Move impacts about 10% of the retailer’s patients.
The health care arm of the nation’s largest operator of traditional supermarkets announced late last month that it has notified Express Scripts of plans to terminate their pharmacy provider agreement if a new contact with improved terms isn’t in place by the end of the year. Should that come to pass, the pharmacy benefits manager’s commercial customers would no longer be able to have their prescriptions filled at Kroger’s 2,200 pharmacies across the U.S.
Impacting about 10% of the retailer’s patients, the move would open another front in the pharmacy industry’s bid to counter PBMs’ pervasive influence in the prescription drug marketplace, thereby easing the relentless downward pressure on profit margins that they have had to contend with for decades. Benefits managers have suffered a string of setbacks of late. In December 2020, the Supreme Court ruled in Rutledge v. PCMA that the Employee Retirement Income Security Act, more commonly know as ERISA, did not override an Arkansas law that regulates PBMs. The decision unleashed a flood of state legislation, with more than 90 reform bills having been passed into law thus far; hundreds more are pending.
Early this year, the Centers for Medicare and Medicaid Services finalized a rule that strengthens transparency requirements for the application of DIR fees under Medicare. The Federal Trade Commission launched an investigation into PBMs’ business practices in June, and a growing number of members of Congress are expressing concern about the impact of benefits managers on their constituents’ access to pharmacy care.
Colleen Lindholz, president of Kroger Health, says the decision to reject the existing deal with Express Scripts was motivated by a desire to do what’s best for patients and keep the retailer’s pharmacy business on a sustainable course. “We took the necessary step of announcing our intention to terminate our contract because the current agreement does not enable Kroger to improve health access, deliver greater pricing transparency and keep prices affordable for our more than 17 million patients,” she notes.
Kroger is challenging Express Scripts for all the right reasons, reasons that it shares with other pharmacy operators, including Walgreens. The latter company took a similar principled stand a decade ago when it stopped doing business with Express Scripts (which was then an independent entity and is now owned by health insurer Cigna). A protracted stalemate ensued, with both sides digging in.
After 13 months, the two companies finally struck a deal, bringing Walgreens back into the PBM’s network. Terms of the agreement were not disclosed, but the drug chain was hurt by the deadlock. Financial analysts estimated that Walgreens lost $4 billion in sales, together with attendant store traffic. Previously loyal customers were forced to turn to other pharmacies in the Express Scripts network, which welcomed them with open arms.
What’s different this time around? If a new contract between Kroger and Express Scripts isn’t struck before the end of the year, the latter is likely to rely on the same tactics that it used a decade ago. Kroger is, however, in a somewhat better position than Walgreens was a decade ago. The supermarket operator’s business mix — about 90% of sales come from groceries — makes it far less vulnerable to disruptions in the pharmacy department. Back in 2011, 65% of Walgreens’ revenue came from prescription medications. With food and related products being the chief reason that people shop a Kroger store, the drop-off in foot traffic that Walgreens experienced during its battle with Express Scripts is unlikely to occur.
Kroger should also benefit from the high standing that pharmacy enjoys after its exemplary performance during the pandemic. The industry has thus far administered more than 270 million COVID vaccine doses, enabling the country to get back to normal, and provided easy access to health care services and many other household essentials throughout the emergency.
The challenge that Kroger has taken on is fraught with difficulty, but there is a compelling need to act. Pharmacy operators of all kinds are quick to express their concern that the fee-for-dispensing model that has governed the industry for so long is broken to the point where it poses a threat to both patients and providers.
“Kroger is doing everything possible to deliver greater value for our customers and navigate this ongoing period of record inflation. We do not believe Kroger customers should have to pay higher costs to increase Express Scripts’ profits,” says Lindholz, adding that failure to reach a fair settlement with Express Scripts will cause the disruption of vital services for many individuals.
There is a lot on the line — for patients, Kroger and the entire health care sector. The hope here is that Express Scripts and Kroger can agree on a new contract before the end of the year, ensuring continuity of care for patients, while at the same time recognizing the need to rethink the entire pharmacy reimbursement model. Changing the basis of remuneration from products dispensed to services rendered and outcomes achieved would go a long way toward preventing future impasses.