Canadian benefits plan sponsors are becoming more involved in assessing their drug plan designs. This has been a positive step forward in terms of helping to ensure long-term plan sustainability and affording plan sponsors the ability to reinvest unnecessary spending in areas that will produce far greater return. By contrast, one area in which plan sponsors have had much less success is the distribution channel of prescription drugs, as there has long been a disconnect between plans and pharmacy providers. That may begin to change in a significant way, and it will be interesting to see what happens within the marketplace if we start to see more vertical integration of the drug distribution channel.
There was a presentation at this year’s Solutions in Drug Plan Management Conference, held September 8 in Toronto, that highlights where the market may be going. One of Shoppers Drug Mart’s (SDM) HR representatives delivered a presentation entitled “How SDM Redesigned It’s Drug Plan and is Laying the Foundation for Employee Wellness.”
The presentation was particularly noteworthy because it served as SDM’s coming out party in terms of how the company is looking to engage plan sponsors. Up to that point, SDM had been notably absent from aggressive marketing of preferred provider networks and other programs designed to catch the eyes of Canadian plan sponsors. SDM appeared to be falling behind competitors like Rexall, Loblaw, Sobeys, Metro, Costco and others who have begun to formally engage plan sponsors—a foreign world for most pharmacy groups. The conference served as a forum for SDM to trumpet the work they have done within their own plan, and deliver their message of cost containment and enhanced wellness from the perspective of a large employer.
What remains to be seen is what happens from here. It seems like little coincidence that publicly pulling the covers off their offerings last month also coincided with the announcement that SDM had been named as a finalist for two different Benefits Canada Workplace Health & Benefits Awards: the Employer Award and Health/Wellness Program Award (SDM has since been announced as a winner in the Employer category). It’s quite clear SDM has its sights set on establishing credibility within the private payer community, and plans on using its own employee plan as a testing ground.
If one looks at the 2010 SDM annual report, a key metric pops out: while prescription volumes increased by 4.7%, sales in the pharmacy area only increased by 2.8%. With a stock off its highs of $58 per share (now trading in the $41/share range), it’s not hard to see that a key driver of growth in SDM’s share price is going to be a higher volume of prescription sales, which will necessitate more market share. Sure the population is aging, but thanks to increased competition and drug pricing reforms, that alone won’t be enough to drive top-line and bottom-line numbers. There will need to be a strong focus on increasing market share. The surest path to that goal is vertical integration.
In the U.S., pharmacy benefits managers are not only involved in processing claims, they are involved in plan design, supplier negotiations, formulary development, plan design and medication management. Most importantly, they control the distribution channels for prescription drugs.
It’s not a stretch to see where all this is going. The SDM presentation last month focused on formulary solutions, wellness solutions and chronic disease state management. When you factor in that SDM now has its own line of generic medications, a network of over 1,200 pharmacies coast to coast, an army of pharmacists on its payroll and a existing pharmacy business model that is dying a slow and painful death, the idea that SDM could follow the U.S. model of vertical integration and become its own closed network—doing everything from managing plan designs to claims processing and plan administration to drug distribution—is not far-fetched.
This concept of vertical integration in this area isn’t new to Canada. Managed Health Care Services Inc. (MHCSI), a subsidiary of Sobeys, has been doing this (primarily in Atlantic Canada) since the mid-1990s. The Quebec-based pharmacy giant Jean Coutu got into generic drugs four years ago. Pharmacies have long stressed they can be more involved in medication management and chronic disease state management, so it’s not a stretch that they are looking to plan sponsors to buy in. What is new is that the efforts of SDM have the potential to start a domino effect with other national pharmacy chains. A large player like SDM has the capital to get into this space in a significant fashion. If they do, and if they put together offerings that resonate with plan sponsors and deliver concrete value, there could be profound changes in the way prescription drug benefits are delivered in Canada. We could see a world where a business model similar to that which MHCSI pioneered years ago could become mainstream across the country.
In the near future, market offerings may feature plan administration, plan design, product distribution, health and wellness, and medication management services all rolled together. These entities could look like a hybrid of a third-party administrator, pharmacy benefit manager, employee assistance program provider, plan advisor, retail pharmacy and mail-order pharmacy.
We’ll have to see if SDM and others are successful in moving in this direction and finding ways to capture a greater proportion of the market and develop new revenue streams to breathe life into a decaying traditional pharmacy reimbursement model. Based on what they presented, there appears to be little doubt this is the direction they are headed. But talking is the easy part. It will be interesting to see how this is executed, and how it impacts the preferred networks and other programs being built by SDM’s national competitors who, to date, have not looked at this degree of vertical integration.
In the interim, as the mechanism of delivery of drug plan benefits undergoes a period of significant evolution, plan sponsors still control the most critical element of cost containment: the ability to manage plan designs. We’ll have to see how the rest of this story plays out in the quarters ahead.