Here We Go Again – WAG and ESRX Network Dispute

This morning Walgreen’s announced that it could not reach agreement with Express Scripts on their retail network contract. This is a big deal (for both parties) as Walgreens processes approximately 90M Rxs for Express Scripts or approximately $5.3B worth of Rxs.

This has definitely happened before (see CVS Caremark and Walgreens before), but this year’s dispute is different for a few reasons:

  1. CVS Caremark clearly had their own retail network to fall back on. Express Scripts wouldn’t likely partner up with CVS so they’d be pushed into creating limited networks and partnering with everyone except the two biggest retail chains (in so much as PBMs partner with retailers versus simply negotiate with them).
  2. Last year’s dispute seemed focused on Maintenance Choice while this year’s dispute seems focused on contract terms (from press release).
    1. Express Scripts insisted on being able to unilaterally define contract terms, including what does and does not constitute a brand and generic drug, which would have denied Walgreens the predictability necessary to reliably plan its business operations going forward.
    2. Express Scripts rejected Walgreens request to be informed in advance if Express Scripts intends to add or transfer a prescription drug plan to a different Express Scripts pharmacy network, and to provide patients with equal access to Walgreens retail pharmacies.
    3. Express Scripts proposed to cut reimbursement rates to unacceptable levels below the industry average cost to provide each prescription.

As with last year (and year’s prior), I believe this will get resolved, but it creates an arbitrage opportunity for all the PBMs except Express Scripts in the short-term. [In the short-term, Express Scripts gets hurt in the sales cycle with this distraction. If this played out, Walgreens would take the brunt of the real impact by losing significant script volume. Ultimately, it’s a game of chicken with potential bad outcomes for all (as the picture indicates).]

My questions are:

  • These have been issues in contracting for a long time. Why now?
  • Why are these disputes with CVS Caremark and Express Scripts? What are Medco (or others) doing to avoid these issues?
  • Does Walgreens get these terms from other PBMs? Or, is Express Scripts able to get these terms from CVS and other large chains like Walmart?
  • Is this just a negotiating tactic which is to put public pressure out there? If so, it’s seemed to work in the past. Will it work again? [The UAW used to do this on a rotating basis to the big 3 auto makers. It worked well, but every once in a while they had to go on strike.]

I know one Wall Street analyst who is at Express Scripts tomorrow. That should be an interesting discussion.

If history is any indication, I would expect we’ll see an Express Scripts press release on their perspective by the end of the day.

Ultimately, the big question is whether something like this could be the final event to push the industry into limited / restricted networks (see Walmart post) and get it from the 5-10% of clients that use this today to a more meaningful number.

[FYI – As of right now, ESRX is down 1% and WAG is down almost 6%…buying opportunity?]

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2 Responses to “Here We Go Again – WAG and ESRX Network Dispute”

  1. Express Scripts issued their press release response earlier today (http://phx.corporate-ir.net/phoenix.zhtml?c=69641&p=irol-newsArticle&ID=1576686&highlight=). The key points (direct from the press release) were:

    Market Conditions Require Competitive Rates

    •Walgreens’ current rates are not competitive with its pharmacy peers. We are negotiating for Walgreens to provide competitive market rates. Over the next three years, the costs of non-specialty branded medications are projected to increase approximately 10 percent per year (more than 30 percent over three years), the costs of branded specialty medications are projected to increase more than 14 percent per year (nearly 50 percent over three years), and more than $60 billion worth of branded medications will lose patent protection, opening the door to more affordable generic alternatives. Without Walgreens providing reasonable adjustments to its rates, our clients and patients will bear the financial burden of branded price inflation, while not receiving the full economic benefit of increased generic utilization. Under Walgreens’ current proposal, the added cost burden to our clients would result directly in profits to Walgreens.

    Express Scripts Seeking No Other Changes to Contract Terms

    •Express Scripts has requested the same contract terms that were mutually agreed upon in the existing contract. To be clear, Express Scripts has not asked to change the definitions of branded and generic medicines.

    Control of Pharmacy Benefit Plan Design Should Remain with Plan Sponsors

    •Walgreens wants to dictate which clients and members to serve, focusing on the most profitable patients. Neither network providers nor Express Scripts should control pharmacy benefit plan design. This is the sole responsibility of plan sponsors to represent the best interests of their members.

    • This is not a surprise, both parties have their own standing points.
      WAG wants to maintain the profit rate, for the best interest of their share holders. ESRX wants the same outcome and stay competitive, also in the likelihood of lowering cost for their own clients.

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