Tuesday, February 04, 2020

New Part D Enrollment Data for 2020 Preferred Pharmacy Networks: CVS Holds Steady, Walmart Rebounds, and Walgreens Tanks

The Centers for Medicare & Medicaid Services (CMS) has just released its first 2020 data on enrollment in Medicare Part D prescription drug plans (PDPs).

Our exclusive analysis of these numbers finds that for 2020, 92% of seniors are enrolled in PDPs with preferred pharmacy networks. That’s an increase from last year’s figure (88%).

Below, we use the new enrollment data to examine the major pharmacy chains’ position within the 25 major Part D plans that have preferred networks.

As you will see, in 2020 Walmart seems poised to capture market share from Walgreens, while CVS has maintained its position. Rite Aid’s position looks better than it has in previous years.

A pharmacy’s per-prescription profits are lower in preferred plans. However, I expect that pharmacies will continue to accept low reimbursements and suffer with direct and indirect remuneration (DIR)  payments in exchange for increasing or maintaining store traffic.

I'll have an update on pharmacy DIR soon. In the meantime, the pharmacy industry shoudl consider what John Maynard Keynes once observed: Markets can remain irrational longer than you can remain solvent.

LET’S (EN)ROLL

ICYMI, we published the following three part series on the 2020 Medicare Part D market:
For a deep dive into the economics and strategies of narrow network models, see Chapter 7 of our Economic Report on U.S. Pharmacies and Pharmacy Benefit Managers.

For 2020, we examined the 26 Part D plans offered by nine major companies. Our evaluation included only stand-alone prescription drug plan (PDP) and excluded certain other plans. There are 24 major multi-regional Part D plans with preferred cost sharing pharmacy networks, 1 smaller plan (EnvisionRxSecure) with a preferred network, and 1 plan (Humana Basic Rx) with an open retail network. These companies operate 840 regional PDPs, accounting for 89% of total regional PDPs.

For the 25 plans with preferred pharmacy networks, we identified the preferred status of the largest six retail chains. We used these data on enrollment: Medicare Advantage/Part D Contract and Enrollment Data. The figures include enrollment as of the January 1, 2020 payment, so they appropriately reflect 2020 trends. For each plans, we summed the total January enrollment.

SOUNDS LIKE A PLAN

Based on the new enrollment figures, the 25 plans with preferred networks enrolled 17.6 million people. That equates to 86% of the total beneficiaries enrolled in a stand-alone Part D plan, and 92% of the total beneficiaries enrolled in a stand-alone Part D plan with a preferred network.

We used the enrollment data to measure the major retail chains' positions in the 2020 preferred networks. The chart below shows the total enrollment in the plans for which each chain is a preferred pharmacy. For comparison, we include data from previous open enrollment periods.

[Click to Enlarge]


These data quantify the relative position of the major retail chains:
  • CVS pharmacy. For 2020, CVS maintained the value of its preferred position in 14 of the preferred plans. CVS Health’s retail pharmacies are preferred in plans that enrolled 9.5 million people—second only to Walmart. These enrollment data suggest that CVS will retain its Part D prescription market share in 2020.
  • Walgreens. Based on the initial enrollment data, only 5.4 million people signed up for the eight plans in which Walgreens is a preferred pharmacy. This marks the chain’s fourth consecutive year of underperformance in preferred networks. Walgreens remains the only national chain in the AARP MedicareRx Walgreens plan, which grew its enrollment by only 2% for 2020.
  • Walmart. Walmart is a preferred pharmacy in 19 of the 25 major preferred cost sharing networks. Consequently, 13.9 million people are enrolled in plans with Walmart as a preferred pharmacy. That’s a leap from its position in 2019 preferred plans, when a comparatively low 8.4 million enrolled in plans for which Walmart was a preferred pharmacy. However, Walmart will be hurt by its role as the only national chain in the Humana Walmart Value Rx Plan. That plan enrolled only 686,000 people—a sharp drop (-66%) from the 2019 figure.
  • Rite Aid. For 2020, Rite Aid will benefit from its decision to engage further in preferred networks. Slightly more than 1 million people enrolled in plans that have Rite Aid as a preferred pharmacy in 2020, compared with plans that enrolled 590,000 people for 2019. However, it will take Rite Aid a few years to overcome the management missteps that led the chain to sit out the boom in preferred networks.
  • Kroger. For 2020, Kroger will be a preferred pharmacy in 17 major national plans that enrolled 8.5 million people—10% higher than the 2019 figure.
  • Albertsons. Though Albertsons increased its participation in preferred networks for 2020, it will be a preferred pharmacy in plans that enrolled only 5 million people. This marks the third year that enrollment decreased in plans for which Albertsons is preferred.
THE TOUGH ECONOMICS OF NARROW PHARMACY NETWORKS

A pharmacy’s cost structure encourages competition for network position. For a typical pharmacy, total annual operating costs do not vary based on small variations in the total number of prescriptions dispensed. These costs include pharmacists’ salaries and benefits, as well as such general overhead costs as rent, utilities, insurance, advertising, computer systems, and other items.

These costs are not fixed indefinitely, because enough extra volume will require a larger pharmacy or an extra pharmacist. However, we can treat them as fixed when considering small changes in prescriptions dispensed.

Consequently, the marginal (incremental) cost of dispensing one extra script is very low. These incremental costs are far below the average cost of dispensing. The average cost of dispensing is typically pegged at about $10 to $12, but the incremental cost of dispensing one extra prescription is probably below $1.

Pharmacies therefore have incentives to reduce their gross margins in exchange for growing or even maintaining market share. That’s why the reduction in pharmacy profits is the biggest source of cost savings from narrow networks.

Anyone expecting margins to improve—or direct and indirect remuneration (DIR) fees to vanish—should revisit the Keynes quote above.

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