Chain, independent drug retailers strengthen strategic alliances
The drug store industry has taken the gloves off. But its bout with the forces that threaten its future is likely to go many rounds and to require all the swiftness, steely nerves and endurance chain pharmacy leaders can muster.
The threats to chain and independent pharmacy retailers are well documented but no less daunting now than they were a year ago. Among the toughest:
White House and congressional ignorance of and indifference to pharmacy’s challenges and its health care contribution;
U.S. fiscal policy that consistently targets community pharmacy for the brunt of its health care cost-cutting efforts, most notably this year in the Medicaid program;
“Low and slow” reimbursement policies among the prescription drug plans administering the Medicare Part D drug benefit program, which have stretched many independent and small-chain pharmacies to the breaking point as the PDPs hold up payments for Medicare scripts dispensed—in some cases for 45 and even 60 days, according to angry pharmacy owners;
Continuing resistance from pharmacy benefit plans and corporate health plan sponsors to the notion of paying for advanced pharmacycare programs like disease management, patient education and disease outcomes monitoring and management—despite growing evidence that those programs save significant health care costs over the long run by keeping patients out of hospitals and acute-care settings;
A very mixed progress report on the launch of Medication Therapy Management, which Congress mandated as part of the Medicare Part D program, but which has spurred much confusion about what constitutes MTM, which patients qualify for it, who pays for it, who delivers it and how much it costs.
The threat posed by mail order pharmacy continues—particularly mandatory mail plans that severely penalize plan members who opt to purchase their prescriptions from local pharmacies rather than from the faceless mail order facility sponsored by their plan.
Those and other threats have spawned an unprecedented era of coalition building among chain and independent pharmacy groups. Realizing they have much in common when confronted by massive Medicaid funding cuts, clumsy and ill-informed government policies and other forces that undercut already-slim pharmacy profit margins, organizations like the National Association of Chain Drug Stores, the National Community Pharmacists Association, the American Pharmacists Association and the Food Marketing Institute have joined forces to lobby on behalf of all of retail pharmacy. Also joining the battle have been pharmacy educators, state pharmacy associations and pharmacy policymaking groups.
The result is the creation of alliances like the Coalition for Community Pharmacy Action and the Community Pharmacy Foundation. Both collectively under those umbrella organizations and individually, pharmacy leaders are lobbying hard on Capitol Hill and in state houses to turn back budget cuts to pharmacy reimbursement, mandatory mail order plans in public health programs and other threats to the industry.
Thus far, their efforts have met with only limited success. Despite an occasional victory in the legislative arena—most notably in ongoing efforts to turn back a mandatory mail provision in the new funding bill for military programs like TRICARE, the military health plan, and in efforts to win over new supporters among legislators in Congress—the pharmacy lobby all too often finds itself on the short end of the stick when it comes to the divvying up of federal health care dollars for programs like Medicaid.
One executive with NACDS, interviewed by Drug Store News in late July, issued his own wry commentary on the lobbying power and economic clout of chain and independent pharmacy versus that of powerful groups like the pharmaceutical and insurance industries. “PhRMA employs 40 outside firms to lobby on its behalf. We don’t,” said Paul Kelly, vice president of government affairs for NACDS.
“They are sort of everywhere” on Capitol Hill, he added in an interview in late July. “And they’re smart. They develop good arguments that make sense to policymakers. We have good arguments, too, but they’re just in more venues where [lawmakers and staff] are to make their points to support their goals.
“Ultimately, this industry, I think, is going to have to focus more on our natural grass-roots power, and that has to be done more effectively,” Kelly added. “We have to focus those assets, which, if done properly, could be very impressive and very effective. Drug stores are going to have to get used to the idea of making time for some of their people to communicate with members of Congress.”
Kelly cited the grass-roots lobbying effort that went on last year, in which chain and independent pharmacies enlisted their own customers who were members of the military or their dependents in successful bag-stuffer campaign. “Patients were getting information on how to call Congress and weigh in on these TRICARE [mandatory mail] provisions, and it succeeded.”
In his first presentation to members of NACDS as the group’s new president and chief executive officer earlier this year, Steven Anderson rallied the industry to take the offense in communicating the value of community pharmacy.
The new CEO echoed the oft-repeated call by former NACDS chairman Tony Civello for all of retail pharmacy to “speak with one voice” and forge a more powerful coalition to spearhead common goals. “It’s time for a change. And NACDS is going to lead that change,” Anderson declared in his “State of the Association” remarks at the NACDS Annual Meeting in Scottsdale, Ariz. “My goal is to position NACDS to take the lead in uniting the industry and to take the offense in developing the strategy and framing the message. We must make sure that no one has more authority than we do when it comes to the dictates and developments that impact chain pharmacy,” Simply said. “We need to quit playing defense.”
“We must promote an accurate perception of this industry that promotes the value of pharmacy, our importance to the local community and the national economy, and the critical role pharmacy plays in health care and patient outcomes,” Anderson added.
Grocer sings new tune in community involvement
Meijer is taking another step in community relations, to the tune of promoting and selling CDs of local musicians.
The Michigan-based 176-unit grocery chain launched the Outside the Mainstream promotion in February with a solo CD from Josh Davis, a singer from Lansing, Mich., whose Fool Rooster CD was recognized by Performing Songwriter magazine for its lyric.
Each month, the chain is featuring a new performer in its circulars, which are sent weekly to 7 million households in Ohio, Michigan, Illinois, Indiana and Kentucky, according to company vice president of public affairs Stacie Behler. Meijer purchases 1,000 of the artist’s CDs and offers them for sale in all the chain’s stores for $7.49.
“The goal of the program is to bring some of the talent that we find in our own backyards to a wider audience than they can normally reach by themselves,” Behler said. “And by supporting this with a low price and a feature in our circular, hopefully it will lead people to gamble on the purchase of music that is worthy of discovery.”
Meijer, according to Behler, is trying to create regional loyalty to its stores by promoting local talent.
CDs chosen for promotion, according to the chain, must have a UPC and be professionally duplicated. Submitted CDs are sorted according to state and chosen on the basis of whatever state will be featured that month and how different the music is from the previous month.
Featured in April is Michigan-based Potato Moon with its CD “The Life of The Lonely Jones.”
CVS wins Caremark battles
WOONSOCKET, R.I. —The battle for Caremark Rx has finally come to an end. And, to the dismay of Express Scripts, CVS has emerged the winner, creating a $75 billion pharmacy benefit management powerhouse that is likely to serve as a benchmark for additional mergers within the industry.
“CVS/Caremark will offer end-to-end services, from plan design to prescription fulfillment, as well as the opportunity to improve clinical outcomes, which will result in better control over health care costs for employers and plan providers,” stated Tom Ryan, president and chief executive officer of CVS/Caremark, late last month when the deal closed. “The company will improve the delivery of pharmacy services and health care decision-making, enabling consumers to benefit from unparalleled access, greater convenience and more choice.”
With the close of the transaction—ultimately valued at $27 billion—CVS/Caremark has moved into a strong, competitive position. The combined company will be No. 1 in pharmacy sales, PBM-managed lives, specialty pharmacy sales and retail-based health clinics. It will be No. 2 in mail services.
That adds up to a lot of extra leverage for the retail health care juggernaut with suppliers, as well as insurers and payers.
In terms of synergies, CVS expects to realize between $800 million to $1 billion in revenue synergies in 2008, and significantly more thereafter. The company expects about $500 million in cost savings, largely related to better purchasing.
“We would like to note that every deal that both CVS and Caremark have done historically has yielded synergies significantly in excess of original guidance,” stated Citigroup analyst Deborah Weinswig in a recent research note. “We believe this deal will be no exception.”
Charles Boorady, also of Citigroup, believes that if the company achieves cost savings from the drug-procurement process, it likely will come from a combination of the following: manufacturers accepting the lower price or offering greater rebates, the wholesalers and distributors accepting lower prices and manufacturers bypassing the wholesalers and selling directly to the combined CVS/Caremark entity.
While many industry observers view the merger as a boon for the companies, it undoubtedly will have major implications on the industry, in general, as vertical integration is a new paradigm that—if successful—could clear the way for more mergers moving forward, with Medco and Express Scripts likely being the next targets.
“The fragmentation in the past may be the reason why vertical integration did not work, but the sheer scale of the CVS/Caremark company may be able to make it work,” Boorady said. “The only test will be whether customers buy into the concept or the concerns over the perceived channel conflict will outweigh it.”
Either way, Boorady sees it as a win-win for rival PBMs. “I see Medco and Express Scripts winning either way. If this integration works, they are likely to be the ones that are acquired next. If it doesn’t work then they could stand to gain customers that prefer a standalone [PBM] instead of a vertically integrated model.”
Another issue such a deal brings to the forefront is network restriction. If customers are willing to restrict the retail pharmacy so that employees can get their prescriptions filled at a single chain, or just a few chains in the market, then it will make the synergy from a vertical integration more obvious, according to Boorady.
However, this has been a concern for several years and has yet to materialize.
“I think most employers have concluded, and will continue to conclude, that the sheer hassle factor that you are putting on your employees by making them go to a CVS instead of a Walgreens, or vice versa, isn’t really worth what little savings you can get relative to other things you can do that present less of a hassle to the employee but can save a lot more money,” Boorady said.
However, prior to the deal, CVS Pharmacare controlled a provider network of more than 56,000 retail pharmacies. Meanwhile, Caremark’s network numbered more than 60,000 retail pharmacies, so it is unlikely that the combined company, post-merger, would suddenly pull back the size of its network—particularly, if the end goal is to remain attractive to insurers and payers and competitive with stand-alone PBMs.
According to William Blair & Co. analyst Mark Miller, the combined company is facing its first big test as it expects an announcement on the large Federal Employee Program contract—currently up for negotiation—as early as May. Three years ago, Caremark won this contract from Medco and it is likely that the two PBMs, among others, will bid for this business aggressively.
“While there are many moving parts to these types of negotiations, this will be the first big test for the new CVS/Caremark, and may provide some incremental perspective on the current state of the competitive environment,” Miller stated in a research note.
In related news, CVS/Caremark has announced the members of the company’s board of directors. As previously disclosed, the 14-member board was evenly split among designees from CVS and Caremark.
Former Caremark chairman and chief executive officer Mac Crawford has been elected chairman of the board of the combined company. Ryan will continue to serve as president and chief executive officer.
The following individuals named to the board from CVS are:
Ryan, president and chief executive officer of CVS/Caremark Corp.
David W. Dorman, senior advisor and partner, Warburg Pincus LLC.
Marian L. Heard, president and chief executive officer, Oxen Hill Partners.
William H. Joyce, chairman and chief executive officer, Nalco Co.
Terrence Murray, former chairman and chief executive officer, FleetBoston Financial Corp.
Sheli Z. Rosenberg, former vice chairman, president and chief executive officer, Equity Group Investments LLC.
Richard J. Swift, former chairman, president and chief executive officer, Foster Wheeler Ltd.
The following individuals named to the board from Caremark are:
Mac Crawford, chairman of CVS/Caremark Corp.
Edwin M. Banks, founder, Washington Corner Capital Management LLC.
C. David Brown II, chairman, Broad and Cassel.
Kristen E. Gibney Williams, former executive of Caremark’s Prescription Benefits Management division.
Roger L. Headrick, managing general partner, HMCH Ventures; president and chief executive officer, ProtaTek International
Jean-Pierre Millon, former president and chief executive officer, PCS Health Systems
C.A. Lance Piccolo, chief executive officer of HealthPic Consultants