Structural Collapse at Walgreens
New Navigational Knowledge Required
Takeaway: The American Way of Healthcare will need different policy, economic and business constructs for what lies ahead, but we will not build them so long as we wander the wasteland of our past.
Updates since original publication July 2, 2024:
October 15, 2024 to integrate Walgreens announcing closing 1,200 stores over next 3 years, 800 more under evaluation (per Bloomberg)
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Earnings for its third quarter showed the extent of Walgreens’ troubles, reported Anna Mathews and Joseph Walker last week for The Wall Street Journal. The pharmacy chain missed on fiscal third-quarter earnings and slashed its full-year profit guidance. Walgreens also announced plans to close about a quarter of its 8600 US store locations, and Sebastian James, who had run Walgreens' U.K. retail pharmacy chain Boots as CEO since 2018, resigned over the weekend.
Walgreens’ stock is at a price not seen since the 1990s.
The results, write Mathews and Walker, reflect worse-than-expected consumer spending and a change in a key industry pricing index that is squeezing reimbursement to pharmacies.
“Like other pharmacies, Walgreens has been facing smaller revenue from prescription drugs, which had been a major driver of sales. Pharmacies have also faced greater reimbursement pressure from the firms, known as pharmacy-benefit managers, that negotiate drug prices on behalf of insurers and employers.”
Walgreens Boots Alliance Chief Executive Tim Wentworth in an interview with the paper also said Walgreens is losing money on filling prescriptions for the fast-growing GLP-1 class of diabetes and weight-loss drugs, a category that includes blockbusters Ozempic and Mounjaro.
One main takeaway from Walgreens’s strategy review, he said, was, “retail pharmacy is central to our future and to our overall customer and patient experience. It enables many other things, but it has to change.”
The future Wentworth envisions is one in which pharmacies are local hubs for healthcare access. His ‘health ecosystem vision’ positions retail pharmacies as the keystone to maintaining patient health (i.e. ‘continuous health engagement’). Part of this narrative includes having pharmacists viewed as expert consultants in the case of minor healthcare needs ranging from advice on over-the-counter products to helping administer specialty drugs on site.
"I am confident WBA will be a leader in the future of healthcare, with pharmacy and retail at its center," he said on his earnings call.
But here's where the storyline gets fuzzy:
Wentworth took over as CEO for Walgreens after a career spent in the business of managing drug benefits, most recently as the CEO of Express Scripts, the very same company responsible for the deep problems affecting the entire pharmacy market.
Around the same time the Wall Street Journal was sitting down and interviewing Wentworth, investigative journalism by Rebecca Robbins and Reed Abelson was published by the New York Times unpacking the power and control of Big PBM, and the strategic effect of that control and power on the economics of the drug market (see: 'The Opaque Industry Secretly Inflating Prices for Prescription Drugs').
What Robbins and Abelson found and reported on was the ‘ground truth’ that everyone who is now or has ever worked in the $5 trillion system of markets loosely called “healthcare” in the United States already knows and understands:
The PBMs, which are responsible for paying pharmacies on behalf of employers, are driving independent drugstores out of business by not paying them enough to cover their costs. Small pharmacies have little choice but to accept these lowball rates because the largest PBMs control an overwhelming majority of prescriptions. The disappearance of local pharmacies limits health care access for poorer communities but ultimately enriches the PBMs’ parent companies, which own drugstores or mail-order pharmacies.
They often charge employers and government programs like Medicare multiple times the wholesale price of a drug, keeping most of the difference for themselves. That overcharging goes far beyond the markups that pharmacies, like other retailers, typically tack on when they sell products.
The largest P.B.M.s recently established subsidiaries that harvest billions of dollars in fees from drug companies, money that flows straight to their bottom line and does nothing to reduce health care costs.
“They’re seeking to extract from the system, without creating any corresponding value for the system,” said Dave Yost, the Republican attorney general in Ohio, who has sued Express Scripts and Optum Rx over their business practices.
“The patients are the ones that are suffering.”
Structural Stalemate
Because of recent mergers, write Abelson and Robbins, Big PBM are becoming more dominant, collectively processing roughly 80 percent of prescriptions in the United States. In 2012, the figure was less than 50 percent. Executives at the PBMs say their size is essential to counteract the companies that make brand-name drugs.
“The biggest driver of cost in this country is the brand manufacturers,” David Joyner, president of CVS Caremark said in an interview. “Size and scale really matters in order to be able to influence and be able to lower the overall cost of branded pharmaceuticals.”
The PBMs, according to the Times’ reporting, also say that tightfisted employers are to blame when patients are charged high out-of-pocket costs or can’t get their medications. “Indeed, many employers skimp on the health benefits they offer workers.”
In other words, the customer is the problem?
Let's call this mess and mass of complexity structural stalemate.
It’s the Mad Riddle of Healthcare, a zero-sum view of competition in a non-zero-sum game. And it's not something that can be "fixed" in the conventional sense -- a system always adapts and finds a way to keep itself alive (e.g., the "Irish Workaround" Abelson and Robbins describe, where UnitedHealth Group created a GPO "to retain billions of dollars of those savings, without having to share them with employers").
Most analysts believe Walgreens is employing a solid strategy, writes Anjalee Khemlanibut at Yahoo Finance, but it will require patience to execute; especially as a key source of revenue, PBMs, are increasingly becoming competition. (Check out related perspective on the “patience thing” published by Blue Spoon: ‘Walmart Checks Out’)
JPMorgan's Lisa Gill said in a note late Thursday that the process would take time. "We continue to believe that in the longer-term, WBA has the potential for growth. If there is a silver lining to this print, we believe that the company is making the necessary steps to stabilize its footprint and working with PBMs and payors to manage reimbursement headwinds," she wrote.
Bank of America's Allen Lutz similarly noted:
"It is imperative that Walgreens pushes back more assertively against PBMs to capture a more reasonable return on capital."But, he added, "It is not fully clear if a more aggressive push by retail pharmacies would yield favorable results. However, the risk from continuing down the current path for WBA may prove worse."
Which is why this from Wentworth’s commentary in the earnings call sounds less like New Possibility and more like Standard Model:
“We are at a point where the current pharmacy model is not sustainable and the challenges in our operating environment require we approach the market differently. We are in active discussions with our PBM and payer partners to align incentives and ensure we are paid fairly.”
New ‘Navigational Knowledge’ Required
The stakes are high.
“Pharmacy chains have struggled to boost profits in recent years, squeezed by drug pricing and lower foot traffic as the pandemic waned. Last year CVS Health said it would cut costs thousands of jobs — mostly corporate positions — as it remakes its business as a healthcare-service company,” the Wall Street Journal reported separately last week.
But “boosting profits” is a bottom-line change. Necessary operationally and relatively simple to automate with tech, but that’s not the same thing as creating a market.
The next cycle of innovation in the business and economics of healthcare should focus on the top-line, something that can take the truly revolutionary achievements in science from the pharmaceutical industry into a new orbit for competition and creative leadership, collaborating with drug manufacturers to position a better storyline of value to employers, state and federal government.
The '“bold vision” on a roadmap is one that moves the American Way of Healthcare beyond the institutional infrastructures that has allowed this kind of big system failure to happen in the first place. Until that reframing takes place, Walgreens is unlikely to move beyond incrementalism and the kinetics behind its strategic collapse.
/ jgs
John G. Singer is Executive Director of Blue Spoon, the global leader in positioning strategy at a system level. To engage: john@bluespoonconsulting.com