Will Caterpillar’s Walgreens Deal Shrink Drug Costs?

The tractor maker's pharmacy-benefit arrangement seeks to cut out the middleman to gain transparent pricing.

Hal Rosenbluth, who, as president of Walgreens’s health and wellness unit, may have an interest in buttering up finance chiefs, observes that CFOs have an “innate” ability to find out the true cost of goods or services their companies are spending money on.

Rosenbluth, whose company launched a direct pharmacy-benefit purchasing arrangement with Caterpillar last week, suggests that the current national focus on cutting health-care costs and the structural shift in workplace-based drug buying that the Caterpillar model features will push CFOs to start asking tough questions about waste in the current pharmaceutical supply chain.

The drugstore executive was alluding to the current arrangement whereby employers contract with pharmacy-benefit managers to handle their drug-purchasing arrangements. Typically, employers negotiate price discounts with PBMs, and the PBMs earn a “spread,” or profit margin, between what they pay a drugstore for the employee’s drug and what they charge the employer. In many of the deals, the PBM agrees that the employer will get rebates that pharmaceutical makers pay out when their brand-name drugs appear in an employer’s list of preferred drugs on their benefit plans.

The complicated pricing system has drawn the ire of many employers, who complain that it’s foggier than a rainy day in London. But it’s also widely acknowledged that the intermediaries do negotiate cheaper drug prices than employers might otherwise get, and that there are powerful incentives that keep the system going despite its potential for waste. In some cases, Rosenbluth alleges, “these rebate dollars are being used to offset the cost of a particular department within the company so it looked like it was a profit center.”

Spurred by current cost concerns, he suggests, a sharp-eyed CFO might detect a cozy relationship between his company’s employee-benefits manager and a PBM in which the benefits department is credited with a nice rebate check — even though the company is paying a higher price than it would have in a direct arrangement with drugstore chain like Walgreens. For instance, a company might get a 15% rebate for a drug priced at $1 that the drugstore is actually selling for 70 cents.

Rosenbluth acknowledges that he knows of such situations only from conversations he’s had with employers and consultants. But there’s no question that a yen for rebates is built into the system. “I can’t argue with the idea that any company would get used to the income of a rebate check, a reliable source of revenue for a quarter,” says Sean Brandle, prescription-drug consulting practice leader of The Segal Co. in New York. Although he hasn’t encountered the exact situation the Walgreens executive describes, Brandle adds that when he advises employers on PBM selection, “the rebates are part of the equation…part of the decision-making process.”

In the arrangement it launched last week with Caterpillar, however, the drugstore company claims to be setting up a leaner and clearer system. Walgreens contends that it has established “a direct relationship for the purchase of prescription drugs using a transparent pricing model,” according to a release issued by the company, which has nearly 7,000 drugstores nationwide. Under the program, Caterpillar will be given a “Walgreens Proprietary Price List,” which it contends is based on the cost Walgreens pays the drug manufacturers.

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