Inside This Issue - Opinion
Momentous year for drug chains begins to unfold
February 13th, 2012
This year promises to be a pivotal one for the chain drug business, as issues of industrywide significance are decided even as individual companies strive to fortify and improve their position in an intensely competitive sector where the pace of change is steadily accelerating.
The Supreme Court will take up the contentious issue of health care reform in March, when it has set aside a full week to hear arguments. Among the questions related to the Affordable Care Act that the justices are expected to answer, the most critical is the validity of the so-called individual mandate, which requires people to obtain health insurance by the time the program goes into effect in 2014 or face a monetary penalty.
If the court overturns that part of the law, the financial underpinnings of the reform process would be in serious jeopardy. A decision in support of the legislation would clear the way for some 30 million additional Americans to join the ranks the insured, a boon for drug chains’ prescription drug business that would also benefit the front end by bringing more customers into their stores more frequently.
The resolution of two issues involving Express Scripts, one of the nation’s top three pharmacy benefits management companies, will have significant implications for health care delivery.
Government regulators are currently examining Express Scripts’ plan to merge with Medco Health Solutions, another of the big three PBMs. Community pharmacy advocates assert that, if the Federal Trade Commission fails to intervene, the combined company would wield unprecedented power in an environment already characterized by steady downward pressure on prescription drug margins.
Market forces will determine the outcome of Express Scripts’ ongoing fight over reimbursements with Walgreens. As of January 1, the No. 1 drug chain was excluded from the Express Scripts network after it rejected contract renewal terms offered by the PBM because they were below market rates and raised the prospect of too much uncertainty for Walgreens’ business.
The retailer is counting on enough patients and health care payers to act on their unhappiness with the loss of access to its pharmacies and either convince Express Scripts to make a more reasonable offer or seek the services of another company when the PBM selling season begins in late summer. If Walgreens prevails in this protracted struggle — a outcome that everyone with an interest in the long-term success of retail pharmacy should hope for — it will be an important victory for the profession, one that validates the value pharmacy brings to health care.
Walgreens is in the thick of another important trend — rethinking the drug store. In recent years chain drug retailers both large and small, among them Rite Aid, Katz Group, Bartell and Lewis, have brought innovative ideas to their store formats, stressing the growing array of health care products and services offered by the trade class and honing the front-end mix to better meet the needs of customers. The degree of success they achieve, particularly outside the pharmacy department, will be important to the channel’s financial performance going forward.
The work Rite Aid has done on its leading-edge “wellness” concept is part of the revitalization evident at the company. After a decade of struggling to keep its head above water following financial wrongdoing in the late 1990s that brought it to the verge of bankruptcy, the retailer has delivered four straight quarters of EBITDA growth and higher same-store sales. The industry as a whole will be strengthened if its third-largest player continues to regain its fiscal health.
CVS Caremark is another prominent member of the trade class that bears watching. The company last year completed a management transition that saw Larry Merlo, president of CVS/pharmacy, succeed Tom Ryan as president and chief executive officer of the entire organization. After a protracted search, Merlo’s former duties were assumed by Mark Cosby, who prior to joining the drug chain last October was head of retail operations at Macy’s. If the new management team is able to hit its stride quickly, CVS Caremark should be able to sharpen its competitive edge by leveraging synergies between the retail and PBM sides of its business.
Those developments, together with such factors as the impact of social media and technology on retailing, the scale and pace of economic recovery, and the November elections, should make 2012 a very memorable year.