Wednesday, January 4, 2012

The Lover's Quarrel: Walgreens vs. Express Script

That Walgreens requires access to Express Script's patient base in order to avoid a sharp decline in gross revenue is clear. However, it appears that Express Script is in no rush to re-open its book of business to the once proud chain pharmacy partner.  This begs the question.  What is the root cause of the two parties inability to reach a mutual contractual agreement?  For most businesses it boils down to cash and this case is no different.  But, the root cause is a bit more complicated than simple greed.

Many health care companies have been making subtle changes to their business strategies for a while now.  Well, at least since the prospect of a national health care program (Patient Protection and Affordability Care Act) became a reality.  While the pool of potential customers will certainly increase, as a result of PPACA, profit margins will undoubtedly decrease.  PPACA is the root cause of the two organization's unwillingness to come to a mutual agreement.

In other words, without health care reform there is enough hidden cash flow to go around for everyone. I surmise health care reform is also the primary reason Express Scripts has agreed to purchase Medco.  The loss in profit margin will be compensated for, in part, with higher volume. PPACA makes it easier and less costly for those persons without existing or adequate coverage to gain access to health care thus substantially increasing the number of potential customers.

The federal government is a bit more [state governments are making headway, but still have a lot to learn] prudent when paying for prescription drugs compared to private industry.  Simply put, it will not pay as much for prescription drugs as state governments and private industry nor will it allow PBMs to charge historically exorbitant fees to providers in the newly created health care exchanges. Excluding the obvious choice, buying power, there are two major reasons for these aforementioned facts: unlimited resources and accountability.

Most private companies just don't know enough about pharmacy benefit management to deliver for shareholders what they expect and that is too purchase quality goods and services at the lowest possible cost.  Instead, they pass a majority of the responsibility to pharmacy benefit consultants. This is okay except when the consultant is ignorant.  In my experience most consultants lack the knowledge, tools and/or desire necessary to prevent its clients from being duped by traditional PBMs.

Having said that, much of the meal ticket for traditional PBMs, like Express Scripts, will be eliminated.  This is due to fully-insured health care plans being much more impacted by PPACA than self-insured payors.  Still many self-insured employers will continue to be played for patsies by traditional PBMs and TPAs.  I've discussed the implications of PPACA on self-insured plan sponsors in a previous blog post called Health Care Reform (PPACA) Provisions that Impose Obligations on or Affect Self-Insured Health Plans.

According to a WSJ article on Tuesday 1/3/2012, Walgreens as late as December 2011 offered to keep rates flat, but ESI (Express Script) rejected that proposal.  ESI has said it remains open to keeping Walgreen it its network, but only at a rate that is right for its clients.  Really, that sounds good, but an astute business person should interpret this as....a rate that is right for their shareholders.  ESI accounts for about $5 billion in revenues for Walgreens or 14% of total sales.

Walgreens in an attempt to retain some ESI patients is offering coupons, discounts and boosting staff.  I equate this to putting lipstick on a pig.  It's not a good look and doesn't work long-term. If Walgreens accepts any deal lowering existing rates ESI will see a weakness and continue to press in the future for further rate reductions.  It is a large hit, but in my opinion Walgreens should make plans to fully move on without ESI.  

If you have any questions or comments and do not want to post them send directly to Tyrone D. Squires via email to director@transparentrx.com.






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