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Will pharma’s access to patients be affected?
It took three years, but the gloves are now coming off in the retail battle for customers following CVS’ 2007 merger with Caremark, which brought together the leading retail pharmacy and the leading PBM. On June 7, Walgreen Co. (the largest chain pharmacy by number of stores) “surprised” CVS Caremark (it said) by announcing that it would no longer honor PBM contracts with Caremark, citing “unacceptably difficult” pricing policies for servicing accounts, a lack of information on movements of consumers from one plan to another, and CVS Caremark’s promotion of mail order. “Unfortunately, as a result of CVS Caremark’s pharmacy benefit management practices toward Walgreens, it no longer makes good business sense for Walgreens to be part of their network for new and renewed plans,” said Walgreens President and CEO Greg Wasson.
“Today's announcement by Walgreens is nothing more than a transparent effort to raise its reimbursement rates at the expense of plan sponsors and members and illustrates an inability to adapt to the demands of the marketplace,” fired back CVS in press release.
A dispute like this was predictable from when the CVS merger with Caremark (itself a nasty fight among shareholders) was announced, creating a new “hybrid” model. CVS, like Walgreens, is a chain pharmacy; Caremark was a pharmacy benefit manager (PBM) that nominally competes for business with chains. In practice, though, PBMs use many chains (and also mail order) to fill prescriptions and serve mostly to aggregate demand for employer drug plans. CVS Caremark says that it has access to 64,000 pharmacies (of which 7,000 have been Walgreens). Walgreens has its own, much smaller, PBM business that could include CVS pharmacies.
In the aftermath of the dueling press releases, the stock prices of both CVS Caremark and Walgreens fell (Walgreens by a larger amount). Financial analysts were scrambling to figure out how much revenue Walgreens would lose (the estimate is 7%) or how many Caremark customers would be left with bad prescription-filling options (such as being forced to drive a long distance to a local pharmacy; on that point, CVS Caremark told Dow Jones that the percentage of its customers who live within a three-mile radius of a pharmacy in its network would change from 85.9% to 85.7% if Walgreens were excluded). CVS Caremark also said it “remains open to discussion” with Walgreens.
Meanwhile, independent pharmacies, who have complaints filed with the Federal Trade Commission against CVS Caremark and other PBMs over commercial practices, are sitting on the sidelines as enthusiastic fans hoping for both teams to lose.
What does it mean for pharma?
From manufacturer through to pharmacy, all participants feel the pressure from payors for reimbursement; in the CVS Caremark/Walgreens dispute, this pricing pressure is simply being hashed out between two sometimes-competitors, sometimes collaborators. Certainly, pricing negotiations between pharma and PBMs will intensify, but that only means potentially a different face across the table from the pharma negotiator, not a different negotiating stance. The various loyalty card or sponsored promotion activities among PBMs and retail pharmacies might be affected, but the effects will be felt more by the loyalty-card sponsors who will need to scramble to maintain broad coverage. Adam Fein, president of Pembroke Consulting (and Pharmaceutical Commerce Editorial Board member) contends that the merger of CVS and Caremark was a mistake, and that this dispute will strengthen the rationale to de-merge.
The picture is less clear for specialty pharmaceutical distribution, where some manufacturers have been comfortable with exclusive agreements with specialty pharmacies, some of which are run by PBMs. But here, the restricted distribution network has already been established. Potentially, when the dust settles, pharma might find it easier to work with one PBM over another.