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.

An Open Marriage
The arrangement is also nonexclusive, meaning that neither Caterpillar nor Walgreens is locked into it with that particular company. That will enable Caterpillar to continue a similar arrangement it began last year as a pilot program with pharmacies at Wal-Mart Stores. Todd Bisping, Caterpillar’s PBM, also notes in an interview that the company will continue to work with the PBM it has used for the past 10 years, West Bend, Wisconsin-based Restat. But while the PBM will still administer all of Caterpillar’s drug-benefits claims, it will not be involved in the company’s price negotiations with Walgreens.

As part of an effort to make its drug-benefit plan more cost-efficient, Caterpillar found that there was a great deal of waste inherent in a system that uses PBMs as middlemen, according to Bisping. “They would negotiate a price with drug manufacturers, on one hand, and then employers would pay a higher price. [The PBMs] would keep the spread,” he says. “And they would keep all or a portion of rebates.”

Another problem, says Bisping, is that PBM-generated pricing arrangements with employers are based on discounts off a drug-industry benchmark called average wholesale price. But drugstores typically buy drugs and negotiate payment from PBMs using a different benchmark, wholesale acquisition cost. Usually, AWP amounts to a 20% markup of WAC. To Bisping, AWP pricing is laughable. “We sometimes joke that it’s a random number,” he says. “It’s a price that we don’t feel is based on the actual cost of the drug.”

After it entered into its pilot program with Wal-Mart, Caterpillar began to work with Walgreens, a much bigger pharmacy chain, according to Bisping. Under the arrangements with the two chains, “the cost that we pay for drugs is not based off of AWP in any way. It is only based on what Walgreens paid a manufacturer for that drug,” he says. “It’s a real price, like most things that are procured in this world.”

For its part, Walgreens is willing to give up a bit of its profit margin to gain the market share that a big employer like Caterpillar can deliver. The pharmacy chain will base its discounts on the market share it stands to gain from its relationship with the company in the regions both operate in, according to Rosenbluth. Caterpillar will be motivated to steer more of its employees to Walgreens via incentives because the more drugs the employees buy at the stores, the cheaper the drugs will be for both the employer and the employee, he notes.

The price Caterpillar and its employees will pay, Bisping notes, is based on a “cost-plus pricing methodology.” Asked what the “plus” consists of, Rosenbluth says it includes distribution cost (the cost of getting the drug from the manufacturer to Walgreens’s 12 distribution centers and then finally to its drugstores), cost to fill prescriptions at the pharmacy or via mail order, and a profit. The pharmacy executive says he doesn’t want to go into all of the factors “because I don’t want to give our formula away for everybody to copy.”

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