DEERFIELD, Ill. — Despite an 11th-hour attempt, Walgreen Co. was unable to come to contract renewal terms with Express Scripts Inc. and the new year began without a deal in place, putting the drug chain out of the pharmacy benefit manager’s network. In an interview with Chain Drug Review, Walgreens chief executive officer Greg Wasson discusses the implications of the impasse for patients, payers, the company and the retail pharmacy business.

CDR: As of January 1, Walgreens was no longer part of Express Scripts’ pharmacy network. What are the implications for patients and payers?

WASSON: I’m afraid this is all pain and no gain. We obviously started this Sunday [January 1]. After our best efforts to come to an agreement with Express Scripts before the deadline were rejected, we wanted to make sure that we took the high road. First and foremost that means taking care of our patients who are coming in upset and confused because they’ve had their first choice among pharmacies taken away. We’re trying to offer those people solutions so they can continue to use Walgreens.

One tool is our Prescription Savings Club card, which we came out with four or five years ago. We have a January promotion on the card, which features a reduced enrollment fee. The response during the first few days has been incredible. If that doesn’t work for some patients, then we’re helping them find other pharmacies because that’s what we should do.

CDR: Express Scripts asserts that Walgreens’ costs are too high and that it’s doing this to save money.

WASSON: I want to make sure that everybody who is responsible for making pharmacy benefit design changes or influences them this selling season, and beyond, understands that there is no significant cost savings, if any at all, without Walgreens in their network. There’s a lot of pain that’s being caused because of this, and when they’re thinking about making PBM choices they should understand the whole picture and what patients are going through for little or no savings.

CDR: How do you know Express Scripts isn’t saving money for its clients?

WASSON: We came to that conclusion based on discussions with folks we have worked with that have shared Walgreens’ performance in their network and compared it to their network average. Because there’s such a narrow band of cost difference in a pharmacy network — which we believe is no greater than 3% to 5% — we are, in most cases, at or near the average. And when you consider our generic utilization rate, which typically is industry leading, and the opportunity to have 90-day prescriptions at retail, our performance is even better.

In many cases, if you remove Walgreens from a network, costs are actually going to go up. Catalyst Rx did a white paper that includes a case study that supports that.

CDR: What does that translate to at the individual script level?

WASSON: The variations in prescription cost by provider are very small. That’s the main premise. Take a $60 prescription, for example, and say that there’s a 5% difference — which we doubt based on actual data -— between Walgreens and the average of the network providers. Then factor in that we fill about one out of five prescriptions within that network and you’re down to basically a few cents on a $60 prescription in potential savings. So by Express Scripts removing us from the network, there is very little savings.

CDR: Do you have the sense that Express Scripts recognizes the full value that Walgreens provides to its pharmacy patients?

WASSON: No. Take generics substitutions. We know from looking at Express Scripts’ own generics utilization report that we drive an additional $2 per script savings by our additional generic utilization compared to the network average.

So if you take the rate for 30-day scripts, where we might be a matter of a few cents difference from other pharmacies, and then factor in our generics utilization rate and our ability and desire to do 90-day prescriptions at retail, we provide some significant cost savings for Express Scripts’ customers and cost savings over other pharmacies in the network.

CDR: Why can’t Express Scripts see that?

WASSON: They may have promised savings to some of their clients that requires them to focus aggressively on reducing network costs. But, frankly, we can’t be sympathetic if they’re trying to create a cost structure we can’t support.

I look at this situation in three buckets. First, we have data to support that there are little, if any, savings by removing Walgreens from a network. As we just said, in fact, in many cases your cost could go up because you’re losing our generic utilization and 90-day retail ­capabilities.

Second, there are substantial savings available if a PBM would encourage a client to add a 90-day retail benefit on top of an existing mail benefit. But because of the conflict Express Scripts has from owning its own mail business, they aren’t encouraging clients to realize that. Again, with Catalyst Rx, they showed as much as 7% savings could be realized if they just added a 90-day benefit to a client’s program.

Third — and here’s the real deal — is the fact that due to lack of transparency, PBM clients in most cases never see the network cost because of the PBM markup that’s being added to that.

This situation has arisen because Express Scripts made savings commitments to its clients and is trying to maintain its markup on the back of retail pharmacy. We aren’t going to let it happen.

CDR: Why did Express Scripts pick a fight with Walgreens as opposed to another major pharmacy operator?

WASSON: There are probably multiple reasons, some of which I don’t know. The main reason is our contract. We were in the third year of a three-year contract that expired December 31. We were in negotiation on a new contract. We also fill one out of every five retail scripts in America and, in some markets, more than that in their network. Because they made aggressive commitments in terms of what they promised clients, they’ve decided to try to force the cost they pay to Walgreens down.

This is not just about Walgreens. This is as much, if not more, about the retail pharmacy industry. If the leading pharmacy retailer in the land cannot tolerate the type of reimbursement Express Scripts is talking about, who will be able to? It’s just a matter of time before other pharmacy operators are faced with the same situation.

CDR: Maybe you could talk a little bit more about the patients affected by this. Before the beginning of the year, were most of them aware of what was happening?

WASSON: It’s interesting. We’ve done our best to get the word out for a long time. Our third quarter earnings call in June is when we talked about the fact that we hit an impasse with Express Scripts and most likely wouldn’t be in its network. We’ve been out there for six months. Our focus in the stores has been talking to Express Script patients, letting them know that there was a good chance we would not be able to fill their prescription after the first of the year.

It is interesting. No matter how much communication you try to generate, the vast majority of patients still came in and weren’t fully aware of the dispute or understood what it means.

We have to help them get through that. Patients come in and they’re confused, upset, frustrated. Patients are upset with the PBM once they understand what a PBM is. They see the PBM as blocking their choice of pharmacist.

CDR: How have patients responded to your efforts to help them through this?

WASSON: We’re seeing a real interest in our Prescription Savings Club card as a way that they can continue to use Walgreens. We’ve had record sign-up days at the start of the year. The card represents great value because roughly 90% of the therapeutic categories today have a generic available. With [Pfizer Inc.’s] Lipitor becoming generic that’s going to be even greater. So, in most cases, a vast majority of patients have drugs available to them in their therapeutic class at a discount with the card.

The way many of them look at it is that they can try this card and continue at this Walgreens pharmacy and also use their employer coverage where appropriate for their needs.

We’re going to drive that message hard through ads and other means. There’s a huge potential for us to continue to grow as a consumer prescription drug plan.

CDR: What have you told your pharmacists?

WASSON: I’ve never felt more proud of our people. We have communicated all year to folks as to what this issue is about and why we’re taking this stance — that it’s as much about the community pharmacy industry as it is about Walgreens and the fact that their pharmacist-patient relationship is much more than a dot on a map. That, ultimately, we believe that the service we provide, and that relationship and that trust, is worth far more than what Express Scripts is valuing it at today.

Our key strategy is to advance the role community pharmacy plays in health care. That’s where folks want us to go. I’ve had key stakeholders across the entire health care landscape in our new concept pilot stores. The No. 1 comment is, ‘This is terrific, how fast can you go?’ Because they see the value that community pharmacy can provide. That’s where we’re headed.

CDR: What about the payers? How do they view this conflict?

WASSON: We’re in the business to fill prescriptions. What’s encouraging is the desire from the rest of the industry that has Walgreens in their network to create and form deeper relationships with us to be able to win business against Express Scripts and health plans that use Express Scripts going forward. The objective for us is to grow and work more closely with the rest of the industry that really sees this as a huge opportunity to win clients and compete against Express Scripts.

CDR: It seems that part of the problem is that the incentives for different sectors of the health care system are misaligned. How do you think the retail pharmacy-PBM relationship is going to evolve over the long term?

WASSON: It’s starting to change, and health care reform and everything else we’re seeing will accelerate as it is. There are going to be folks who are focused more on the entire medical cost and trying to get at new solutions to help really improve the quality and the value but also the reduced cost of total medical. And pharmacy is a component of that.

The profession can be used more effectively than just trying to reduce the cost of pharmacy in a silo and instead help get to the overall quality of medical care and cost. The secretary of HHS [Kathleen Sebelius] didn’t come to one of our health and daily living stores in Chicago last October to see prescriptions being dispensed. She came to see the role that community pharmacy can play going forward.

By expanding our scope of services, co-locating professionals, freeing up pharmacists to do more of what they’ve always done, that’s where this industry needs to go and where people want it to go.

CDR: Health care reform will also give more power to the individual versus the plans.

WASSON: Yes. The individual marketplace is going to grow, and the individual is going to become more retail-like in his or her health care purchasing. That’s where the relationship and the trust of community pharmacists become tremendously valuable.
There are folks out there — health plans, health systems and physicians groups — that are looking to manage care more holistically or in a more coordinated way. They are looking for community pharmacy to play a greater role than what others are.

CDR: Is Express Scripts blind to that?

WASSON: Its model is focused on the old way — trying to reduce pharmacy cost or pharmacy spend. Express Scripts is overcommitted and forced to continue to unrealistically push those costs down.

Express Scripts uses what we would call a spread model. So they make money by maintaining or growing their margin from the difference between what they’re paying pharmacies within their network and what they charge clients. Very few end clients ever see the true cost of the network in their model.

CDR: Is that standard in the pharmacy benefit management industry?

WASSON: It has been. But as people understand what pharmacy benefit managers do, and the fact that they’re earning more as a middleman per script then the ultimate provider, folks will begin to question that.

CDR: How do you see this situation playing out with Walgreens’ stockholders and members of the financial ­community?

WASSON: We’ve talked about the fact that the long-term ramification of accepting Express Scripts’ proposal is far greater than any short-term implication.

I’ve been out personally with our top shareholders and analysts, as have other members of our management team. And, frankly, I think we have the confidence and support of our shareholders who see this as the right thing to do for the company long term.