Merger Puts Pharmacies On the Defensive

WOONSOCKET, R.I. The merger last month of the nation's biggest retail drug chain with the second-largest prescription benefit manager company forms a pharmacy powerhouse with potential so large, competitors are only beginning to guess how it will affect them. The combination of CVS/pharmacy here with its 6,200 stores, and Caremark, Nashville, Tenn., creates a giant one-stop prescription drug fulfillment

WOONSOCKET, R.I. — The merger last month of the nation's biggest retail drug chain with the second-largest prescription benefit manager company forms a pharmacy powerhouse with potential so large, competitors are only beginning to guess how it will affect them.

The combination of CVS/pharmacy here with its 6,200 stores, and Caremark, Nashville, Tenn., creates a giant one-stop prescription drug fulfillment business model, retailers said. It will be known as CVS/Caremark and will be based here.

As a result, supermarket and other retail pharmacies will have to compete with another retailer that is suddenly one of the biggest players in mail order, with the capability of steering mail-order customers into its stores or other pharmacies' patients to its mail-order entity. Meanwhile, its size makes it better able to negotiate drug prices and realize other efficiencies of scale, sources said.

“The combined company will be able to offer patients, employer groups and managed-care organizations a wide variety of services related to drug dispensing, and that is the big advantage,” said John Beckner, director of pharmacy and health services, Ukrop's Super Markets, Richmond, Va.

Although the full impact isn't likely to materialize for another two to three years, smaller pharmacy operations should be prepared for the possible competitive challenges, according to Robert Appel, spokesman for the National Community Pharmacists Association, Alexandria, Va. “Plan benefits managers have a long history of providing take-it-or-leave-it contracts to independent pharmacies that put those pharmacies at a disadvantage,” he said.

For example, Appel said, some plans are designed to give a patient a discounted co-pay if they choose to refill their prescriptions every 90 days through mail order, while prohibiting an independent pharmacy from offering patients a 90-day refill option.

“Our chief executive officer, Bruce Roberts, has talked to the CVS chief executive, Tom Ryan, and Ryan indicated that he shares some of our concerns about the way plan benefits managers have operated in the past,” Appel said. “We encouraged CVS to allow patients to fill prescriptions for a 90-day supply at retail pharmacy, and to work to eliminate the administrative burden on pharmacies looking to be reimbursed by insurance plans.”

CVS' hand in the design of insurance plans may cause those plans to be more sympathetic to retail pharmacy. However, CVS will be in the top position to negotiate, retailers said.

“It may open up some opportunities at retail, such as 90-day fulfillment, but CVS is going to be the first choice for those patients,” Beckner said.

“All of the contracts between retail pharmacies and insurance plan benefit managers are exclusive, but none this large are owned by a retailer,” said John Fegan, senior vice president, pharmacy, Ahold USA, Quincy, Mass.

CVS' direct competitors, Walgreens and Rite Aid, operate much smaller drug benefit management arms, but no supermarkets are involved in such an endeavor, sources said.

“Each company can still negotiate its own contracts, but this may give [CVS/Caremark] more leverage,” Beckner said.

Fegan said he is not sure that any supermarket operators currently have the focused resources to run a plan benefits manager on their own.