Walgreens and Express Scripts: The Plot Thickens ($ESRX, $WAG)

Remember when this “conflict” was first announced a few months ago.  If you’re like me, you probably assumed this would be over in 30-days like the Walgreens – CVS Caremark dispute last year.  What’s different?  I’m not sure.  It seems like both sides are well dug in.  (From my poll a few days ago of 22 of the readers of this blog, 65% felt this would get resolved by 1/1 and 25% felt that it would never get resolved.)

Now, it seems like both sides are continuing to take significant steps towards no resolution.

Express Scripts has apparently launched a pilot program to move share from Walgreens stores now using coupons.  I believe the pilot was with Lowes and is about to expand to the Department of Defense.  Additionally, I’ve heard that Express Scripts has sent out letters to their clients preparing them for a limited network starting 1/1/12 without Walgreens.

On the flipside, I’ve heard that Walgreens has begun putting signage out encouraging consumers to talk to their plans about excluding them from the network and for Medicare members to chose plans that aren’t run by Express Scripts.  Walgreens also put out a whitepaper about what happens when you remove them from the network.  This has some really interesting data in it.

Key Statement: Excluding Walgreens from a pharmacy network will result in little to no savings for most sponsors and patients, and in some cases will raise costs, while causing significant patient disruption and risking gaps in care, and increasing administrative costs on plan sponsors.

• As part of this document, they are encouraging payers to consider directly contracting with them and/or creating a custom network (if their PBM contracts allow for that).
• They state that their costs are comparable to other retailers or within 2% of their costs.
• They show some data from another PBM (not named) that modeled out network savings for them based on a limited network taking into account their drug costs, generic fill rate, and 90-day rates.  It shows a jump in costs versus savings.

• They share data that their Generic Fill Rate (GFR) is 1.4% higher than the rest of the Express Scripts retail network which the paper says translates to $2 per Rx in cost.
• They say that 90-day retail generates a 6-8% savings compared to 30-day retail based on the pricing that they offered to Express Scripts.

Ultimately, I still believe resolution will occur before the end of the year.  While both parties are dug in, I believe it’s a lose-lose situation for this to stay unresolved.  That being said, there are lots of things that could occur here:

• This creates a wave of direct contracting between payers and pharmacies.
• This validates the integrated model of CVS and Caremark.
• This creates a large number of limited networks.
• This creates greater use of the Walgreens discount card and/or cash business at Walgreens especially for lower cost generics.
• Alienating Walgreens creates a disruptive force in the FTC review of the proposed Medco acquisition.
• Another PBM jumps in to do a creative deal with Walgreens which limits their long-term ability to work with Express Scripts.
• Express Scripts ends up in a shotgun relationship with CVS.
• The terms of PBM contracts get changed going forward based on new terms regarding retailers.
• Walgreens becomes a much more vocal voice in the retail world through NCPA and other organizations.

Between this and the proposed Express Scripts acquisition of Medco, the landscape in the PBM market could be radically different by early 2012.

[Note: As the stock market has dropped, I have continued to buy stock in the PBM industry including several of the specific companies mentioned in this post – MHS, ESRX, WAG and CVS.]