CAT Rolls Out Preferred WAG-WMT Pharmacy Network

Equipment maker Caterpillar (NYSE:CAT) has begun rolling out a pharmacy network made up primarily of Wal-Mart (NYSE:WMT) and Walgreens (NYSE:WAG) pharmacies. Their move is a logical outgrowth of the cost-plus deal that I discussed in CAT + WAG = More Momentum for Cost Plus.

I want to review some newly-public details of their program, which starts in January 2010. Based on my reading of the plan design, this set-up will increase market share for Wal-Mart and Walgreens. Look for copycat deals in 2010 and 2011 if CAT can evolve this network strategy into a beautiful butterfly.

As always, Pembroke Consulting retainer clients can contact me for additional thoughts on this topic. Gerson Lehrman Group customers can make a request via their GLG client representative.


Cost-Plus Pharmacy Reimbursement and Network Design

In my pharmacy trends report, I predict the growing establishment of retail pharmacy networks that use financial incentives or explicit restrictions to direct consumers into specific pharmacies or channels. These programs encourage or designate the consumer’s pharmacy options in a way that provide lower costs and/or greater control for a third-party payer. Most common are benefit designs encouraging the use of mail pharmacies (as described in the section of the pharmacy report beginning on page 13).

Wal-Mart’s pricing of generic drugs in its direct-to-payer agreement with Caterpillar is a Preferred Network model because consumers have specific incentives to use Wal-Mart’s store-based pharmacies. Consumers are still free to choose a different pharmacy but only at Wal-Mart will they have no co-payment for the selected 2,500 generic drugs. See Exhibit 20 of the report for a graphical representation of the financial flows in this system.

The benefit design math worked for CAT in this initial deal because of the cost-plus reimbursement methodology. Reimbursement for prescriptions filled at a Wal-Mart pharmacy are based on Wal-Mart’s actual invoice prices plus an additional (undisclosed) amount to cover Wal-Mart’s overhead and profit margin. Wal-Mart claims that its cost-plus model saves employers 30% to 35% on generic drug costs and some (unspecified) savings on brand-name drugs.

In August 2009, Walgreens announced an agreement with Caterpillar that would extend the cost-plus pricing model to Walgreens’ broader network of pharmacies starting in January 2010.

Network Metamorphosis

Now that there are two pharmacies with broad geographic reach in the network, Caterpillar is motivated to steer even more of its employees to its preferred pharmacies. The pharmacies will reportedly base its discounts on the market share gained through the Caterpillar relationship. (source) The more drugs that Caterpillar beneficiaries purchase at Walgreens or Wal-Mart, the cheaper the drugs will be for Caterpillar.

Caterpillar will drive consumers to its “Participating Provider” pharmacies through financial incentives (lower co-payments) and higher hurdles (more paperwork). Here are some highlights from Caterpillar’s 2010 Prescription Drug Network FAQs document.

4. Am I required to go to a Walmart or Walgreens pharmacy for my prescription drugs? No. But you will pay more at other pharmacies. You must use Walmart/Sam’s Club/Neighborhood Market or Walgreens/Happy Harry’s pharmacies if you want to continue to purchase prescriptions at the current copay levels.

5. What happens if I use a nonparticipating provider pharmacy? We will continue to use the current process: If you use a nonparticipating provider pharmacy you will pay an applicable nonparticipating provider coinsurance percentage of the total cost of the covered prescription. When you initially make the purchase you will pay 100% of the total cost of the covered prescription at the pharmacy and you’ll need to submit a paper claim to RESTAT for a coverage determination and processing.

Note that Walgreens and Wal-Mart can’t provide complete coverage so Caterpillar is selectively adding other pharmacies in small towns while simultaneously encouraging home delivery. From the FAQ:

Currently, 85% of participants nationally have access to a Walgreens or Walmart within 10 miles of their home and 95% of participants in urban areas have access to either a Walgreens or Walmart within three miles of their home…For certain medications, participants may wish to consider the Walgreen’s mail order or Walmart ship-to-home program.

You can read one independent pharmacy’s story in CAT to Keep Some Independent Pharmacies At Least Another Year from the Peoria Journal Star. The comments below the article are worth reading, if only to see how misinformed most people are about pharmacy economics. Your old friend Drug Channels even got a shout-out in a comment from CAT_Man, who is the reason that Google alerts found the article for me.

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Pharmacy Benefit Managers (PBMs) are only nibbling around the edges of the preferred model for now, with the exception of CVS Caremark’s (NYSE:CVS) odd couple.

But I think that the trend toward more restrictive preferred pharmacy networks will accelerate, especially if we see demonstrated pharmacy savings. As it does, these programs will increase market share for retail pharmacies designated as “preferred” providers of pharmacy services. The excluded pharmacies will complain loudly, but ultimately be forced to adapt.