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.
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.”
Shoppers is no corporate weakling. Canada’s largest drugstore chain, it generated annual double-digit profit increases until a few years ago when major drug reforms arrived. In 2011, its profit rose 3.7 per cent to $614-million, which is nothing to sneeze at but lower than what it produced in its heyday. Now, it and other major chains are rushing to rev up their non-prescription businesses to make up for the shortfalls.
But drugstores also face private plan sponsors that increasingly are raising red flags about their mounting drug costs. The spending will continue to climb in an aging work force that uses more drugs. And new specialty drugs can set back a company’s plan by tens of thousands of dollars or more annually for an individual’s single prescription. The numbers are daunting: While less than 1 per cent of private benefit plan members use these expensive new drugs, spending on them makes up 17 per cent of drug plan expenditures, according to drug benefit consultancy Cubic Health. And it will reach 26 per cent within three years.
For years, employers have teamed up with pharmacies to get a break on prescription dispensing fees or on the prices of over-the-counter medications.
But those traditional discounts are no longer enough for Toromont and others. Mike Sullivan, president of Cubic Health, recently scouted major chains – including Shoppers, Katz Group/Rexall and Costco – on behalf of Toromont. Costco offered prescription prices that were about 12 per cent lower than those at other retailers, along with other services such as free workplace clinics, blood-pressure tests and other screenings, he said.
But Shoppers and other major specialty chains “didn’t bite” on providing lower prices or additional services for Toromont plan members to match those that Mr. Sullivan found.
In an e-mail, Shoppers said it recognizes the importance of price, noting that it offers generic and other substitutes to keep down costs. And the drugstore chain said it offers both convenience and services that “resonate with payers and patients alike.”
Mr. Pilla said earlier this year that his team is trying to convince employers to use its pharmacists to help ensure patients stick to their drug regimes in “getting employees to be more productive, less absenteeism. Less long-term care costs and total health care costs.”
Shoppers already provides free deliveries and counselling on such health matters dealing with heart disease, asthma and diabetes, he said. Drugstores are negotiating with provincial governments to get additional funding for providing more free pharmacist services.
If those negotiations are successful, Shoppers and other traditional drugstores will add to their consumer appeal. But Mr. Pilla envisages that, at some point, patients may have to start paying for pharmacists’ extra services out of their own pockets.
THE HOME DELIVERY JUGGERNAUT
Even as Mr. Pilla develops a strategy for private plan sponsors, Express Scripts is ramping up its home delivery pharmacy. Already it is reshaping how and where U.S. consumers purchase their prescriptions, prompting pharmacy groups to warn that the company’s market clout (it’s estimated to have nearly a third of the U.S. prescription market) will limit competition.
Express Scripts cites a third-party study that found that actively managed drug plans in the United States cut costs by an average of 29 per cent in 2010.
Now, it is intent on delivering those kinds of savings to Canada. So far this year it got the regulatory nod to open four pharmacies in each of Ontario, British Columbia, New Brunswick and Manitoba to serve all of Canada except Quebec, where it also is working on setting down roots.
“This could change the face of the benefit program in Canada, and we’re just starting,” said Michael Biskey, president of Express Scripts Canada. “We’ve got lots more we’re going to do.”
Its strategy is to entice members of plans that sign on with it for other management services to buy from its home delivery pharmacy their “maintenance” prescriptions: those used repeatedly for chronic conditions such as asthma and diabetes, together representing about 60 per cent of prescriptions sold today.
And it’s expected to cast a wider net. In its U.S. home base, Express Scripts’ pharmacy sells expensive specialty drugs and observers believe it’s just a matter of time before the firm expands to those drugs also in Canada, threatening one of the most lucrative businesses of drugstores.
Canadian Pacific, which partnered with Express Scripts this year for most of its 14,000 Canadian employees, already is enjoying a 7-per-cent saving in Ontario alone, said Judy Au, CP’s human resources director. It no longer provides drug benefit coverage to 6,500 of its unionized plan members if they buy their maintenance prescription drugs elsewhere.
CP estimates that it will save at least $1-million over three years on an annual $5.2-million spending on maintenance drugs from using Express Scripts. Ms. Au has this warning for traditional drugstores, including Rexall, which is CP’s conventional pharmacy partner: “You can either work with us as plan sponsors to provide opportunities or options to save money, or you’re going to face, quite frankly, a loss of market share ... The big drugstores haven’t made any overtures to most plan sponsors to say: ‘Here’s how we can save you money.’ ”
Still, the savings can have their own costs. William Brehl, whose Teamsters union represents about 3,500 CP maintenance employees, said some workers complain of problems getting drugs, including insulin, shipped to them on time, forcing them to pay out of pocket for the prescription at a local pharmacy. The delivery problem is exacerbated by many of the members being on the road a lot, he said.
And getting through to the Express Scripts hotline can be time-consuming, he said. The union doesn’t want to renew the program after it expires on Dec. 31 “unless they fix the problems.” (Ms. Au said employee feedback has been positive; Express Scripts said there have been “isolated incidents” and some delays, but that it has been able to ensure that drugs are delivered when and where needed.)
John Caplice, a senior vice-president of Shoppers, said mail order has been available in Canada for years, but has never been able to replace the personal touch of the pharmacist-customer relationship.
Even so, independent pharmacists are worried about the potential for Express Scripts to drain business from them and limit patient choice. “It’s a concern,” said Adam Silvertown, a Toronto pharmacist. “A lot of pharmacists like myself are seeing this as a trend, and there’s nothing we can do to stop it but find some way to draw attention to it.”
He may hope that added scrutiny will discourage switching to lower-cost rivals, but Toromont executives like what they’re seeing in their new benefit alternatives. More of its staff are choosing Costco for drug purchases.
And Toromont’s Mr. Wetherald is starting to speak to Express Scripts about teaming up with its home delivery pharmacy to try to pare expenses even more. “I like the idea of game changers.”