 673 regional PDPs, or 87% of regional PDPs with a preferred cost sharing network. We then identified preferred chain pharmacies for each plan. We examined the largest eight retail chains.

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.

Smaller pharmacies participate in pharmacy services administration organizations (PSAOs) to leverage their influence in contract negotiations with the plans. In a future post, I’ll look at PSAOs’ participation in the 2018 Part D plans.


The table below summarizes retail chain participation in the 22 major multi-regional Part D plans with preferred cost sharing pharmacies. These eight retail chains operate nearly 33,000 locations, or about half of all U.S. pharmacy locations.

[Click to Enlarge]

The shaded boxes indicate a change in a chain's participation from 2017 to 2018. Sixteen plans were offered in both years. From our list, three plans will be new for 2018 and three plans will switch from open to preferred networks for 2018.


Here are our observations on the largest chains:
  • CVS wants a straight flush. In December 2015, 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.” Consequently, CVS retail pharmacies were preferred only in two major plans for 2017.

    But for 2018, CVS has reversed course and will be preferred in 11 major Part D plans. What’s more, CVS has displaced Walgreens in the five plans from Aetna, First Health, and EnvisionRx. CVS will be the primary drugstore chain in the new Express Scripts Medicare Saver plan. It will also be the only preferred pharmacy chain in the plans that switched from an open to a preferred network: CVS Health’s SilverScript Choice and the Wellcare plans.

    Yesterday, Anthem launched IngenioRx, its new pharmacy benefits manager. CVS will provide prescription fulfillment and claims processing services, so we expect the chain to play a major role in any future Part D plans offered by Anthem.
  • Walmart calls. Walmart has historically been more willing than any other pharmacy to compete on price. For 2018, the company is maintaining the more conservative posture that it adopted for 2017. Walmart is a preferred pharmacy only in 11 of the 22 major preferred cost sharing networks. It is non-preferred in the plans owned by CVS Health (SilverScript Plus and Choice) and Rite Aid (EnvisionRxPlus), the three Express Scripts plans, the AARP MedicareRx Walgreens plan, and the Wellcare plans that switched to preferred networks.

    FYI, 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.
  • Kroger raises. Kroger, Albertsons, Costco, and Publix all remain active participants in the 2018 preferred networks. These three chains operate more than 5,500 retail pharmacies. Notably, Kroger—the seventh largest U.S. pharmacy—significantly increased its participation as a preferred pharmacy in 2018.
  • Rite Aid folds. Once again, Rite Aid will not participate as a preferred pharmacy with any of the major multi-regional plans. For 2018, it is participating only in the plan sponsored by EnvisionRx, the PBM that it acquired in 2015. Rite Aid is still searching for synergies from this deal. (See What Will Happen to Rite Aid’s Struggling EnvisionRx PBM?.)
Numerous sources document payers’ savings from narrow networks. These savings come primarily from pharmacy contracting concessions. For 2018, Part D preferred networks will be the pharmacy industry’s version of lowball poker.

CORRECTION: We misidentified Walmart's participation in one network. Walmart is not a preferred pharmacy in Aetna Medicare Rx Select network. It is a preferred pharmacy in 11 (not 12) of the 22 major preferred cost sharing networks. We apologize for the error.

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