Mandatory mail order threatens Motor City business: the impact of the GM and UAW decisions could suck hundreds of thousands of customers and hundreds of millions of dollars out of drug stores operating in Michigan

Drug Store News, June 6, 2005 by Mike Duff

You might say that the Motor City has given retail pharmacy the shaft--and you wouldn't mean the drive shaft, either.

Thanks to decisions by the United Auto Workers in 2004 and General Motors earlier this year to move members of its health care plans into mandatory mail programs for chronic care medications, Detroit has become a tough town for drug stores to do business.

Most recently, GM announced that its 1 million-plus employees and retirees no longer would be able to get their prescriptions for maintenance medications filled at Walgreens stores. Walgreens was singled out at the exclusion of its competitors, presumably because of a misunderstanding of the company's policy concerning mandatory mail programs. Walgreens in the past had been very vocal in its opposition to renew managed care contracts that had a mandatory mail component--however, it said it would continue to honor any existing contracts, a point company executives assumed they had made clear.

While the chain has downplayed the impact GM's decision could have on its business--GM receipts comprised a fraction of 1 percent of Walgreens' total pharmacy sales, a company spokesman noted--it continues to negotiate to find a mutually agreeable option that would allow Walgreens to continue to serve GM employees. Almost three months after the automaker enforced its decision, no settlement had been reached, but Walgreens was still pitching. "We are still in discussions with leaders at GM," Walgreen Co. spokeswoman Tiffani Bruce told Drug Store News last month.

Although CVS and Rite Aid, the respective No. 1 and No. 2 pharmacy players in the market, were not included in the ban, the move was considered a blow to retail pharmacy, which has grappled with the growing ability of prescription benefit managers to shift patients on chronic care medications into mail order pharmacy subsidiaries. Published reports peg GM as the largest private purchaser of health care products in the United States, spending more than $5 billion on health care for active and retired employees.

Some of Walgreens' competitors immediately tried to build on the GM decision, with Kroger and Meijer promoting their continued association with GM.

The GM move came just two months after a provision of a new United Auto Workers contract with the Big Three automakers took effect, requiring active and retired union members and their families to fill prescriptions for maintenance drugs through Medco Health Solutions' mail order pharmacies. The contract covers Ford, Daimler/Chrysler, GM, Delphi and Visteon. In negotiating the provision with the UAW, automakers acted on the belief that they could save as much as $70 million per year by shifting patients to mail order prescriptions, even though drug store operators say they could match those savings if given a level playing field.

Together, the combined impact of the GM and UAW decisions could suck hundreds of thousands of customers and hundreds of millions of dollars out of chain and independent drug stores operating in Michigan. The UAW move alone could cost retail pharmacy some $268 million in lost revenues and as many as 3,000 jobs, including more than 160 full-time pharmacists and pharmacy techs--a major blow for an area already fundamentally challenged from an employment standpoint. In March, the unemployment rate in the Detroit metro area stood at 7.9 percent, the highest among U.S. cities with populations of more than 1 million, according to recent U.S. Department of Labor statistics.

Metro Detroit is a study in contrasts. The U.S. Census Bureau includes Ann Arbor and Flint in its definition of the metropolitan area and in the 2000 census pegged the population at 5.46 million; the city itself counted just 951,000 residents. Population trends have been away from the city proper for some time. From 1990 to 2000, the metro population advanced 5.2 percent, but the city's population declined 7.5 percent and fell under 1 million. Detroit's population has continued to slide, hitting 880,000 in the 2003 census update.

In the 2000 census figures, the city of Detroit's population skewed roughly 82 percent African-American, a little more than 12 percent Caucasian and about 6 percent Hispanic. In the greater metro area, the mix is approximately 70 percent Caucasian, 20 percent African-American and a much smaller Latino community.

And, as always, disruptions in core economic institutions, particularly the impact of auto mobile company decisions, also tend to have a large impact on Motor City.

Collectively, all of these factors make Detroit, generally speaking, a difficult retail environment.

Making the Detroit marketplace even more volatile is A&P's announcement that it is exiting the Midwest, including Detroit. The major source of turmoil in the market in recent years had been Kmart, which still clings to the No. 5 spot in terms of pharmacy market share, though Wal-Mart is just a fraction of a percentage point from overtaking it.

First, Kmart cut back on the number of stores, particularly supercenters, it operated in the market. Now, owned by Sears Holding, it has seen its first conversion of a Kmart store to a Sears format. In Rochester, Mich., a Kmart has been converted to the new Sears Essentials format, which basically is a Kmart discount store with a few core Sears departments, such as Craftsman tools, home furnishings and major appliances under the Kenmore line, and Kmart's pharmacy and HBA department.