Walgreen and CVS settle drug plan fight

NEW YORK Fri Jun 18, 2010 12:09pm EDT

A Walgreens sign above Times Square in a file photo. REUTERS/Lucas Jackson

A Walgreens sign above Times Square in a file photo.

Credit: Reuters/Lucas Jackson

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NEW YORK (Reuters) - CVS Caremark Corp (CVS.N) and Walgreen Co (WAG.N) ended an 11-day standoff over reimbursements for drug prescriptions, saving a relationship worth billions of dollars and lifting shares of the two biggest U.S. drugstore chains.

Caremark members would continue to be able to have their prescriptions filled at Walgreen's pharmacies, the companies said in a statement on Friday. They did not disclose the exact terms of the agreement, but said it was a "multi-year" deal.

Walgreen shares were up 3.8 percent at $30.37 in late morning trading while CVS shares rose 3.3 percent to $32.89. Shares in rival pharmacy benefit management companies Medco Health Solutions MHS.N and Express Scripts (ESRX.O), who were likely to benefit if the dispute continued, fell more than 1 percent.

Walgreen, the No. 1 U.S. drugstore chain, said early last week that it would end its arrangement to fill prescriptions for millions of CVS Caremark drug plan members. It cited CVS's efforts to divert customers to its own pharmacies and inadequate reimbursement rates.

CVS said two days later that it would drop Walgreen from its network by July 9.

Analysts said the dispute was jeopardizing billions of dollars in sales for each chain, and predicted that the companies would resolve the problem quickly.

"They had to reach a deal because there was a lot of risk to both the companies," said Lazard Capital Markets analyst Tom Gallucci.

S&P Equity Research analyst Joseph Agnese raised his rating on CVS shares to "strong buy" from "buy," saying that the quick resolution of the dispute prevented damage to CVS' ability to line up new PBM business.

CVS's pharmacy benefits management business administers prescription drug benefits for employers and health plans. It also operates a large mail-order pharmacy.

BATTLE OVER REIMBURSEMENTS

Walgreen's arrangement with CVS's Caremark unit accounts for about 7 percent of sales, but analysts said Walgreen was willing to risk severing that relationship to send a larger message out to other PBMs that it would fight a trend to shrink reimbursements.

CVS was eager to show investors that its $27 billion purchase in 2007 of Caremark and its PBM business was a good deal, after losing $4.8 billion worth of contracts last year.

CVS could ill afford the disruption its standoff with Walgreen was creating as its campaign to sell its plans to large employers was peaking, analysts had said.

Walgreen holds great sway in the PBM business in part because it fills about one in five U.S. drug prescriptions.

Walgreen operates about 7,500 stores out of the 64,000 pharmacies served by Caremark's network.

That leverage probably allowed Walgreen to squeeze out some concessions on reimbursement rates, an analyst said.

"My best guess would be that Walgreen got some higher reimbursement rates that could eventually lead to higher margins for them," said Morningstar analyst Matthew Coffina.

(Additional reporting by Nivedita Bhattacharjee; Editing by Lisa Von Ahn, Robert MacMillan and Gunna Dickson)

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Comments (3)
Storyburn_has wrote:
Two corporate greed mongers battling it out. Classic American capitalism

Jun 18, 2010 11:16am EDT  --  Report as abuse
SeniorMoment wrote:
It would have been better for the Walgreen chain to have not struck a deal with Caremark because Caremark in the plan I have already has a $300 deductible to use any non-mail order pharmacy, but no deductible for mail order pharmacy use, so when filling a local prescription I look less for a participating pharmacy than for a low cost pharmacy. In a year I will put off even an antibiotic prescription for more than a ten day supply rather than fill it locally. This means I never spent $300 a year at a local pharmacy with my Caremark plan.

With some low cost generic prescriptions though, I simply buy a one year quantity and ignore the Caremark rules for 30 day and 90 day supplies in favor of low price and convenience to buy locally filled prescriptions. Dealing with Caremark, Express Scripts, etc. justs adds costs for local pharmacies. One chain pharmacy told it accepted over 2,000 prescription plans, some of which had 10,000 sub plans with a different approved set of allowed prescriptions and he couldnt’ do his job without a computer telling him what to charge. Around the same time a different chain pharmacist told me the minimum she could charge even for an aspirin if she dispensed it was $8.95 (before the $4 prescription price wars) and an independent pharmacist who did not participate in my pharmacy plan filled a prescription for my copay he said because it still made a profit for him at that price.

The best thing that Walgreens could have done was to cut overhead costs by not contracting with Caremark. As Paul Harvey used to say, It isn’t the dollar volume of business that matters but how much money a company makes on the volume of each segment of business. When a company becomes overly dependent on low profit margin volume of business from a single payor, it also becomes vulnerable to that company’s late payments and failure and may even lose money simply from the cost of handling the money transactions and overhead expenses of the associated business volume. A company can become more profitable by dumping such a customer.

Speaking as a health plan member who has a Caremark pharmacy benefits card, from my perspective the role of the local pharmacy is now sharply limited beyond antibiotics. Even products required requiring refrigeration are now being routinely shipped to consumer homes by overnight services from CareMark or its regional units for injectibles.

Jun 18, 2010 12:00pm EDT  --  Report as abuse
Hanan wrote:
CVS and Walgreen are fighting over reimbursement? what will this deal benefit the consumer at large? Cost of health care in the US has becoming very costly due to influences from the pharmaceutical industry and now the retailers even exacerbate the existing flawed system into unsustainable level.Afterall,the US health care sucks let alone the generic drugs available in the stores and prescribed by the smartest cost-effective pharmacists that would benefit their buddies in the insurance sector. Folks! have you seen where the waste come from? very sad and playing with lives of many people.

Jun 18, 2010 5:34pm EDT  --  Report as abuse
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