Walgreens doesn’t set drug costs; the Insurance coverage corporations do. And there may be the difficulty.
Insurance coverage firm’s contract the PBMs to barter with the pharmacy chains comparable to Walgreens or CVS. They set up the pricing contract on coated medicine and what portion these pharmacies get reimbursed in return servicing their clients.
Walgreens felt it didn’t must signal with one of many three or 4 PBMs on account of its measurement. It lastly did signal with a PBM far to late within the {industry} after the opposite chains had already established themselves with a PBM. The PBMs management the {industry} in what one name a monopoly which the Gov. allowed.
It’s a prolonged however attention-grabbing learn . . .
“The Real Reason Walgreens Collapsed,” BIG, Matt Stoller
It’s not that Walgreens didn’t modernize or couldn’t compete with Amazon. The 124-year-old firm is being squeezed to loss of life by monopolistic pharmacy profit managers. Or the favored acronym PBMs.
I get pleasure from Scott Galloway’s well-liked podcast Prof G Markets, and I used to be listening to him and co-host Ed Elson talk about why the personal fairness big Sycamore Companions – which focuses on squeezing blood out of failing retailers – is shopping for Walgreens for $10 billion. Walgreens is America’s second-largest drug retailer chain, and has been a public firm for greater than 100 years. “Going private,” significantly to a fund like Sycamore, is an admission of failure.
The traits for Walgreens aren’t good – it has closed a thousand shops since 2018 and plans to shut 1,200 extra this 12 months. And should you have a look at the gross working revenue of the U.S. retail section, it’s collapsing.
What’s occurring? Properly that’s easy. Margins are falling aside.
Galloway and Elson went backwards and forwards on why Walgreens is flailing. The corporate hasn’t modernized within the age of Amazon. It has too many shops. Dangerous administration. A dumb acquisition of VillageMD in 2021. And so on. And these would appear like cheap causes, since a number of different retailers are dying within the face of low-price competitors.
However the actual cause Walgreens, and the pharmacy enterprise usually, is dying, is due to a failure to implement antitrust legal guidelines towards unfair enterprise strategies and unlawful mergers. Elson touched on it when he talked about decrease reimbursement charges, however I don’t suppose individuals recognize the total scope of what occurred to Walgreens, and to the total pharmacy enterprise usually. This isn’t a case of dangerous administration; it’s a case of determined administration.
Let’s begin by noting that on first blush, Walgreens ought to be fantastic. It’s a historic firm, and a traditionally highly effective one. In 1901, pharmacist Charles Walgreen created the primary Walgreens retailer, and he was an aggressive and entrepreneurial founder. He did a few of his personal drug manufacturing and shortly expanded Walgreens to 100 shops inside 25 years. The chain invented the malted milkshake in 1922, and that decade it took benefit of prohibition by promoting “medicinal” alcohol. It was additionally a robust chain retailer, not as dominant as A&P, however a part of the set of corporations that decade who fostered a robust political backlash from native companies.
And its scale remained just about to the current day. As late as 2015, Walgreens was value $100 billion, an investor darling and an icon of Wall Road and America. And it’s not like Amazon has come into the drug retailer area and brought Walgreen’s margin. Sure, there may be some competitors, however pharmacies are regulated companies, and the patron doesn’t select a pharmacy primarily based on worth. A physician prescribes a drug, the patron goes to probably the most handy pharmacy and pays the copay that his or her insurance coverage mandates. It doesn’t matter what pharmacy you select, it simply issues that it’s in your insurance coverage firm’s community. After you’ve hit your deductible, the patron worth is identical wherever you go.
Furthermore, even at present, the opposite monetary numbers from Walgreens aren’t dangerous. Gross sales aren’t going gangbusters, however the quantity is principally rising, and so are the variety of 30-day prescriptions, despite the fact that they’ve lower the variety of shops yearly since 2017. Its bills, other than a brief a spike having to do with an uncommon opioid settlement, are manageable. Listed below are some charts I constituted of their annual studies making these factors.
You’d suppose Walgreens could be doing fantastic. However it’s not.
So what’s the reason? It’s not that the price of bodily prescribed drugs is increased. Walgreens has market energy, and so they personal a part of Cencora, which is likely one of the main distributors. The issue is exclusive to the enterprise of pharmacies, which is that its pricing is nearly completely out of its management. Regular retailers set pricing by shopping for wholesale, including a mark-up, after which promoting for the wholesale worth plus the markup. And Walgreens does that in a bunch of strains of enterprise, like if you go into the shop and get sweet or stationary. However in its predominant line of enterprise – prescribed drugs – Walgreens doesn’t set costs.
Insurance coverage corporations do. And there’s the rub.
Within the U.S., a shopper will go right into a drug retailer, on this case Walgreens, after their physician prescribes medicine, after which the patron will make a copayment. A Walgreens pharmacist then dispenses it. After doing so, Walgreens will get a set reimbursement from that shopper’s insurance coverage firm for that medicine. How a lot does it get? Properly, these insurance coverage firm’s contract with what’s known as pharmacy profit managers (PBM) to handle negotiations with pharmacies. A PBM units up a community for insurance coverage corporations, manages drug costs, and handles all of the fee logistics between sufferers and pharmacies. PBMs negotiate with pharmacies, and arrange a pricing settlement on which medicine are coated and the way a lot these pharmacies get reimbursed in return for permitting these pharmacies to serve its clients.
Theoretically, either side have some leverage on this negotiation. If a pharmacy chooses to not settle for the costs and phrases supplied by these PBMs, then customers who’ve an insurance coverage firm that makes use of that PBM simply received’t go there. PBMs even have an incentive to provide cheap phrases, or not less than used to, as a result of it’s useful to have extra pharmacies in your community. In spite of everything, an insurance coverage firm that doesn’t let its clients store at well-liked drug shops doesn’t have as compelling a product.
Pricing wasn’t an enormous drawback for Walgreens when there have been a number of PBMs, as a result of it had the flexibility to say no if the deal was unreasonable and nonetheless preserve a circulate of shoppers. However within the early 2010s, there have been a bunch of mergers within the PBM area. Two corporations, Categorical Scripts and Medco Well being Options, mixed in 2012, forming the most important PBM.
Right now, there are actually solely three PBMs – Categorical Scripts, Caremark and OptumRx – serving 80% of shoppers. And if there are three gatekeepers for patrons, you actually haven’t any selection however to signal on the dotted line, irrespective of the phrases. No enterprise, not even one as massive as Walgreens, can afford to lose 20-30% of its income, which is what occurs should you refuse to do enterprise with one of many large PBMs. Right here’s what occurred to Walgreens when it bought right into a struggle with Categorical Scripts in 2012, simply after the Medco-Categorical Scripts merger, which one {industry} analyst known as it an “apocalypse” for the drug chain.
Walgreens finally got here again with its tail between its legs and signed a cope with Categorical Scripts. At that second, it turned clear that PBMs had all the facility, and drug shops had none.
It bought worse. In 2015, the third greatest PBM OptumRx purchased the fourth largest PBM Catamaran. There have been many different mergers, and this graphic is nifty, notably CVS Caremark shopping for Aetna in 2018. Sure, CVS, a significant Walgreens competitor, is setting its income, which is insane. (That’s why CVS’s drug shops entered a number of markets whereas its pharmacy rivals flailed.)
Some might find out about PBMs as middlemen who hike the worth of medicine to customers, typically taking 50% or extra in rebates from drug makers. The Federal Commerce Fee famous one instance of a PBM marking up drug costs by as a lot as 7,736%. Different rebating practices are on the coronary heart of the FTC lawsuit on insulin and ought to be barred by closing the exemption within the Anti-Kickback statute.
However PBMs additionally impose prices on the opposite facet of the market, to the pharmacies. In 2015, the large three, with their market energy, started reducing reimbursement charges on pharmacies and charging a number of latest charges. And that features doing it even to the second greatest drug retailer chain in America, Walgreens, which was politically highly effective and value $100 billion on the time. Walgreens flagged it was occurring on the time to Wall Road. Right here’s the corporate’s annual report from that 12 months.
We skilled decrease reimbursement charges in fiscal 2015 as in comparison with the identical interval within the prior 12 months.
In addition they famous that consolidation was now a enterprise danger.
Many organizations within the healthcare {industry}, together with PBM corporations and medical insurance corporations, have consolidated in recent times to create bigger healthcare enterprises with higher bargaining energy, which has resulted in higher pricing pressures. For instance, in July 2015, OptumRx, UnitedHealth Group’s pharmacy care providers enterprise, accomplished its mixture with Catamaran Company, with the mixed companies anticipated to meet over one billion prescriptions in 2015 and be the third largest PBM firm in america. . . . If this consolidation development continues, it might give the ensuing enterprises even higher bargaining energy, which can result in additional stress on the costs for our services and products.
Properly then, there we go, Walgreens warned in 2015 that monopoly energy might choke out its enterprise. And it did. The decrease reimbursement price sentence returned within the 2016 Annual Report, with an extra phrase.
We skilled decrease reimbursement charges in fiscal 2016 as in comparison with the identical interval within the prior 12 months… We count on this development to proceed.
Sure, in 2016, Walgreens realized they didn’t have leverage, thus “we expect this trend to continue.” Walgreens additionally saved the consolidation warning in there, because it did yearly thereafter. And each single annual report since has had the identical set of sentences. 2017
The Firm skilled decrease reimbursement charges in fiscal 2017 as in comparison with the identical interval within the prior 12 months. The Firm expects these pressures to proceed.
The Firm skilled decrease reimbursement charges in fiscal 2018 as in comparison with the identical interval within the prior 12 months. The Firm expects these pressures to proceed.
The Firm skilled decrease reimbursement charges in fiscal 2019 as in comparison with the identical interval within the prior 12 months. The Firm expects these pressures to proceed.
The Firm skilled decrease reimbursement charges in fiscal 2020 as in comparison with the identical interval within the prior 12 months. The Firm expects these pressures to proceed.
The Firm skilled decrease reimbursement charges in fiscal 2021 as in comparison with the identical interval within the prior 12 months. The Firm expects these pressures to proceed.
The Firm skilled decrease reimbursement charges in fiscal 2022 as in comparison with the identical interval within the prior 12 months. The Firm expects these pressures to proceed.
The Firm skilled decrease reimbursement charges in fiscal 2023 as in comparison with the identical interval within the prior 12 months. The Firm expects these pressures to proceed.
The Firm skilled decrease reimbursement charges in fiscal 2024 as in comparison with the identical interval within the prior 12 months. The Firm expects these pressures to proceed.
Each single 12 months, Walgreens informed buyers it was getting worse reimbursement charges, and it anticipated that development to proceed. Each single 12 months, it warned buyers that consolidation in PBMs was hurting its enterprise. However quite than attempting to get policymakers to behave towards dominant PBMs, the administration bought determined, looking for methods to mimic CVS with out with the ability to break into the PBM layer. It went world with the acquisition of Boots Alliance, opened a specialty pharmacy, tried to get into medical care, and purchased VillageMD. The company even employed its present CEO, Tim Wentworth, from his place main Categorical Scripts, which is the PBM that destroyed Walgreens within the first place. However none of it labored, as a result of none of it addressed the illegal squeezing of its income.
One of many large variations between Walgreens and, say, Toys “R” Us, one other chain that felt the sting of Amazon, is that Walgreens isn’t just an organization, it’s a regulated medical supplier. Its pharmacists are licensed, it handles managed substances, and its staff are caregivers. That imposes vital limits and constraints, comparable to legal responsibility for wrongfully shelling out opioids, nevertheless it additionally provides it an embedded aggressive benefit. There’s a cause that it has lasted for 125 years, the native pharmacist is tough to do away with.
PBMs, nevertheless, are engaged in a form of industry-specific arson. And we will see this dynamic by taking a look at unbiased pharmacies’ writ massive, practically one in three of whom have closed within the final ten years. Right now, 46% of U.S. counties now have pharmacy deserts, that means no pharmacies in any respect. Walgreens, in some methods, is healthier arrange than most unbiased pharmacies, as a result of it’s large and has bargaining energy in buying medicine. It additionally has a decrease value of capital. However it’s dying regardless.
Three days in the past, my group launched a report displaying that 326 pharmacies have closed since December of 2024. Why is that month vital? Properly, that’s the month Elon Musk tanked laws to handle among the monopolistic squeezing that PBMs are placing on pharmacies and customers. Musk later mentioned he didn’t know what a PBM is, however on the time, his beef was that the year-end laws had too many pages in it.
I suppose we will thank Musk for the sale of Walgreens to personal fairness. Hopefully, Sycamore Companions realizes there’s more cash if PBM reform goes via and tries to make use of their political leverage to make their funding work out.
