Leading pharmacy benefit managers report that client interest in narrow pharmacy networks has picked up, but so far few have been willing to proceed.

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Analyst: PBMs see little uptake on narrow networks

June 18th, 2012

CHICAGO – Leading pharmacy benefit managers report that client interest in narrow pharmacy networks has picked up, but so far few have been willing to proceed.

In presentations at William Blair & Co.'s 32nd Annual Growth Stock Conference here last week, Express Scripts Inc. and CVS Caremark Corp. said most client discussions and proposals this year have included a specific bid request for narrow networks.

"We suspect both Express and CVS are encouraging these discussions, although there has yet to be much evidence that these conversations are converting into new contractual plan designs," William Blair analyst John Kreger wrote in a research note. "CVS said few clients are adopting narrow network plans, and Express Scripts did not quantify the portion of legacy clients that have signed on to narrow networks in the wake of the Walgreens [contract] dispute."

Meanwhile, SXC Health Solutions Corp. "continues to use its open retail network offering as a differentiator and has pointed to a focus on '90‐day retail,' " he said.

Express Scripts had no news to report on its contract impasse with Walgreen Co., Kreger added.

"Express Scripts management repeated that legacy Express clients can realize savings from the lack of Walgreens in the network if they formally sign on for a narrow network," he stated. Yet the PBM didn't disclose the number of legacy Express Scripts or Medco Health Solutions clients that have opted to do so, he noted.

In another report on the conference, William Blair analyst Mark Miller said industry sources indicate that CVS Caremark recently had some key PBM contract wins, including the Goodyear Retiree VEBA and UPS contracts for 2013, along with the previously disclosed Assurant contract.

"Regarding narrow networks, [CVS Caremark] indicates that it is having many conversations, but so far has not seen widespread adoption of the offering," Miller wrote. "Competitive pricing is viewed as very consistent in this season."

PBM contract wins have provided a lift for the CVS/pharmacy business, which continues to benefit from the company's successful Maintenance Choice program that gives mail-order customers the option of picking up some prescriptions in CVS drug stores.

According to Miller, the CVS retail pharmacy share of prescriptions in Caremark has climbed from 19% at the time of the company's acquisition of the PBM to between 28% and 29% currently.

CVS Caremark estimated that for this year it could pick up 16.9 million to 23 million prescriptions from Walgreens if the drug chain and Express Scripts fail to resolve their contract dispute, Miller reported.

"This outlook could be conservative, in our estimation, as the 6 million prescriptions captured in the first quarter was a higher run-rate," he stated. "Management's guidance for a 6 cents to 7 cents EPS benefit in 2012 assumes a 3 cents to 4 cents benefit in the second quarter, in addition to the 3 cents benefit realized in the first quarter.

"Management indicated that there will be some continuing expense in the second quarter with the step-up in pharmacy staffing carrying over from the first quarter, but this cost should largely dissipate in the second half," Miller added. "Hence, if there is no resolution between Walgreens and Express this calendar year — and we are not aware of any active dialogue between the companies — it is reasonable to estimate the annual EPS lift could be greater than our projection of a 13 cents benefit in 2012." 

In March, PBM Argus Health Systems Inc. announced that it had established a preferred network arrangement with CVS/pharmacy for commercial, Medicaid and Medicare networks.

"When analyzing current pricing, we see a potential cost savings with an alternative network versus an open network," Argus chief executive officer Jonathan Boehm stated at the time of the agreement with CVS. "Customers utilizing our alternative network options can generate potential savings, dependent on which network option is selected." In announcing a preferred network with Walmart last September, Argus pegged the potential savings of a preferred versus an open network at from over 2% to more than 4%.

Pharmacy industry observers and executives have said a key reason many businesses thus far haven't gone for preferred network arrangements is that the potential savings hasn't been enough to overcome the pharmacy choice restrictions for employees.