The Lover’s Quarrel: Walgreens vs. Express Script

That Walgreens requires access to Express Script’s patient base in order to avoid a sharp decline in gross revenue is clear. However, it appears that Express Script is in no rush to re-open its book of business to the once proud chain pharmacy partner.  This begs the question.  What is the root cause of the two parties inability to reach a mutual contractual agreement?  For most businesses it boils down to cash and this case is no different.  But, the root cause is a bit more complicated than simple greed.

Many health care companies have been making subtle changes to their business strategies for a while now.  Well, at least since the prospect of a national health care program (Patient Protection and Affordability Care Act) became a reality.  While the pool of potential customers will certainly increase, as a result of PPACA, profit margins will undoubtedly decrease.  PPACA is the root cause of the two organization’s unwillingness to come to a mutual agreement.

In other words, without health care reform there is enough hidden cash flow to go around for everyone. I surmise health care reform is also the primary reason Express Scripts has agreed to purchase Medco.  The loss in profit margin will be compensated for, in part, with higher volume. PPACA makes it easier and less costly for those persons without existing or adequate coverage to gain access to health care thus substantially increasing the number of potential customers.

The federal government is a bit more [state governments are making headway, but still have a lot to learn] prudent when paying for prescription drugs compared to private industry.  Simply put, it will not pay as much for prescription drugs as state governments and private industry nor will it allow PBMs to charge historically exorbitant fees to providers in the newly created health care exchanges. Excluding the obvious choice, buying power, there are two major reasons for these aforementioned facts: unlimited resources and accountability.

Most private companies just don’t know enough about pharmacy benefit management to deliver for shareholders what they expect and that is too purchase quality goods and services at the lowest possible cost.  Instead, they pass a majority of the responsibility to pharmacy benefit consultants. This is okay except when the consultant is ignorant.  In my experience most consultants lack the knowledge, tools and/or desire necessary to prevent its clients from being duped by traditional PBMs.

Having said that, much of the meal ticket for traditional PBMs, like Express Scripts, will be eliminated.  This is due to fully-insured health care plans being much more impacted by PPACA than self-insured payors.  Still many self-insured employers will continue to be played for patsies by traditional PBMs and TPAs.  I’ve discussed the implications of PPACA on self-insured plan sponsors in a previous blog post called Health Care Reform (PPACA) Provisions that Impose Obligations on or Affect Self-Insured Health Plans.

According to a WSJ article on Tuesday 1/3/2012, Walgreens as late as December 2011 offered to keep rates flat, but ESI (Express Script) rejected that proposal.  ESI has said it remains open to keeping Walgreen it its network, but only at a rate that is right for its clients.  Really, that sounds good, but an astute business person should interpret this as….a rate that is right for their shareholders.  ESI accounts for about $5 billion in revenues for Walgreens or 14% of total sales.

Walgreens in an attempt to retain some ESI patients is offering coupons, discounts and boosting staff.  I equate this to putting lipstick on a pig.  It’s not a good look and doesn’t work long-term. If Walgreens accepts any deal lowering existing rates ESI will see a weakness and continue to press in the future for further rate reductions.  It is a large hit, but in my opinion Walgreens should make plans to fully move on without ESI.

If you have any questions or comments and do not want to post them send directly to Tyrone D. Squires via email to

PPACA: Imposes Obligations on Self-Insured Health Plans

There has been an ongoing trend for large employer benefit plan sponsors, particularly those operating in multiple states, to move away from insured health and welfare benefit plans (“H&W Plans”) and to create self-insured plans. A rationale for this transition is that self-insured plans offer greater flexibility in benefit design because, by virtue of ERISA’s first preemption clause, 29 U.S.C. § 1144, they are not subject to state insurance benefit mandates.

The following review of some of the burdens and obligations imposed on insured ERISA H&W Plans, multiple employer welfare arrangements (“MEWAs”), and voluntary employees’ beneficiary associations (“VEBAs”) demonstrates that self-insured plans have been spared many of the obligations imposed by PPACA. I’m unaware whether or not Congress purposefully structured PPACA to encourage the growth of self-insured plans. PPACA imposes the following burdens and obligations:

Comprehensive Coverage for Health Benefits Package – Self-insured plans are not required to offer the package of benefits specified in Section 1302 of PPACA. This is required of insured plans only.

Essential Health Benefits Requirements – This provision of PPACA is applicable to “Health Plans” and, thus, does not apply to self-funded plans.

Prohibition of Discrimination Based on Salary – Self-insured plans are expressly relieved of the obligation to comply with this requirement.

Annual Limitation on Deductibles for Employer Sponsored Plans – This limitation does not apply to self-insured plans.

Guaranteed Issue of Coverage – This does not apply to self-insured plans.

Self-Insured Plans Are Not Subject to Jurisdiction of State Ombudsmen – PPACA provides for the creation of a state-level office for an “Ombudsman.” The function of the Ombudsman is to address complaints concerning violations by plans or plan officials of both state and federal laws. Section 2793 clearly provides that the Ombudsman’s jurisdiction is limited to insured plans. As a result of this exclusion of self-insured plans from the Ombudsmen’s jurisdiction, some complex ERISA preemption issues have been avoided.

Prohibition on the Making of False Statements and Representations – This provision is applicable only to MEWAs.

Application of State Law to Combat Fraud and Abuse – This provision also applies only to MEWAs.

Imposition of Cease and Desist Orders – This applies only to MEWAs.

Ensuring that Consumers Get Value for Their Dollars – This provision empowers the Secretary to investigate the reasonability of premiums and to publicize findings and conclusions.

Administrative Simplification – Pursuant to this provision, the Secretary is required to develop a “single set of operating rules” governing the administration of various functions and transactions that are common to all H&W Plans. The entities subject to these rules will have to file documented reports of compliance with the Secretary, and are subject to penalties if they make misrepresentations in those reports. The entities subject to these obligations are “Health Plans,” a category that excludes self-insured plans.

Guaranteed Renewability of Coverage – This requirement applies only to insurers.

Exemption from Sections 2716 and 2718 of the PHSA47 – These provisions involve (i) the prohibition of discrimination in favor of highly compensated individuals, (ii) the protection of Second Amendment gun ownership rights and the prohibition of the collection of information on gun ownership, (iii) the prohibition of considering gun ownership as a factor in the calculation of premiums, and (iv) the requirement for the submission of annual reports providing detailed financial information concerning the provision of covered benefits.

Self-Insured plans are favorably treated under PPACA. There are clear advantages to self-funded plans; they allow employers greater flexibility and discretion with respect to both state laws and PPACA. From an administrative perspective, self-insured plans need not impose any greater burden on employers than insured plans. Many insurers administer self-funded plans under ASO arrangements, as do many TPAs. Stop-loss coverage is offered by many insurers so that an employer may define and limit its benefit cost risk.

The choice to self-insure need not be limited to very large employers with thousands of employees. There are legal structures through which smaller employers can implement self-insured benefit plan structures and limit their risk exposure. In this fashion, they can achieve the same flexibility available to very large employers in selecting the benefits they can afford to offer to their employees. As demonstrated, more flexibility is available to employers that sponsor self-funded benefit plans than to those that choose to sponsor insured benefit plans.

If you wish to discuss this subject further, please contact the author:

Proposed ESI (Express Scripts Inc.) and Medco Health Solutions Inc. Merger

There is no question that pharmacy benefit managers provide a valuable service. One that when properly implemented saves lives, reduces costs, increases employee productivity, and improves patient lifestyles. However, there are plenty of opportunities for pharmacy benefit managers to exploit loopholes in the supply chain and increase profits through arbitrage.

In economics and finance, arbitrage is the practice of taking advantage of a price difference between two or more markets: striking a combination of matching deals that capitalize upon the imbalance, the profit being the difference between the market prices. When used by academics, an arbitrage is a transaction that involves no negative cash flow at any probabilistic or temporal state and a positive cash flow in at least one state; in simple terms, it is the possibility of a risk-free profit at zero cost.

Traditional PBMs like Medco, CVS/Caremark and ESI take advantage of retail, mail-order and rebate price differences to reap excessive profits. I say excessive because much of these profits should go back to payors in the form of lower drug costs. I don’t care what you’ve been told or by whom; if your PBM is unwilling to accept a fiduciary role and commit to it contractually then it is in all likelihood Hiding Cash Flows via arbitrage. I’ll dive into this subject, with more detail, in later posts.

In my opinion, the proposed merger of Medco and ESI will primarily benefit ESI and Medco shareholders. Sure ESI will have greater pricing power, but do you really believe for one second that these savings will be passed down to payors particularly small to medium-sized businesses? It is a public corporation with two goals: survival and shareholder return!

I am not a Big Three (Medco, Caremark and ESI) hater. Don’t get it twisted. I’m a capitalist at heart and strongly believe in every company’s right to grow revenues, but at what cost? Simply put, I am telling you from experience what I’ve seen (see) as a former employee of Eli Lilly and Company and now the founder of TransparentRx, LLC and a mail-order pharmacy. Most pharmacies, PBMs, health insurers, and employers will in the long-run be negatively impacted by this merger if it is approved by the FTC.