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Spilled pills (Andrew Soundarajan/iStockphoto)
Spilled pills (Andrew Soundarajan/iStockphoto)

The battle to bottle up drug costs Add to ...

For years, Dale Horton and his family bought most of their prescription drugs at their nearby Shoppers Drug Mart, with the costs covered largely by his employer’s benefit plan. But last year, his family switched to another pharmacy, at Costco Wholesale Canada, after his employer teamed up with the discounter.

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A Costco store isn’t as close to his home as Shoppers, but Mr. Horton, an inventory specialist at Toromont Industries Ltd., prefers the trek to spending an extra $200 a year at Shoppers.

“It’s not that I dislike them ... But if I can save myself some money and I’m not inconveniencing myself too much, why wouldn’t I do that?”

For its part, Toromont is shaving hundreds of thousands of dollars from its once-soaring bill to cover the annual prescription drug benefits for its 3,000 employees, partly by partnering with Costco, said David Wetherald, its vice-president of human resources.

In the past 18 months, Costco’s prescription sales among Toromont’s work force have jumped tenfold, at the expense of other drugstores, no doubt in part because employees don’t have to pay the regular $9 deductible per prescription.

“That’s coming out of somebody else’s pocket,” Mr. Wetherald said.

The pockets in question belong to traditional drugstores, whose profit margins already are under attack from provincial governments that are forcing through sweeping changes that slash lucrative generic prescription prices.

In the past two years, spending on prescription drugs rose about three times faster among private plans and individuals compared with public plans – almost 7 per cent versus just over 2 per cent – according to estimates from the Canadian Institute for Health Information.

The arrival of expensive new specialty drugs for cancer, auto-immune and other diseases will only increase the pressure on costs.

Now, companies such as Toromont are opening up another front in that battle, as they turn to less traditional prescription purveyors to cut the costs of their drug benefit plans. The initiatives threaten to shake up an already pinched drugstore business model, putting pressure on players such as Shoppers Drug Mart Corp. to offer more to plan sponsors, or to suffer losses.

One of the new foot soldiers in the escalating drug battle is a new online home delivery pharmacy. Launched in January by deep-pocketed U.S.-based titan Express Scripts, it offers cost savings for using its mail order drugstore and managing company plans. Already, two big employers – Canadian Pacific Railway Ltd. and Canada Post – have signed up for the service, raising the possibility that hundreds of thousands of pharmacy customers could switch to Express Scripts.

It is an attack on the conventional pharmacy retailer, such as Shoppers, Katz Group/Rexall and London Drugs Ltd. And it could change how consumers buy their drugs – picking them up from their mailbox rather than their neighbourhood pharmacy.

“What we’re going to see is more employers entering into these arrangements where the employee may end up having less choice on where to go to buy drugs,” said François Joseph Poirier, a partner at benefits consultancy Mercer.

The new programs are aimed at generating millions of dollars of savings for employers and employees by steering them to cost-friendly pharmacies. For investors, the new initiatives highlight the risk for retailers such as Shoppers, which count on customers to head to their drugstores for medications as well as milk, mascara and much more.

Domenic Pilla, chief executive officer at Shoppers, acknowledges the “tremendous amount of challenges” in the industry and says he is “planning to do more” for plan sponsors and carriers.

“All of us will have cost pressures that we’re going to have to manage,” said John Tse, vice-president of pharmacy at London Drugs in Richmond, B.C. “We’re going to be less profitable. The cost model as it is today will have to work itself out for drugstores across this country ... It will be a lot tougher.”

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