Mandatory mail still a threat, but prescriptions by post slow
The impact mail order has had on community pharmacy over the past decade is profound. And the rapid rise of mandatory mail plans, which penalize members with higher co-pays if they choose to get their chronic-care prescriptions from their local neighborhood pharmacist, has made the situation that much worse.
Large numbers of employees and their dependents now fall under mandatory mail plans, including employees of such big companies as IBM, DuPont and General Motors, as well as members of such unions as the United Auto Workers.
According to the 2007 Pharmacy Satisfaction Digest from WilsonRx and Boehringer Ingelheim, approximately 1-out-of-3 households indicate that they use a mail-order pharmacy to fill or refill prescriptions at least some of the time, and 36 percent of those households say they’re required to do so by their health plans.
The result has been a significant long-term shift of prescription business away from community pharmacy and into giant mail-order operations, many of them owned by the very prescription benefit management companies that chain and independent pharmacies depend on for the vast majority of their pharmacy customers. Although retail pharmacy leaders have long complained about the potential conflicts of interest and monopoly that PBM-owned mail-order pharmacies represent, the managed care industry has reaped a sales and profit bonanza by shifting millions of patients into its own mail divisions—and by convincing large employers and other health plan sponsors to impose mandatory mail provisions on their own beneficiaries.
For retail pharmacy, however, the picture isn’t all bleak. While the mail-order pharmacy business continues to grow, that rate of growth appears to be leveling off. Prescriptions by post grew at a lower rate of 10.7 percent in revenue in 2006, according to IMS Health, to $42.3 billion, or 21.5 percent of total U.S. retail prescription sales. Sales in units, or numbers of prescriptions actually dispensed by mail-order pharmacies, rose just 4.2 percent last year, for the second year in a row.
As a percent of all retail U.S. scripts dispensed, mail accounted for just 6.8 percent of total prescription units in 2006.
By contrast, script counts jumped 13.2 percent at mail-order pharmacies in 2004, according to IMS, with dollar volumes up 17.9 percent. The following year, that growth rate already was showing serious signs of a slowdown, with script revenues up 11.5 percent for mail-order pharmacies in 2005, and units dispensed growing at 4.2 percent.
The latest data underscore the slowing growth trend. “For the first time in several years, script growth at chains [including mass] rose at a faster pace than at mail, with a 5.8 percent increase [in 2006] vs. the 4.2 percent growth in mail scripts,” noted retail analyst Meredith Adler of Lehman Brothers Equity Research. “The growth in scripts for all retailers was only 4.3 percent, with independents’ growth of 1.9 percent dragging down the retail average, but even then retail growth was about the same as mail growth.”
It could be that mail-order is nearing full capacity as an alternative form of prescription delivery—particularly with the advent of 90-day prescription programs by many pharmacy chains and growing acceptance of 90-day retail programs by third-party health plans and states. Meanwhile, pharmacy leaders are lobbying intensively for legislative changes to the Medicaid program that would allow retailers to match the 90-day script benefits offered by mail-order plans to Medicaid patients.
Chain and independent pharmacy stakeholders did score one significant victory in recent months on the mail-order front. A massive grassroots lobbying campaign by retail pharmacies and their supporters persuaded members of the U.S. House of Representatives to keep a mandatory-mail provision out of the new appropriations measure for the Tricare military health program and its 9.2 million beneficiaries. The provision was contained in the massive Fiscal Year 2008 National Defense Authorization Act, although the measure has yet to win final approval in the Senate and the signature of the president.
“This bill is pro-soldier and pro-veteran in that it protects the right of Tricare beneficiaries to benefit from their relationships with community pharmacy, which improve patient outcomes. The bill also is pro-savings for military families and for the Department of Defense,” said National Association of Chain Drug Stores president and chief executive officer Steven Anderson.
“In a partnership with the National Community Pharmacists Association, representing the independents, we directed over 100,000 letters, faxes and phones calls to legislative offices,” noted former NACDS chairman Tony Civello, who is president and chief executive of Kerr Drug, in a speech earlier this year. “Using our enormous combined energies—and reaching deep into our local grassroots—we conducted a successful strategic campaign. And the result was a win, not only for retail pharmacy, but for all the people served by Tricare who might have been denied the right to get their medications from their community pharmacy.”
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