By Jon Kamp
The strained relationship between Express Scripts Holding Co.
(ESRX) and Walgreen Co. (WAG) has heightened interest in networks
that limit the number of drugstores available to pharmacy-benefit
customers, but can result in savings for their employers and health
plans.
The aim of so-called "narrow networks" is to strike a balance
between drugstore options and prices for health-plan sponsors.
Because Express Scripts' members saw limited disruption when nearly
8,000 Walgreen drugstores left the pharmacy-benefit manager's
network, other pharmacy-benefit customers are exploring plans to
trade some retail convenience for savings, according to industry
observers.
This poses risks for Walgreen because Express Scripts is
pitching networks that don't include the nation's biggest drugstore
chain to clients of Medco Health Solutions, according to
consultants. Express Scripts bought Medco in April to create the
largest pharmacy-benefit manager, or PBM. Express Scripts members
have had to use other pharmacies since Jan. 1, but Medco members
generally still have access to Walgreen outlets.
These narrow networks are "something that's getting a lot more
focus and attention than in prior years," said Larry Merlo, chief
executive of CVS Caremark Corp. (CVS), which has both the
second-largest PBM and pharmacy chain in the U.S.
PBMs handle drug benefits for health plans and corporate clients
and strike deals with pharmacies over prescription reimbursement
rates. Speaking at a recent conference, Mr. Merlo credited Express
Scripts with helping members smoothly transition to new
pharmacies--CVS has reaped significant rewards as Walgreen's
biggest competitor--while showing limited pharmacy networks can be
beneficial rather than disruptive.
These arrangements generally involve a smaller number of
pharmacies where PBM members can get coverage for their medicine.
The pharmacies within that network offer better rates in return for
more traffic, creating savings for health plans and companies
hiring PBMs.
Shifts to these networks won't happen overnight, and a busy PBM
selling season is ongoing, but "it's more of a discussion point
than it's been in the past," said David Dross, who leads the
managed-pharmacy practice at consulting firm Mercer LLC. Tony
Perkins, senior director of investor relations at PBM SXC Health
Solutions Corp. (SXCI), cited a "huge spike" in requests to explore
narrow networks, driven by the need to create comparisons with
Express Scripts offerings, but a smaller increase so far actually
using such plans.
For big pharmacy chains, giving up some pharmacy profits to get
in narrow networks can mean more traffic in the retail aisles. But
pressure to cut prices and join these networks creates challenges
for the nation's independent, community pharmacies, which typically
get at least 90% of their revenue from prescriptions, said Douglas
Hoey, chief executive of the National Community Pharmacists
Association trade group.
These community pharmacies represent more than one-third of the
roughly 60,000 drugstores in the U.S. Mr. Hoey noted that small
pharmacies often serve towns that don't have many other options,
making them important locations.
Nevertheless, the vast U.S. retail pharmacy industry creates
room for PBM customers to whittle down network sizes, said Edward
Kaplan, a consultant for PBM clients who leads the managed-pharmacy
practice at the Segal Co. Express Scripts' mostly uneventful
transition away from Walgreen has served as important evidence as
clients weigh modest savings against potential disruptions, Mr.
Kaplan said.
This evidence could have further implications for the Express
Scripts/Walgreen's relationship. The two companies have declined to
say when the contract between Walgreen and Medco is scheduled to
end, but industry consultants say Express Scripts is offering Medco
clients the opportunity to carve out Walgreen in return for
savings. Some Medco clients have taken Express Scripts up on the
offer, according to Robert Ferraro, a pharmacy-benefits specialist
who works with PBM clients at Xerox Corp.'s (XRX) Buck
Consultants.
Walgreen on Thursday reported a 15% drop in June same-store
pharmacy sales, the latest evidence of businesses losses linked to
the Express Scripts dispute. Walgreen declined to discuss the Medco
matter beyond recent comments on conference call, where Chief
Financial Officer Wade Miquelon said Medco clients want to keep
Walgreen, and that there was "very little risk" in losing that
business.
Express Scripts confirmed it's actively marketing narrow
networks to clients, though it wouldn't discuss specifics or its
Walgreen strategy.
"We are out there showing every client the value that a narrow
network" brings, said Tim Wentworth, a senior vice president
overseeing sales and account management at Express Scripts, who
joined the firm from Medco. That "certainly includes legacy Medco
clients," he said.
-Write to Jon Kamp at jon.kamp@dowjones.com