Walgreen Signs New Limited Network Deals for Medicare Plans

--Walgreen joins with more health insurers to create limited pharmacy networks for Medicare prescription drug plans

--Preferred networks offer financial incentives for seniors to visit a preferred pharmacy chain

--Walgreen signs new agreements with Humana, UnitedHealth and SmartD Rx

 
   By John Kell 
 

Walgreen Co. (WAG) is joining forces with more health insurers to create limited pharmacy networks for Medicare prescription drug plans, which can reduce costs for seniors while potentially lifting volume at the drugstore chain's pharmacy counters.

Preferred pharmacy networks for Medicare Part D--the government health plan's drug offering--offer financial incentives for seniors to visit a preferred pharmacy chain, which in turn offers lower costs to the plan's sponsors. Clients can visit pharmacies outside the preferred network, but at a higher copay cost.

Walgreen will be a part of the preferred pharmacy networks for Medicare Part D plans for Humana Inc. (HUM), UnitedHealth Group Inc. (UNH), Coventry Health Care Inc. (CVH) and new Medicare Part D offering SmartD Rx. A Walgreen spokesman said all of the agreements were new with the exception of Coventry, whose preferred pharmacy network Walgreen joined last year.

Humana helped pioneer this type of plan in 2010 through a partnership with Wal-Mart Stores Inc. (WMT), and has said their co-branded Part D offering has helped pump up its Part D membership ranks.

Monday is the first day of Medicare's annual open enrollment period, which runs through Dec. 7 and is the time seniors can sign up for a new plan or change coverage. Those changes will then take effect on Jan. 1.

Morningstar analyst Matthew Coffina said the disclosure signaled a shift in Walgreen's strategy, saying it made sense to increasingly participate in preferred or narrow networks, even if the drugstore chain had to cede margins in favor of volumes.

"They tried to beat the pharmacy-benefit managers and now they are joining them," Mr. Coffina said.

The most highly publicized example of that battle this year was when Walgreen engaged in a contract spat with Express Scripts Holding Co. (ESRX), opting to leave the PBM's network for several months and resulting in millions of clients transferring their prescriptions until the firms mended fences last month.

Mr. Coffina said Walgreen had previously argued that it could command a premium for convenience from PBMs, as it touted the company's vast network of drugstore chains that totals 7,944 domestically. PBMs handle drug plans for health plans, big corporations and other clients, and they negotiate with pharmacies over reimbursement rates for dispensing prescriptions.

"This announcement indicates that view has changed," Mr. Coffina said, as convenience doesn't necessarily allow a drugstore chain the ability to charge higher prices. He said PBMs and employers aren't willing to pay extra to chains like Walgreen with over 50,000 domestic competitor pharmacies available to clients.

Walgreen on Wednesday said it has expanded its preferred network relationships for the upcoming enrollment period to offer more options for beneficiaries that use the company's locations and services.

ISI Group analyst Ross Muken in a research note touted Walgreen's expanded preferred network for the upcoming enrollment period as an "incremental positive" for the company, as it could help the chain reclaim prescriptions lost after it left pharmacy-benefit manager Express Scripts's network for several months earlier this year.

Mr. Muken said the agreements could also help improve traffic in Walgreen's stores, a metric that has slumped this year when millions of Express Scripts members were forced to transfer their prescriptions away from Walgreen as the firms battled over a contract. Walgreen is now attempting to win back those lost clients.

Walgreen shares were up 2 cents at $35.62 in recent trading. The stock has gained 7.7% this year, slightly under the S&P 500's gain.

--Jon Kamp contributed to this article

Write to John Kell at [e-mail]

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