The game of pharmacy has changed.
The drug store industry’s two most powerful players, Walgreen Co. and CVS, each made dramatic moves this year that signal a bold new retail strategy: to exert a powerful influence within the managed care industry that has been the bane of retail pharmacy for two decades.
Both CVS and Walgreens are pursuing a new kind of pharmacy marketing, by buying up or building a major stake in the PBM industry that to a large extent controls pharmacy reimbursements and determines where patients can get their prescriptions filled.
In the process, both chains—and CVS in particular—are rewriting the rules that have governed pharmacy retailing since the 1990s.
CVS has struck hardest. In March, the 6,200-store chain completed its multi-billion-dollar buyout of Caremark, the nation’s third-largest PBM and one of its largest mail-order pharmacy operations. The merger of Caremark with PharmaCare, CVS’ existing PBM operation, created a new, retail-owned PBM powerhouse. In a larger sense, the combination of CVS and Care-mark—and the integration of Caremark’s massive member rolls and patient outcomes and drug utilization data with CVS’ own economies of scale and powerful market reach—are likely to shift the balance of power in both retail pharmacy and pharmacy managed care.
CVS chairman, president and chief executive officer Tom Ryan called the merger “a game-changer.
“It is changing the way the industry offers pharmacy and pharmaceutical services,” Ryan told analysts in the run-up to the buyout. “For years, we had one industry just looking at the payer and one industry just looking at the consumer. No one has ever taken a holistic view end-to-end, and that’s what this combination is going to do.”
Walgreens, for its part, is pursuing a similar strategy from the ground up. The nation’s top-selling and most-profitable drug chain has made growing its pharmacy managed care subsidiary, Walgreens Health Initiatives, a top strategic priority. It is using WHI as a platform for the development and rollout of new pharmacy service offerings. Its nearly 6,000 stores can provide services to patients enrolled in any pharmacy benefit plan, like its Advantage90 long-term maintenance prescription program.
One telling sign of the high importance Walgreens places on WHI as a key component of its overall pharmacy strategy was the promotion in April of WHI’s president, Greg Wasson, to president and chief operating officer. The elevation of Wasson puts him firmly in line as the next top manager of Walgreens and brings to the executive suite his perspective as head of a major PBM operation, with annual sales now well in excess of $2 billion.
Wasson has spent the last six years running the company’s burgeoning pharmacy benefit management and mail-order division, overseeing its rise to become one of the largest of the second-tier PBM and mail order operations.
The pursuit of an integrated strategy that combines the patient-centered capabilities of thousands of pharmacies with the market-moving clout of a chain-owned PBM makes sense on another level, as well. CVS’ takeover of Caremark thrust it into the upper ranks of the pharmacy benefit management industry, changing the dynamic of an often-troubled relationship between community pharmacy and PBMs by giving one of chain pharmacy’s own control of the PBM industry’s biggest player.
That, in turn, could soften that relationship. Caremark, at least, could prove to be a more pharmacy-friendly entity under its new owner. “In general, if there’s more retail pharmacy influence on prescription management, and it’s enhancing the role of community pharmacy in health care, those could be positives for community pharmacy,” noted a spokesman for one major CVS competitor.
A major survey of pharmacy consumer shopping preferences early this year by Wilson Health Information pointed to the potential power CVS and Walgreens could exert by combining the marketing power, leverage and data-gathering capabilities of their massive pharmacy networks with their fast-growing PBM operations.
The poll was conducted prior to CVS’ purchase of Caremark. As reported in the Boehringer Ingelheim Pharmaceuticals 2007 Pharmacy Satisfaction Digest, based on the Wilson Rx survey, Walgreens ranks highest in overall shopping preference, with 12.5 percent of the more than 33,500 that responded to the Wilson poll naming Walgreens as their top choice for prescriptions and other pharmacy services. CVS ranked second, with 10.2 percent of customer households naming the chain the most commonly used pharmacy.
Wal-Mart rated No. 3, ranking highest in preference with 6.8 percent of consumers. Next up in preference—and here’s where the numbers get interesting—were the mail-order pharmacy operations of Medco, with 4.7 percent, and Caremark, at 3.7 percent.
“We think [the merger of CVS and Caremark] will obviously take share and grow our business both in mail, retail and the front end of our stores,” Ryan said.
In particular, CVS’ top executive foresees “significant benefits for payers through more effective cost management and innovative new programs.” Consumers, he added, would gain “expanded choice, unparalleled access and more personalized services…all with the goal of lowering costs and improving health outcomes.”
Wall Street appeared to endorse the strategy. Senior research analyst Eric Bosshard called CVS/Caremark “a more valuable franchise” that “better controls its destiny.”
What this new industry dynamic means for smaller and less-capitalized rivals—including independent pharmacies with far less leverage vis-à-vis PBMs and health plan payers—remains to be seen. The National Community Pharmacists Association reacted to CVS’ purchase of Caremark cautiously on behalf of its independent pharmacy members, and called on CVS to make its PBM’s negotiations more transparent, “so that employers, health plans, regulators and consumers can see how their dollars are being spent.” It also asked for an end to take-it-or-leave-it contracts, an end to shrinking drug formularies and mandatory mail programs, and a level playing field that would allow patients to fill 90-day prescriptions at retail.
It goes without saying that the integration of patient databases at CVS/Caremark and Walgreens/WHI will have to conform to the patient privacy protections mandated by the Health Insurance Portability and Accountability Act. HIPAA considerations aside, merging each chain’s prescription data with the patient drug utilization and outcomes data captured by that chain’s PBM division creates a whole slew of possibilities. Wielding that powerful database—particularly at a time when the nation’s health care system is being pushed to adopt a comprehensive, integrated health information technology platform that connects all the pieces of the health care puzzle—could yield big advantages in areas like medication therapy management, disease and outcomes management, and patient compliance.
“Once electronic records become prevalent, a pharmacist can play a more serious role as a caregiver,” asserted Laura Miller, a senior economist for the National Association of Chain Drug Stores. “The retail pharmacy that takes advantage of this opportunity will be ahead of the health care curve.”
Thus, it’s no accident that Walgreens, like CVS, is pursuing an integrated approach to pharmacy marketing, pharmacist-delivered patient care services and pharmacy benefit management. “Pharmacists,” said Walgreens chairman and chief executive officer Jeff Rein, “are the core of who we are. Our future is about emphasizing the personal and clinical aspects of pharmacy, as well as broadening drug store services.
“As medication experts, pharmacists are in a unique position to be involved with patient outcomes,” Rein added. Community pharmacy is evolving from a dispenser of product to a more sophisticated model.
Trent Taylor, executive vice president and chief information officer at Walgreens, elaborated in a recent, company-sponsored roundtable on the future of pharmacy. “We used to re-engineer pharmacy procedures to lower costs and improve efficiencies. Now we can connect networks, capture data, integrate information and automate more tasks to give pharmacists more time for patients,” he said.
This year, Walgreens’ pharmacy leaders are making a major push to boost patients’ compliance with their drug therapy. Former chairman David Bernauer called the “growing role of government and private industry to push patient compliance” a positive trend “that bodes well for patient health, control of health care costs and pharmacies like Walgreens.”