SPECIAL REPORT

BALANCING ACT

Chains have a tricky job juggling their pharmacies and PBMs

Pharmacy benefit managers owned by chain drugstores have a tough row to hoe. On the one hand, as pharmacies, chains must strive to get the best reimbursement they can. On the other hand, as PBMs, they have to keep drug costs to a minimum for payers.

Another paradox facing chain-based PBMs: As providers jousting with AdvancePCS, Merck-Medco, and Express Scripts, they are glad to see legislation introduced regulating these PBMs. But, as such organizations themselves, they are constrained by the same legislation.

A similar contradiction faces associations representing chains, namely, the National Association of Chain Drug Stores. It has been calling for the limiting of PBMs. Yet, of the five leading chain drug companies, four have PBM arms: Walgreens Health Initiatives, CVS PharmaCare, Eckerd Health Services, and Longs' RxAmerica. The fifth, Rite Aid, had been one of the dominant PBM competitors until a major financial breakdown forced it to sell off its AdvancePCS subsidiary to pay down debt.

Denouncing PBMs while at the same time representing the interests of members who harbor this business requires some fancy footwork. This is evidenced by the position some groups have taken with respect to the just-passed Georgia law regulating PBMs.

When the Georgia legislature was considering legislation to regulate PBMs, chain drug support for the bill came only after it was amended to allow for an increase in the state's pharmacist-technician ratio, according to Oren H. Harden Jr., executive v.p. of the Georgia Pharmacy Association.

"The chains basically were neutral on the legislation," said Harden. "They wanted an amendment in our practice act that would increase the technician/pharmacist ratio from 2:1 to 3:1." Traditional PBMs, such as Merck-Medco, vehemently opposed the measure, he added.

One reason Georgia chain pharmacies as a group may not have been as enthusiastic about the PBM regulation as independents, Harden said, is that two of the chain companies with the largest presence in the state, CVS and Eckerd, have their own PBM subsidiaries.

"I don't think that the Georgia Association of Chain Drug Stores had a position one way or the other," he continued. "I think they were neutral because they have some members that have PBMs and others that don't." Eckerd, CVS, and the Georgia chain drug association did not return phone calls asking for comment.

While the Georgia chain drug group may have been neutral, NACDS was a wholehearted supporter of the Georgia bill, said Crystal Wright, v.p. of media relations.

"Basically we think what Georgia is doing is a great thing," Wright commented. "We'd like to see it go even further." She said NACDS has been working with the National Community Pharmacists Association to come up with "model language that will create more substance for future bills that aim to legislate in this important area."

PBMs are middlemen, she added. They "don't buy drugs and they don't sell drugs, but if they're going to be in the business of dispensing them, they certainly should be monitored and regulated like pharmacy and held to the same standards." The fact that some of the association's largest members have their own PBMs had no bearing on NACDS' stance, she said. "I'm just speaking to NACDS' position as related to pharmacy," she added. "I cannot speak for member-owned PBMs."

Strengths and weaknesses

None of the chain PBMs has the heft of AdvancePCS, Merck-Medco, or Express Scripts. In fact, chain PBMs bid mainly for regional contracts, but they are significant players. And they do have the upper hand over the three leading PBMs in one respect: brand recognition. As Terry Latanich, senior v.p. of government relations at Merck-Medco, explained, as seniors weigh which Medicare-endorsed discount card to enroll in—in the event the program comes to pass—they might be more drawn to well-known companies such as Walgreens and Eckerd than to other managed care firms that are less popular.

On the other hand, chain PBMs carry a potential of creating the appearance of conflict of interest. "People have always been concerned about the ultimate motive of a PBM. Is it to control their clients' costs, or is it to push somebody's drug, or drive somebody into a certain pharmacy chain?" mused Chris Robbins, principal with the pharmacy benefit consulting firm Arxcel.

"I think there are a lot of dichotomies behind that whole issue of what's best for the chain drugstore and what's best for the PBM and the client," Robbins said. "The question that pops up no matter who owns the PBM—whether it's independently owned or owned by a chain drugstore—is that you want to make sure their objectives are aligned with the client's objectives, and that's to control drug costs, not to drive people into an Eckerd or a CVS," he said.

To show how PBM ownership can create the appearance of ambivalence on the part of chains, Robbins used the example of a chain PBM quoting a price of AWP minus 14% versus a rival PBM quoting AWP minus 13%. "If you were a stockholder who was concerned about the [chain's] drugstores, which PBM would you rather see get the business? I'd prefer to have the one that's paying me more."

He also raised the question of chain companies' dealings with manufacturers. "I have no specific knowledge of this," he said, "but from what I've seen, I just wonder how the drug manufacturers feel about a pharmacy chain negotiating with them on the price of ... products—and then ... a different division negotiating with them on formulary rebates. At some point in time, is that going to be considered double-dipping?"

Robbins mentioned, too, the concerns that some might feel about information being passed from one arm of the company to the other. "I realize there's a firewall, but there's always a suspicion," he said.

What drives chain PBMs

The motivation behind the chains' PBM ownership may vary, but the common link is competition. The chains insist that pharmacy is their arena: They want to be able to serve not only individuals at the pharmacy counter but also large pharmacy benefit customers that are under growing pressure to reduce the soaring costs of prescription benefits while still maintaining quality care.

The chain PBMs' common operational strategy is to offer an array of cost-saving drug and pharmacy care benefits directly to employers and third-party insurers. In this way, they attempt to wrest business away from the traditional PBMs, which have had a negative impact on retail pharmacy margins. The chains say one of their biggest strengths is the access they provide to neighborhood pharmacists across the country.

A company like Walgreens Health Initiatives (WHI), for example, touts a network of more than 50,000 pharmacies, including not only its own nearly 4,000 stores but also chains and independents nationwide. Like the other chain PBMs, WHI promotes cost-saving features like increased generic utilization, formulary management, and mail service. Clinical support programs such as drug utilization review, medication management, and health screenings are also part of the service mix. WHI recently announced that it had added 100,000 employees to its benefits roster from such companies as American General Financial Group, Fuji Photo Film USA, and Ruby Tuesday.

CVS said its PharmaCare Management Services subsidiary is among the top 10 full-service PBMs, providing services for more than 12 million lives. CVS recently merged its specialty pharmacy business, ProCare, into PharmaCare. The move was part of a streamlining plan that came in the wake of sharply reduced corporate profitability. The cost-cutting plan also included closing of stores, a distribution center, and a mail facility. The chain took a fourth-quarter $353 million pretax charge in connection with its moves. CVS insists that PharmaCare remains profitable and growing.

Although JC Penney-owned Eckerd does not break out results of its Pittsburgh-based Eckerd Health Services PBM, the chain said its subsidiary "is among the largest pharmacy-based prescription benefits in the country." Eckerd said its EHS network includes more than 55,000 retail pharmacies and three mail-service pharmacies, and clients include employers, insurance companies, managed care organizations, government agencies, and unions.

Longs Drug Stores last year became the sole owner of RxAmerica when it bought out the half-share held by Albertson's for almost $20 million in cash, notes, and assets. Like other chain PBMs, RxAmerica offers disease management programs, DUR, mail service, and generic-substitution programs. In the fourth quarter, Longs reported that its PBM subsidiary generated $6.2 million in sales and $4.8 million in pretax operating profits. Longs expects RxAmerica "to play a growing role in maximizing managed care profitability," the chain said in its annual Securities and Exchange Commission filing.

Both Walgreens and Eckerd announced recently that their PBM subsidiaries had received top ratings in the Pharmacy Benefit Management Institute's 2001 customer satisfaction study.

For all of these companies, their PBMs are much smaller than their retail enterprises. So as they juggle these two arms of their business, experts believe they are more likely to put their pharmacy interests before their managed care concerns.

Bruce Buckley

The author is a journalist based in New York.

Bruce Buckley. Chains have a tricky job juggling their pharmacies and PBMs.

Drug Topics

2002;15:72.