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One year after bitter contract dispute ends, Express Scripts and Walgreens form alliance

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A year after Express Scripts Holding Co. and Walgreens ended a bitter contract dispute, the country's largest pharmacy benefit manager and retail drug chain are acting like kissing cousins.

The once fierce rivals, whose sniping and cutthroat negotiations in 2011 and 2012 altered the drug-buying habits of tens of thousands of Walgreens consumers in the St. Louis area, have found new ways to cooperate.

Express Scripts, the north St. Louis County powerhouse, and Deerfield,Ill.-based Walgreen Co. have formed an alliance, or so-called "narrow network," that will give some but not all customers more of a choice in how they obtain prescription refills.

And perhaps more telling, the pact enables the former foes to compete effectively against CVS Caremark Corp., a hybrid conglomerate based in Woonsocket, R.I., which operates drugstores and a mail order pharmacy.

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Employees whose health plans select Express Scripts' new "Smart 90 Walgreens" option and participate in its network with Walgreens will be able, beginning as early as January 2014, to either receive a 90-day supply by home delivery from Express Scripts or pick up a 90-day refill at a Walgreens drugstore -- at no extra cost to the employee.

"In a way they did bloody each other, and now they're walking away with new respect," said Ken Schafermeyer, a professor and administrator at St. Louis College of Pharmacy.

Finding ways to ensure that patients continue to take their prescribed medicines has been a challenge for Express Scripts, which manages prescriptions for about 100 million Americans, and other pharmacy benefit managers.

"We think that 90-day prescriptions for maintenance medications are the best, most cost-effective solution," said Brian Henry, a spokesman for Express Scripts. "They drive the best patient outcomes in terms of adherence."

Through the partnership with Walgreens, Express Scripts wants to be sure that customers are "getting the best care, the best pricing. What we have found over the last year and a half is that our clients are interested in different network options," Henry said.

Michael Polzin, vice president at Walgreen described "Smart 90 Walgreens" as "a product that makes sense for both companies to put together, and I think it will benefit both companies."

"It really brings Walgreens services to any payers or plans that sign up for this program at a lower cost to the patient," he said, "and it's a program that, because it can provide cost savings, it will lead to better adherence and lead to lower health care costs."

Besides promoting consumer choice, he said, it "gives us access to those patients." The additional foot traffic generates dispensing fees for prescriptions filled as well as nondrug sales, such as cosmetics and personal care products, at more than 8,000 Walgreens stores nationwide.

The partnership doesn't mean Express Scripts is less enthusiastic about home delivery. The company's chief executive, George Paz, says that home delivery is one key to his company's future growth. Mail order represents 30 percent of Express Scripts' total adjusted claims, while about 75 percent of prescriptions are for maintenance medications.

"I think there was a misperception by a lot of people that PBMs were one-trick ponies and all they did was offer generic (drugs)," Paz has told Wall Street analysts. "We'll grow as we continue to add value to our clients by driving out waste and improving health outcome."

It remains to be seen how many of Express Scripts' clients will choose the "Smart 90 Walgreens" option, or how heavily it will be marketed. Health plans such as large employers receive a substantial discount if they place their employees in a mandatory mail order program.

And not everyone is convinced about the benefits of the 90-day refill.

The refill -- either by mail order or retail -- is best for long-term, maintenance medications if a patient can "self-mange" their medicines, but it also can result in huge waste if the drug isn't tolerated well or causes side-effects, Schafermeyer said.

"Studies indicate there's a lot of waste associated with a mail-order program, and therefore unnecessary waste," he said. "The personal interaction is the advantage of going to a pharmacy."

Starting in June 2011, the two had publicly bickered when Walgreens announced that it was breaking off contract talks. Walgreens ended that contract in December 2012, complaining that Express Scripts was trying to force below-average reimbursements for prescriptions. The two finally signed a deal in July 2012, after Walgreens sustained an estimated $4 billion in losses.

"Walgreens had an inflated view of their value. They were tired of getting pushed around on price," said Jeff Jonas, an analyst at Gabelli & Co., an investment brokerage in Rye, N.Y. "Now that they've gone through that painful fight, I think they've wised up a bit and things have calmed down a lot."

The companies' strengthened ties follow sweeping new changes in the pharmacy benefit and retail drug industries, including the opening by Walgreens of full-fledged health clinics in many of its drugstores.

"It's a good sign that Express Scripts and Walgreens were able to sit down at the table like adults and get a deal like this. ... Maybe it's relieved some of the bad blood from the past," said Judson Clark, an analyst at Edward Jones & Co. in Des Peres. "But I don't think it's going to move the needle as to the financials of these companies."

Yet, the rivalry is apparent as each company continues to tout their key business model.

Express Scripts' research data shows that home delivery is the most reliable method of ensuring that patients take their medications for chronic conditions and also of making certain that customers receive -- via telephone -- needed counseling, according to the company.

"Home delivery is still the ideal solution from a client's perspective," added David Whitrap, also an Express Scripts spokesman. "The dispensing through our mail order pharmacy is 99.9 percent accurate, preventing clinical errors that sometimes pop up at a retail pharmacy. There's cost savings, and there's the convenience of medications arriving at your house."

Walgreens and other drugstores contend there's nothing better than a face-to-face consultation with a retail pharmacist.

Still, there's common ground.

Gabelli's Jonas said both companies really want to compete with CVS Caremark, which has offered a similar program ever since CVS merged with Caremark in 2007.

"People are realizing (prescription) adherence is better with the 90-day prescription, whether you get it through mail order or retail," he said. "The pharmacies used to insist on 30-day scripts because they wanted the traffic in their stores and they wanted three dispensing fees. ... Express Scripts pretty clearly won that fight with Walgreens, but it was still expensive and distracting."

Jonas said that Express Scripts' "Smart 90" options have been fairly small in scope "until now. ... I think it's relatively popular. It was CVS that started it. It's getting some traction. ... Mail order growth has flat-lined in the last couple of years." ___

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