Walgreens Joins the Attack on PBM Mail Profits

Walgreens (NYSE:WAG) launched a new advertising campaign last week to convince consumers to fill 90-day prescriptions at a Walgreens retail pharmacy instead of a mail-order pharmacy. Read the press release. The tagline: “It’s 3 refills in one. And for 3 months, you’re done.”

Walgreens announcement highlights the intense competitive battle to gain a privileged position as a consumer and clinical access agent. This competition benefits payers and consumers at the expense of generic and brand pharmaceutical manufacturers.

Low-price retail fulfillment is a threat to PBM profits, especially as the number of generic launches starts to decline post-2015. Walgreens joins Walmart (NYSE:WMT) and CVS Caremark (NYSE:CVS) in pursuing strategies that eliminate the traditional out-of-pocket cost difference for consumers between a mail-order vs. a store-based pharmacy. Will plan sponsors pay attention to drug channel margins and create a strategic vulnerability in the profit model of the other large pharmacy benefit managers (PBMs)—Express Scripts (NASDAQ:ESRX) and Medco Health Solutions (NYSE:MHS)?

Read on for my detailed observations and predictions about 90-day prescriptions at store-based retail pharmacies. FYI, you can learn more about mail-order economics for PBMs, plan sponsors, and consumers in The 2010-11 Economic Report on Retail and Specialty Pharmacies.

90-day at retail undermines mail-order economics. Mail-order prescriptions are typically three times as large as retail prescriptions, e.g., 30 days at a retail pharmacy vs. 90 days from the mail-order pharmacy. In most benefit designs, the pharmacy reimbursement formula and co-payment structure makes 90-day mail-order dispensing less expensive for both the payers and the consumer, encouraging the substitution of -owned mail pharmacies for retail network pharmacies. However, the growth of 90-day at retail levels the playing field, even if a pharmacy earns less for a 90-day prescription than for 3 30-day prescriptions.

Go 90 builds on Walgreens lower-cost infrastructure. Way back in October 2009, I highlighted how Walgreen was positioning itself to succeed as a low-cost prescription fulfillment provider with its Rewiring for Growth. (See Walgreen's Future Profit Potential.) At last week’s annual meeting, Walgreen showed they are on track to take $1 billion in costs out of their operations while growing overhead very slowly.

Walgreens benefits from Part D’s anti-mail bias. As I note in Who Paid for Prescription Drugs in 2009?, Medicare drug expenditures are growing faster than any other payer. The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (Public Law 108-173) contains a “level playing field” requirement and prohibits mandatory use of mail order pharmacies. If a Part D plan offers a 90-day supply at mail, then it must offer a 90-day supply option at retail. (The patient is responsible for any higher cost-sharing that applies at a retail pharmacy.) This is one of the reasons that mail order penetration is much lower in Part D plans vs. the overall market.

Walgreens joins CVS Caremark in promoting channel neutral dispensing. CVS Caremark’s Maintenance Choice program makes mail and retail dispensing channels economically equal for consumers by eliminating the out-of-pocket cost difference for the consumer between mail and retail for 90-day maintenance prescriptions. There is also reportedly no reimbursement difference for payers regardless of the dispensing channel used by a consumer. The program goosed CVS’ retail same-store prescription sales by shifting prescriptions out of its own Caremark mail-order pharmacies and by taking market share from competing retail pharmacies. See CVS Grows While Legal Storm Clouds Gather.

Mail-order script growth will remain below the market. Expect mail growth to be very challenging. The efforts of Walgreens and others will further slow down mail pharmacy growth. In 2009, mail pharmacies were 17.5% of prescriptions but growth lagged the overall market. This reflects a multi-year slowdown in the growth of prescriptions dispensed via mail-order pharmacy. The growth of channel neutral dispensing will put pressure on mail growth. (See chart below.)

Walgreens wants plan sponsors to pay attention. Walgreens President and CEO Greg Wasson made the following critical statement in the announcement:

“Today, some patients still are only able to receive a 90-day supply through a mail-order option designed by their prescription plan administrator. We are out to change that with our ‘Go 90’ program, which will inform eligible patients that they can receive a 90-day medication supply from their trusted community pharmacist. We also will be encouraging all prescription plan administrators to adopt this design to help both their clients and individuals save money, while improving patient health through proper medication adherence and compliance.” (emphasis added)

Hit ‘em where it hurts. The three largest PBMs—CVS Caremark (NYSE:CVS), Express Scripts (NASDAQ:ESRX), and Medco Health Solutions (NYSE:MHS)—account for more than 80% of U.S. mail-order prescriptions. PBMs also operate the largest specialty pharmacies, most of which use a mail-order dispensing format. Mr. Wasson’s statement makes sense when you consider that the majority of PBM profits comes from dispensing generic drugs at their own mail-order pharmacies. Generic drugs from mail pharmacies accounted for only 16% of equivalent prescriptions but 53% of per-prescription profits. (See Exhibit 23 in The 2010-11 Economic Report on Retail and Specialty Pharmacies.)