Pepsi, CVS Caremark, and the FTC

Dinah Brin at Dow Jones reports that a recent Federal Trade Commission (FTC) decision regarding Pepsi could have implications for the agency's ongoing probe of CVS Caremark (NYSE: CVS). See Pepsi Ruling May Have Implications For FTC's Review Of CVS.

An antitrust lawyer quoted in the Dow Jones article states: "There are parallels between the two cases.” Hmmm. I have no idea what evidence or documents the FTC will turn up in its investigation of CVS Caremark, but I’m skeptical of the Pepsi-as-precedent premise.

According to the FTC, PepsiCo must restrict its access to confidential business competitive information of rival Dr Pepper Snapple Group as a condition for proceeding with PepsiCo’s proposed $7.8 billion acquisition of its two largest bottlers and distributors, which also distribute Dr Pepper Snapple Group carbonated soft drinks. The supposed analogy is the business relationship between Caremark and CVS retail pharmacies.

Just to be clear, I'm not going to defend or defame CVS Caremark. Regular readers know I have been critical of how the CVS-Caremark combination is affecting the PBM business. However, Ms. Brin’s article does a very nice job of laying out the two opposing FTC storylines, so it’s worthwhile revisiting an issue I first addressed last April in Could the FTC undo CVS Caremark?

THE CHOICE OF A NEW GENERATION
I consider Maintenance Choice to be a “restricted network” design allowing the consumer to choose the channel (mail versus retail), but not the outlet. The consumer must use either a CVS pharmacy or a Caremark mail pharmacy for dispensing of maintenance medications.

The PBM client (payer) saves money whenever a consumer fills a 90-day prescription at CVS pharmacy (at mail pricing) instead of three 30-day scripts at a CVS or non-CVS retail pharmacy (at presumably higher retail reimbursement levels). As I understand the most common plan design, a consumer switching from Caremark mail to CVS pharmacy would have no financial impact on the payer.

SCENARIO A: BLAME THE PBM

Independent pharmacists claim CVS Caremark breached its “self-imposed firewall” by contacting consumers regarding the Maintenance Choice plan design. From the article:

“Community pharmacists and patients complain CVS Caremark used information about prescriptions for members in its pharmacy benefits manager, or PBM, to force them to buy their maintenance medications through CVS Caremark retail or mail-order pharmacies.”

In a September 2009 letter to FTC Chairman Jon Leibovitz, NCPA states: “We strongly believe that CVS Caremark is engaging in unfair and deceptive business practices that are causing harm to consumers, patients and local community pharmacies.”

SCENARIO B: BLAME THE PAYER

I don't think Scenario A describes the marketplace correctly. In reality, employers choose the specific designs of their prescription drug plans, including member cost sharing and any other limitations or restrictions.

Thus, Maintenance Choice is a benefit design decision made by the plan sponsor, not by CVS Caremark. As of February 8 2010, 412 PBM clients (5.1 million lives) are now in MC and 70 PBM clients (400,000 lives) are in the process of being implemented. (source).

From the article:

“CVS says that for Caremark PBM members whose employers use a "mandatory mail" benefit plan for maintenance drugs, it simply offers a choice to pay lower mail- order prices at its stores. CVS Caremark doesn't decide how much a copay should be or whether a prescription should be filled through the mail or at a particular retail pharmacy; the client makes those decisions in adopting a plan design, CVS said.”

The most recent Prescription Drug Benefit Cost and Plan Design Survey supports this view. According to a survey of 417 employers, the internal HR/Benefits staff is responsible for the drug benefit plan design at 46.3% of the employers compared to only 5.3% employers where the PBM made the decision. (source)

THE PEPSI CHALLENGE

If you are spending your own money, then by all means choose your own pharmacy.

But if you ask someone else—your employer or an insurance company—to pay for your drugs, don’t be surprised if they want you to save them money. Like it or not, Maintenance Choice saves money for the payer by providing mail order pricing in a retail format.

There are other ways for a payer to get lower costs in a retail format, but they also involve a more selective network design. Two obvious examples: the Walmart/Walgreens direct-to-payer model or Walmart’s $4 discount generic program. Both models require the consumer to use a specific pharmacy so that the payer can get the discounts. The consumer is the payer in the Walmart $4 model.

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Please note that I have no business or financial relationship with CVS Caremark. I am not involved in this legal matter and am not privy to any internal documents. As always, I reserve the right to change my opinions as additional information becomes known.