Reprinted from DRUG BENEFIT NEWS, biweekly news, proven cost management strategies and unique data for health plans, PBMs, pharma companies and employers.
By Anthony Vecchione, Editor
October 7, 2011 Volume 12 Issue 20
Despite an impressive 69% increase in fiscal fourth-quarter earnings, Walgreen Co.’s unresolved dispute with Express Scripts, Inc. has Wall Street keeping a critical eye on the drugstore behemoth.
The clash began in June when contract renewal talks broke down over prescription rates offered by Express Scripts that Walgreens said were unacceptable and not competitive. As a result, Walgreens said it would exit Express Scripts’ pharmacy provider network when the contract between the two companies expires on Jan. 1, 2012 (DBN 6/24/11, p. 1).
Because there has been no measurable progress in contract negotiations, investors are concerned about the more than $5.3 billion in annual sales Walgreens derives from its contract with Express Scripts. If the dispute is not resolved, Walgreens pharmacists would have to direct customers with Express Scripts prescription drug coverage to other pharmacies. The impasse prompted Moody’s Investor Service, a ratings firm, to assign Walgreens a negative outlook.
During a Sept. 27 conference call to discuss financial results, Walgreens CEO Gregory Wasson told investors that “contract renewal negotiations have been unsuccessful, and we’re planning not to be part of the Express Scripts network as of the first of the year.”
Wasson suggested that Walgreens may convince some Express Scripts customers to remain with Walgreens. “We intend to work closely with our partners who are focused on lowering overall health care costs and recognize the critical value that community pharmacy can provide.” He added, “since then, many of these partners have indeed made clear that they value the choice, cost effectiveness, convenience and service of Walgreens and want to move forward with us. Also, patients and employees have made it clear they want to continue having the choice of Walgreens, maintaining their personal relationship with the pharmacists they’ve come to trust.”
When asked during the Q&A session to provide details about Express Scripts’ offer, Walgreens CFO Wade Miquelon said, “the proposal we received was below the industry cost to fill a prescription and we don’t think values what we truly can bring to payers and patients across the country.” Miquelon added, “We do believe that there are hundreds of other networks out there that we work well with, that are looking for a lot of the services and solutions that we’re bringing to the marketplace. That’s who we intend to focus on.”
In response to Walgreens’ charges, Express Scripts says that Walgreens elected to walk away from negotiations in June, with six months to go on the contract. “We would welcome Walgreens into the network, as we’ve said all along, but only at rates that are right for our clients,” Express Scripts spokesperson Thom Gross tells DBN.
“Walgreens is a high-cost provider, and if its current rates were to stand, it would be as much as 20% higher than other pharmacies in our network by the end of the three-year contract,” Gross says. He adds that Express Scripts’ clients expect the company to keep costs low. “We have had strong support from our clients and members as we have explained why we find Walgreens’ rates to be out of line.”
Gross says that if Walgreens chooses to leave, “we will still have more than 56,000 pharmacies in our network — independent pharmacies, other chain pharmacies, pharmacies in grocery stores — more than enough to meet all client guarantees for access.”
“I continue to believe that we will see resolution, though I expect that it will go beyond Oct. 15 [the start of the open-enrollment period for 2012 Medicare Advantage and Part D plans]. I didn’t hear anything incremental from Walgreen to change that view, though the market reaction suggests that the market fears that if the dispute does not get resolved, Walgreen may be unable to take out costs if volume is lost,” Helene Wolk, an investment analyst with Sanford Bernstein & Co., tells DBN.
“Walgreen’s fourth-quarter results slightly exceeded our expectations. However, the relatively strong performance was overshadowed by management commentary that seemed to indicate Walgreen and Express Scripts remain far apart in their negotiations, with little hope of reaching an agreement before their current contract expires,” Matt Coffina, equity analyst for Morningstar, Inc., tells DBN. Coffina adds that Morningstar may reduce its estimate of Walgreens’ valuation if the contract is not renewed.
Deadline Is Fast Approaching
“It is in both Walgreen’s and Express Scripts’ best interest to come to an agreement. While investors are rightly concerned that Walgreen’s management claims ‘no substantive progress’ has been made in the negotiations — sending Walgreen’s shares down 6%,” the companies still have three months to find a compromise, Coffina says.
Industry observers say it’s not a good sign that Walgreens appears to be digging in its heels. “We believe Express Scripts has the upper hand in this negotiation, thanks to its relatively stable membership base and the nation’s current obsession with controlling health care costs,” says Coffina.
And Coffina is skeptical that Walgreens will be able to convince Express Scripts customers to contract directly with Walgreens. “Between contract provisions that may prevent such agreements and the added complexity for employers, we are skeptical that Walgreen can retain a significant portion of business this way,” Coffina says.
When asked during the conference call whether any employer groups had actually signed a separate agreement with Walgreens, Wasson said, “we’ve got to keep the confidentiality of our partners and respect that. So as we said, we’re working closely with many, and as they intend to or desire to release that, they will.”
Projected Medical, Prescription Drug, Dental & Vision Trends: 2011 & 2012 | ||||
2011 Projected | 2012 Projected | |||
(without Rx) | (with Rx)1 | (without Rx) | (with Rx)1 | |
Medical (Actives & Retirees < Age 65) | ||||
Fee-for-Service (FFS)/Indemnity Plans | 12.7% | 12.1% | 11.7% | 10.9% |
High-Deductible Health Plans (HDHPs)2 | 11.7% | 11.2% | 10.4% | 9.8% |
Open-Access Preferred Provider Organizations (PPOs)/Point-of-Service (POS) Plans3 | 11.0% | 10.7% | 10.0% | 9.5% |
PPOs/POS Plans (with PCP Gatekeepers) | 11.2% | 10.8% | 10.4% | 9.8% |
Health Maintenance Organizations (HMOs) | 10.2% | 10.0% | 9.6% | 9.2% |
Medical (Retirees Age 65+) | ||||
Medicare Advantage (MA)4 HMOs | 7.0% | 7.4% | 6.6% | 6.6% |
Prescription Drug (Rx) Carve-Out5 | ||||
Actives & Retirees < Age 65 | 9.2% | 7.2% | ||
Retirees Age 65+ | 8.2% | 6.5% | ||
Dental | ||||
Scheduled Plans | 4.8% | 4.1% | ||
FFS/Indemnity Plans | 6.6% | 4.2% | ||
Dental Provider Organizations (DPOs) | 5.5% | 3.8% | ||
Dental Maintenance Organizations (DMOs) | 4.2% | 4.4% | ||
Vision | ||||
Scheduled Plans | 3.2% | 3.8% | ||
Reasonable & Customary (R&C) Plans | 3.5% | 3.9% | ||
1 Trend projections were derived by proportionally blending medical trends and freestanding prescription drug trends. 2 HDHPs with an employee-directed, tax-advantaged health account — a health savings account (HSA) or a health reimbursement account (HRA) — are referred to as account-based health plans and are designed to encourage consumer engagement, resulting in more efficient use of health care services. HDHPs are defined as those plans where the deductible is at least the minimum health savings account (HSA) level required by the Internal Revenue Service ($1,200 single, $2,400 family in 2012). 3 Open-access PPO/POS plans are those that do not require a primary care physician (PCP) gatekeeper referral for specialty services. 4 MA plans, part of the Medicare program, can be private HMOs, FFS plans, PPOs or special-needs plans. Because enrollment is much higher in MA HMOs than in MA FFS or MA PPOs, this year’s survey did not capture data for MA FFS or MA PPOs. The survey did collect information about projected trends for Medicare supplemental plans, commonly referred to as “Medigap” plans, which are projected to be 6.4 percent for 2012. 5 Prescription drug carve-out data was captured for retail and mail-order delivery channels combined. SOURCE: 2012 Segal Health Plan Cost Trend Survey, The Segal Co. Visit www.segalco.com. | ||||
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