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Drug Cards: Who Will Win The Pot?


The Medicare discount drug card that seniors began using on June 1 has left millions of retirees disappointed and confused. But the story is very different for the companies offering the cards. Players of every description are scrambling to get a foothold in the new business Congress created when it passed the Medicare prescription drug law last year.

In recent weeks, dozens of companies have rolled out more than 70 government-approved cards as they pitch for seniors' business. Insurance companies, drugstores, drugmakers, and distribution middlemen called pharmacy benefit managers (PBMS) have all jumped in.

Their goal isn't a big short-term profit; many may actually lose money by offering a card that will go out of existence in just 18 months. A lot of the other players are simply fighting a rear-guard battle to defend themselves in the crossfire. But for everyone, the focus is on 2006, when the card, which provides only limited discounts that companies decide to offer, is due to expire. At that point, it will be replaced by the potentially more lucrative drug insurance that Congress agreed to fund, which will pay a set proportion of seniors' drug costs. "The key is for card sponsors to position themselves for '06," says Vicki Gottlisch, a lawyer at the nonprofit Center for Medicare Advocacy.

The biggest winners may be insurers and PBMs. Their strategy: Use the cards to build a roster of customers they can switch to drug insurance in 2006. The big losers may be the pharmacies, since some discounts will come out of their margins. As for Big Pharma, drugmakers may sell more pills, but they may have to absorb slightly lower prices as well.

SHORT SHELF LIFE

At first glance, the rush to offer cards might seem strange. Sponsors must absorb startup costs for a product with a limited shelf life. And competition is intense. The Congressional Budget Office expects only 7 million of the nation's 44 million seniors will buy a card -- not many to divide among 72 different cards. And with so much confusion, early enrollment has been slow.

Partly to hedge their risks, sponsors have put together a bewildering maze of partnerships and joint ventures. Take the PBMs, which negotiate prices directly with manufacturers. Companies such as Express Scripts (ESRX), Caremark Rx (CMX), and Medco Health Solutions already offer non-Medicare drug discount cards through employers and insurers. But for the Medicare cards, they want to publicize their own brands. So Medco, for instance, has its own Medicare card -- even as it handles price negotiations for several managed-care companies, including giant UnitedHealth Group Inc. (UNH), which has a Medicare card of its own. Confused yet?

United, a Minneapolis health insurer, is putting out its own card, too. But, like other insurers, it's also partnering with others, such as the senior advocacy group AARP -- just in case retirees prefer someone else. United has yet another card called U Share, which is a venture with Pfizer (PFE), Eli Lilly (LLY), and other drugmakers. No wonder seniors can't make heads or tails of what's going on.

TAKING A LONG VIEW

A few players have niche strategies, although they, too, are aiming at 2006 and beyond. First Health Services Corp. (FHCC), a Glen Allen (Va.) management company, runs six state programs that already provide discount drugs for low-income people. Because Congress agreed to pay for $600 in free drugs through the Medicare card for many of these same seniors, First Health is offering its card to more than 250,000 elderly in three of those states -- Michigan, New York, and Pennsylvania. The payoff: The Medicare law allows these low-income seniors to be automatically enrolled in a card -- and First Health has negotiated to sponsor it. That will help position First Health with these customers for 2006, says CEO Teresa R. DiMarco.

The companies with the fewest options may be the pharmacies, especially the mom-and-pop drugstores that still sell 44% of all prescription drugs in the U.S. Until now, many retirees were buying medications from them at retail. Now, drugstores have had to negotiate lower prices with card sponsors or risk losing those customers entirely.

The cards also make it easier for seniors to order drugs through the mail. This fattens margins for PBMs but drives customers out of pharmacies. Not only do druggists lose sales, but purchases of other products -- from sunscreen to pantyhose -- also shrink. "They count on the pharmacy to drive traffic into the store," says Deborah Martin, co-manager of the managed pharmacy practice of Mercer Human Resource Consulting (MMC).

The giant chains may fare somewhat better. For example, 4,397-store Walgreen Co. (WAG) is offering its own card, not just for its stores but for 36,000 other pharmacies around the country. Why would independent pharmacies accept a card from a giant rival? They have little choice but to take nearly any card a senior carries. True, they will have to swallow the lower price set by Walgreen Co. or any sponsor. But if they don't, retirees may take their business elsewhere.

Big Pharma faces trade-offs, too. Volume may rise as seniors buy more drugs. But margins may be squeezed once the drug insurance kicks in. If millions of seniors buy the coverage, insurers will gain added negotiating clout to push prices down nationwide. By 2008, "the volume-price trade-off will be a wash [for drugmakers]," says Richard Evans, an analyst at Wall Street firm Sanford C. Bernstein & Co.

The post-2006 business will be no slam-dunk, even for PBMs and managed-care companies. But the chance to grab a share of the booming seniors market is a temptation few are willing to pass up. That's why so many companies are trying to get on the inside track by offering cards today. Unfortunately, that means a migraine-inducing muddle for seniors.

By Howard Gleckman in Washington


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