Walgreens, CVS to end network relationship

Posted June 7, 2010 at 3:13 p.m.

ct-biz-cvs-web.jpgA CVS store in Boston. (AP Photo/Chitose Suzuki, file)

Associated Press | Drugstore chain Walgreen Co. said Monday that it will end its
relationship with competitor CVS Caremark’s pharmacy benefits management
business because of complaints about prices and policies intended to
bring customers to CVS stores.

The decision does not affect
current Caremark plans, but if Walgreen stands by its decision, it won’t
handle any Caremark-managed prescriptions in about three years.
Walgreen said it will not participate in plans that are awarded to
Caremark or contracts renewed with Caremark starting Monday.

Analysts who follow both companies see Walgreen’s announcement as potentially high-stakes battle to bring CVS to the bargaining table over payment rates.

“We believe Walgreen’s actions represent a negotiating tactic, albeit a very aggressive one, to garner increased reimbursement from Caremark,” said Helene Wolk and fellow analysts from Bernstein Research in New York in a report Monday. “Reimbursement from Caremark represents 7 percent of Walgreen’s total revenue of approximately $4.6 billion.”

Investors did not appear wild about the imbroglio. The price of CVS shares plummeted nearly 8 percent, or $2.70 a share to $31.09 in trading today on the New York Stock Exchange.

Meanwhile, the price of Walgreens shares were off 73 cents, or 2 percent, to $30.11 a share.
Walgreen is the largest U.S. drugstore chain in locations and revenue, slightly ahead of CVS Caremark Corp. It runs more than 7,500 stores in every state, along with Puerto Rico and Washington, D.C.

CVS said it was “surprised and disappointed” by the decision and had recently discussed these subjects with Walgreen’s management. It said it is open to additional talks. It said Walgreens is trying to squeeze Caremark into giving better reimbursement rates.

Walgreen, which is based in Deerfield, said it does not get enough information from Caremark about new prescription drug plans and contracts. That makes it hard for Walgreen to decide whether it makes financial sense for it to participate. Walgreen said it plans to put more effort into marketing its own programs, including health and wellness plans and worksite pharmacies.

Walgreen singled out the Maintenance Choice program for criticism. Maintenance Choice is a major program through which Caremark beneficiaries can pick up 90-day prescriptions at CVS pharmacies or get them delivered through the mail. The program is for patients with chronic illnesses who need regular supplies of medications.

Walgreen said Maintenance Choice “disrupts networks by requiring patients with chronic conditions in many plans to use CVS pharmacies or Caremark mail service facilities for their prescriptions.” It also said Caremark’s approach to Walgreen within the CVS Caremark retail network has “fundamentally changed” in the three years since the CVS-Caremark combination.

CVS and Caremark combined in early 2007. The company’s goal is to negotiate lower prices on prescription drugs and bring more customers to CVS stores through plans such as Maintenance Choice. But critics allege CVS and Caremark have a conflict of interest and that they reduce customers’ options.

Walgreen cited the “growing unpredictability” of CVS Caremark’s reimbursement rates and said payments for certain drugs don’t reflect the market. CVS said Walgreen is reimbursed at rates comparable to other national chains, including CVS’s own stores.

Tribune staff reporter Bruce Japsen contributed to this story.


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