Express Scripts, Walgreen Flap Opens Door for 'Narrow Networks'

  By Jon Kamp 
 

The strained relationship between Express Scripts Holding Co. (ESRX) and Walgreen Co. (WAG) has heightened interest in networks that limit the number of drugstores available to pharmacy-benefit customers, but can result in savings for their employers and health plans.

The aim of so-called "narrow networks" is to strike a balance between drugstore options and prices for health-plan sponsors. Because Express Scripts' members saw limited disruption when nearly 8,000 Walgreen drugstores left the pharmacy-benefit manager's network, other pharmacy-benefit customers are exploring plans to trade some retail convenience for savings, according to industry observers.

This poses risks for Walgreen because Express Scripts is pitching networks that don't include the nation's biggest drugstore chain to clients of Medco Health Solutions, according to consultants. Express Scripts bought Medco in April to create the largest pharmacy-benefit manager, or PBM. Express Scripts members have had to use other pharmacies since Jan. 1, but Medco members generally still have access to Walgreen outlets.

These narrow networks are "something that's getting a lot more focus and attention than in prior years," said Larry Merlo, chief executive of CVS Caremark Corp. (CVS), which has both the second-largest PBM and pharmacy chain in the U.S.

PBMs handle drug benefits for health plans and corporate clients and strike deals with pharmacies over prescription reimbursement rates. Speaking at a recent conference, Mr. Merlo credited Express Scripts with helping members smoothly transition to new pharmacies--CVS has reaped significant rewards as Walgreen's biggest competitor--while showing limited pharmacy networks can be beneficial rather than disruptive.

These arrangements generally involve a smaller number of pharmacies where PBM members can get coverage for their medicine. The pharmacies within that network offer better rates in return for more traffic, creating savings for health plans and companies hiring PBMs.

Shifts to these networks won't happen overnight, and a busy PBM selling season is ongoing, but "it's more of a discussion point than it's been in the past," said David Dross, who leads the managed-pharmacy practice at consulting firm Mercer LLC. Tony Perkins, senior director of investor relations at PBM SXC Health Solutions Corp. (SXCI), cited a "huge spike" in requests to explore narrow networks, driven by the need to create comparisons with Express Scripts offerings, but a smaller increase so far actually using such plans.

For big pharmacy chains, giving up some pharmacy profits to get in narrow networks can mean more traffic in the retail aisles. But pressure to cut prices and join these networks creates challenges for the nation's independent, community pharmacies, which typically get at least 90% of their revenue from prescriptions, said Douglas Hoey, chief executive of the National Community Pharmacists Association trade group.

These community pharmacies represent more than one-third of the roughly 60,000 drugstores in the U.S. Mr. Hoey noted that small pharmacies often serve towns that don't have many other options, making them important locations.

Nevertheless, the vast U.S. retail pharmacy industry creates room for PBM customers to whittle down network sizes, said Edward Kaplan, a consultant for PBM clients who leads the managed-pharmacy practice at the Segal Co. Express Scripts' mostly uneventful transition away from Walgreen has served as important evidence as clients weigh modest savings against potential disruptions, Mr. Kaplan said.

This evidence could have further implications for the Express Scripts/Walgreen's relationship. The two companies have declined to say when the contract between Walgreen and Medco is scheduled to end, but industry consultants say Express Scripts is offering Medco clients the opportunity to carve out Walgreen in return for savings. Some Medco clients have taken Express Scripts up on the offer, according to Robert Ferraro, a pharmacy-benefits specialist who works with PBM clients at Xerox Corp.'s (XRX) Buck Consultants.

Walgreen on Thursday reported a 15% drop in June same-store pharmacy sales, the latest evidence of businesses losses linked to the Express Scripts dispute. Walgreen declined to discuss the Medco matter beyond recent comments on conference call, where Chief Financial Officer Wade Miquelon said Medco clients want to keep Walgreen, and that there was "very little risk" in losing that business.

Express Scripts confirmed it's actively marketing narrow networks to clients, though it wouldn't discuss specifics or its Walgreen strategy.

"We are out there showing every client the value that a narrow network" brings, said Tim Wentworth, a senior vice president overseeing sales and account management at Express Scripts, who joined the firm from Medco. That "certainly includes legacy Medco clients," he said.

-Write to Jon Kamp at [e-mail]