Managed care consternation continues

Drug Store News, May 20, 1996 by Marie Griffith

A funny thing happened to me on April 24, the day Rite Aid withdrew its bid to buy Revco in the wake of the Federal Trade Commission's move to block the merger. I got a call at about 1:15 in the afternoon from a producer for CNN's "Moneyline." Could I go on camera in half an hour to talk about the FTC's decision and its implications for the drug store industry? With just minutes to pull my thoughts together, not to mention fix my hair and makeup, I zipped across town to CNN's newsroom.

The gist of my argument was that while the FTC was correct in looking at the managed care aspect of the proposed merger, managed care organizations are actually the bullies forcing pharmacy retailers to accept reimbursements that no longer cover their cost of doing business. Rite Aid was attempting to match the big PBMs in clout, not overpower them.

Meanwhile, the consumer, which the FTC said it was trying to protect, will Pnd 1ln suffering if more of the nation's 40,000 drug stores are forced to close because they aren't financially viable.

At 2 p.m., the FTC's rebuff of Rite Aid seemed like such a hot topic that I was asked to come back for a live program at 5 p.m. on CNN's new FN network. By 3 p.m., however, I got the call that the anchor had decided to pursue another story.

The general news media aren't interested in the bigpicture issues that underlie the collapse of the Rite Aid/Revco merger. And consumers, business people and government agencies just don't understand the seriousness of the problems the drug store industry is facing as a result of unmanaged managed care.

What were they thinking?

The FTC's statements in rejecting Rite Aid's merger bid were particularly disturbing. George Carey, deputy director of the FTC's Bureau of Competition, told Drug Store News, ffenior editor Lisa Fried: "Managed care hasleverage ... by playing one chain against another. If Rite Aid says, `I won't participate at AWP minus 16' now, another chain may decide to participate."'

How can Carey fail to understand that the managed care companyhas huge leverage in the form of the "lives" it covers? There is no agency to say that a PBM can's have a lock on 80 percent or 90 percent or more of the consumers in a given community through a health plan. The fact that two or more chains may want to compete for access to those customers only increases the pressure on those pharmacy retailers.

Furthermore, why is it that the FTC thinks drug chains should tee pushed by retail competition to accept lower and lower reimbursement? The FTC either doesn2t understand or doesn't believe the predicament of drug store operators, who are continually being forced tD accept diminishing reimbursement for products and services that cost just as much or more to provide.

In 1995, chain drug stores saw their average gross margin in pharmacy slip from 24.3 percent to 23.7 percent. For independent drug stores, gross margins fell from 27.7 percent, to 24 perGent. Meanwhile, the wholesale price of pharmaceuticals rose 1.7 percent, and payroll, real estate and technology costs certainly did not go down.

It's hardly a coincidence that the universe of drug store units declined by 4 percent in 1995 alone. While 1,795 independent pharmacies shut their doors last year, the bigger, stronger chain drug store portion showed a net gain of only 59 units. In fact, the total number of drug stores in the country has been decreasing since 1989, when there were 14,000 more drug stores in operation than there are today. 3igger is better, some of the time

In its analysts of the impact of the proposed Rite Aid/Revco merger, the FTC decided not to count independents at all, apparently determining that they are not much of a factor in today's managed care world. By that logic, the FTC is clearly saying that one has to be big to play in the managed care business. And yet, the agency then turns around and blocks Rite Aid's attempt to get bigger.

When it comes to vulnerability in the face of managed care, drug store chains have more in common with the independents than other types of chains with pharmacies. The independents are just feeling the pain more dramatically because 80 percent of their business is in pharmacy, on average, vs. 40 percent for chain drug stores.

If you're Wal-Mart or Kmart or Kroger or Albertson's or Safeway or Price/Costco -- all of which are among the top 20 retailers in pharmacy -- you may be able to afford to operate pharmacies at break-even or at a loss because that department is only a small fraction of your total. (Pharmacies represent only about 5 percent of sales in supermarkets that have them; for mass merchants, the percentage is even smaller.) For these retailers, managed care is seen as an attractive way to build traffic, as there are many other ways to make money off those customers once they're in the store.

But the situation is dramatically different if you operate a traditional type of drug store, like Rite Aid, with 50 percent of its revenues in pharmacy, or Revco, with pharmacy representing 56 percent of sales (up from 50 percent just two years ago). Keeping the pharmacy department profitable is an imperative for chains like these.