PBMs and pharmacy chains: a shift in the matrix
The US drug insurance hierarchy was supposed to go something like this. Health insurance companies like Blue Cross or HMOs like WellPoint use pharmacy benefit managers (PBMs) to determine what drugs are approved for use for which diseases. This list, called a formulary, was used to determine reimbursement and theoretically to save the insurance companies from paying for overpriced drugs that had cheaper equivalents. Then the insurance companies/HMOs could reimburse the pharmacies (usually chains) who fill the prescriptions, in accordance with the formulary.
But that orderly system is breaking down with a change in the competition matrix. PBMs have become drug suppliers, offering mail-order pharmacy services to patients who can buy several months at a time. And insurance companies (especially with managed Medicare drug discounts being introduced) are making it either strongly recommended or mandatory that customers use such mail-order services for long-term prescriptions. This would bypass the local pharmacy (now mostly divisions of big chains) for all long-term drug use and stick them with servicing one-time prescriptions.
But the drug chains are fighting back. First by playing hardball with the PBMs. According to a n article in Drug Store News ( "Amid challenges, drug chains stand their ground", 8/23/2004):
Many top drug chains--including Walgreens, CVS, Rite Aid and Kerr Drug--have done just that. Staking their ability to walk away from such contracts on their market strength, leverage and reputation with their customers, they have announced they will no longer sign new provider contracts with PBMs that require patients to fill maintenance medications exclusively through the mail.
Second, the pharmacy chains are building their own PBM and mail order branches. When CVS acquired many of Eckerd's drug stores in 2004, it also acquired its PBM business, doubling its PBM base. Walgreens has been pushing its Walgreens Initiative PBM. In April, Rite Aid, the last of the big three chains, entered into the PBM business for the first time.
But the PBMs are also fighting back. Express Scripts, one of the top three, recently announced it would acquire Priority Healthcare Corp., a specialty pharmacy that sells injectable drugs for hepatitis, cancers, and other diseases. The deal was worth $1.3 billion in cash.
In addition, Medco Health Solutions earlier this year bought specialty drug pharmacy Accredo for $2.2 billion. AdvanceRx, the result of the merger of PBMs AdvancePCS and Caremark RX in 2004, runs online pharmacy drugstore.com, and has its own specialty pharmacy as well.
That's along with large mail order services of all three. While PBMs are unlikely to want to get into the bricks-and-mortar drugstore business, they are going to become more and more into supplying drugs directly.
The drug industry is changing fast, and the borderline between PBMs and drug chains is getting harder to detect. In each of the two industries, three survivors have emerged from a process of whittling down. Now they must gird up for another oligopoly fight. For the drug chains, they also have to watch their flanks against Wal-Mart, Costco, and other retailing giants with their own retail drug stores.
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