When the contract dispute between Express Scripts Holding Co. and retail giant Walgreen Co. was first reported last June (DBN 6/24/11, p. 1), a resolution seemed inevitable. Nearly a year later, Express Scripts has been without Walgreens in its network going on five months with clients reporting little to no disruption. With Express Scripts’ integration of Medco Health Solutions, Inc. under way, however, time is of the essence for Walgreens to get back to the table, suggest several industry experts.

Immediately following the close of Express Scripts’ April 2 acquisition of Medco, Senior Vice President and Chief Medical Officer Steve Miller, M.D., said Express Scripts had not seen Medco’s contracts with existing clients prior to the deal’s approval. He told DBN that the new company would honor Medco’s current pact with Walgreens and re-evaluate the position of Walgreens in those clients’ networks “over due time” (DBN 4/6/12, p. 1).

Not having Walgreens in its network, meanwhile, has put Express Scripts at a competitive disadvantage and its hand could be forced in contract negotiations with payers, asserts Rob Shelley, president of PSRx Advisors LLC, a health information technology company that offers PBM pricing, audit and other pharmacy program solutions to public-sector clients.

“Express Scripts has to show more value on the pricing side with that narrower network,” contends Shelley, who works with midmarket and large employer groups through sister consulting firm TRICAST, Inc. “When we’re doing RFPs [requests for proposals], we absolutely on a qualitative side have to handicap Express Scripts and we would expect as we run the financial analyses on their offers to see a corresponding improvement in pricing in relationship to competitors like MedImpact and Catalyst Health Solutions, Inc.”

Nevertheless, Express Scripts may still be in a better bargaining position in attempts to hammer out another deal with Walgreens. “Our position is much the same as it was when Walgreens left the Express Scripts network originally, which is that it’s in both companies’ interest to work something out so that Walgreens can stay in the network,” says Morningstar Inc. securities analyst Matthew Coffina. “Now, with Medco’s business in question, both companies risk losing market share by not having Walgreens in Express Scripts’ network. But I think that Express Scripts still has the upper hand in the negotiations, so to a large extent, I think it comes down to whether Walgreens is willing to accept the reimbursement terms that Express Scripts was willing to offer. Presumably Medco’s existing terms with Walgreens are better than what Express Scripts was offering last year, since Walgreens was willing to accept one but not the other.”

“Walgreens is losing and I don’t know that that there’s much of an opportunity for them to recover the ground that they’ve already lost,” adds Brian Bullock, president and CEO of The Burchfield Group, Inc. “Patients have already moved their prescriptions and are now accustomed to their new pharmacy. The hurdle that they have to leap over to get back to Walgreens is pretty significant — even if Walgreens re-establishes a deal with Express Scripts.”

For the fiscal second quarter, Walgreens reported a 6.1% decline in prescriptions from a year ago. In a March 27 conference call to discuss second-quarter earnings, Executive Vice President and Chief Financial Officer Wade Miquelon estimated the earnings impact of the Express Scripts fallout was 7 cents per share, and projected a fiscal year impact of 21 cents per share. Net earnings for the second quarter were $683 million, or 78 cents per share, down from $739 million, or 78 cents per share, in the same quarter a year ago. Net earnings for fiscal year 2011, adjusted to exclude the after-tax gain on the sale of Walgreens Health Initiatives, Inc. to Catalyst were $2.4 billion, or $2.64 per share.

Analysts estimate that the 90 million prescriptions filled for Express Scripts customers last year represented about $5 billion in annual business for Walgreens, or about 7% of total sales. Walgreens filled 819 million total scripts in fiscal 2011 with total annual sales of $72.2 billion. Medco members accounted for 125 million prescriptions in 2011.

With more than six months left before the Jan. 1, 2012, expiration of its agreement with Express Scripts, Walgreens backed away from contract-renewal discussions last June, citing what it called the PBM’s insistence on being able to unilaterally define contract terms, including what does and does not constitute a brand and generic drug, which would have denied Walgreens the predictability necessary to reliably plan its business operations going forward. Express Scripts, meanwhile, said Walgreens’ rates were not competitive with its pharmacy peers.

“The question is whether Walgreens understands the position they’re in to the degree that it’s necessary for them to come to the table and not have the same thing occur with the Medco block of business, because they’ve got to believe that Express Scripts has got their sights set on that as a big issue,” maintains Bullock.

Walgreens Looks on Bright Side

When asked for comment on the dispute, Walgreens spokesperson Robert Elfinger said the company has a good relationship with Medco and is pleased that Express Scripts intends to honor Medco’s ongoing contract with Walgreens. He declined to disclose when that contract expires.

“Looking ahead, we have never been busier heading into a PBM selling season as more and more PBMs, health plans and others approach Walgreens about developing member services and benefits that can be offered to clients,” adds Elfinger, who declined to comment on any future plans to renegotiate with Express Scripts. “We will continue to move forward and work with all health care payers and providers that value Walgreens and the cost-effective pharmacy, health and wellness services and solutions we offer for payers and patients.”

Express Scripts’ integration of Medco may even give Walgreens some leverage, albeit for a limited amount of time, suggests Coffina. “If I were Walgreens, I would be trying to take advantage of what’s likely to be a relatively short period of disruption during the integration of Medco where Express Scripts probably doesn’t want to have another thing to deal with by excluding Walgreens from the network, and that may have opened a little bit of a window for Walgreens to try to get relatively good terms,” he tells DBN. Such an agreement could be reached sooner rather than later, he predicts.

Shelley says TRICAST now is working with one Medco client whose contract is up and is going through the RFP process. “I know that this is one variable that they’re considering and of course, they are concerned about that disruption,” he explains. Groups that are now in the RFP process to select a PBM “are the ones who need to consider [the possibility that Walgreens will not be in the new Express Scripts network] very closely.”

But Bullock says he doesn’t think it will put Express Scripts at too great a disadvantage. “If an employer or health plan is contracting with Medco for those services, it’s likely that a few of them will consider walking away, but I don’t think a ton of them will,” he contends. “There’ll be pockets in the country where Walgreens is the dominant player and those are areas where you may end up seeing plan sponsors make a decision to switch PBMs as a result of that. But it did not create the issues with Express Scripts that I think Walgreens was betting it would create, and I think you’ll see the same behavior out of Medco’s client base.”

BlueCross BlueShield of Tennessee, for example, recently inked a deal to switch PBMs from CVS Caremark Corp. to Medco for Jan. 1, 2013. Vice President of Pharmacy Elaine Manieri says it’s hard to predict what will happen between Walgreens and Express Scripts over the length of its three-year standing agreement with Medco, but that the plan will during that time consider “other network options that could provide improved pricing based on a smaller network which might or might not include Walgreens. Since we provide medical coverage to a demographically diverse population, it is important to have options from which our employers can choose.”

A spokesperson for another insurer that is a longtime Express Scripts client, who asked not to be identified, adds that the company is not concerned about the loss of Walgreens but does anticipate that the PBM will reach a new agreement with the drugstore in light of the Medco acquisition.

Survey: Customers Switched Stores With Ease

According to a survey of 300 independent pharmacy owners that was conducted at the end of February by North Star Opinion Research, the majority of customers affected by the Jan. 1 exit of Walgreens from the Express Scripts network switched pharmacies with relative ease. The survey was commissioned by the Pharmaceutical Care Management Association, which cited the findings in a March 21 prepared statement in support of narrow-pharmacy-network benefit designs. North Star’s findings included:

• 70% of the interviewed pharmacists with a Walgreens in their area have seen former Walgreens customers start filling prescriptions at their pharmacy in the last few months;

• Three-fifths of the independent pharmacists with a Walgreens in their area say former Walgreens customers are more satisfied with their new pharmacies; and

• Independent pharmacists say they have benefited from the contract dispute by a two-to-one margin.

© 2012 by Atlantic Information Services, Inc. All Rights Reserved.

Drug Benefit News Editor Lauren Flynn Kelly moderated a recent webinar on the implications of the Express Scripts-Medco merger for PBMs and the health care industry as a whole. Click here to listen On-Demand or get a CD of The New Express Scripts: What Does the Largest PBM Acquisition in History Mean for Your Business?