A couple thoughts on the Walgreen, Caremark spat

As you’ve probably heard, Walgreens announced yesterday it won’t fill prescriptions from patients who have CVS Caremark as their PBM. Although the decision is due to take effect gradually as contracts renew, it’s fairly dramatic news. The context for the move is that now that PBM Caremark has merged with retail chain CVS, Walgreens feels it’s being given the short end of the stick by the PBM. Considering that the Federal Trade Commission and some CVS Caremark customers are concerned about the same issue, Walgreens felt safe to make this move.

Most analysts are treating this as a negative for CVS Caremark –whose PBM offering will become less compelling– and for Walgreen, which will lose CVS customers. It’s seen as a boost to the other big PBMs, Medco and Express Scripts. That’s probably right in general.

One of the interesting things about the PBM business is the fact that most plans have a wide, wide network of retail pharmacies. Basically every pharmacy accepts every type of insurance. That’s convenient for patients, but it’s quite different from other types of businesses within health care and outside of it. For example, only certain hospitals and doctors are in-network for most health plans. And outside of health care, ATMs are interoperable but you’ll pay a fee if you go out of network in most cases.

Maybe the Walgreens move will lead to the use of restricted networks in the PBM business. And then again maybe not. Cost savings from restricted networks are limited –since most of the cost is for the drugs themselves, not retail fulfillment. CVS Caremark isn’t in a very good position to negotiate with other pharmacies since it’s lost Walgreens and is facing heat from the FTC. On the other hand, Walgreens might be interested in making a good deal with another PBM to replace the volume it’s losing from CVS.

Most likely no one will do much until the FTC investigation is closed out.

June 8, 2010

One thought on “A couple thoughts on the Walgreen, Caremark spat”

  1. “most of the cost is for the drugs themselves, not retail fulfillment”

    This statement is true for brand-name drugs, where 85%+ of retail revenue flows back to the manufacturer. However, the economics of generic drugs are flipped–the generic manufacturer’s selling cost is much less than distribution and dispensing costs. this is why cost-plus networks can save money.

    I have a detailed review of the CVS-WAG situation on my blog:

    “The WAG-CVS Brouhaha: What’s Really Going On”
    http://www.drugchannels.net/2010/06/wag-cvs-brouhaha-whats-really-going-on.html

    Regards,
    Adam

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