How Obamacare Cost Squeeze May Push Rite Aid To Walgreens
Italian billionaire Stefano Pessina wasn’t ready this week to say Walgreens Boots Alliance (WBA) was prepared to buy Rite Aid (RAD), but he said more government influence on payments to pharmacies could spur rapid consolidation in the U.S.
Now the top executive at Walgreens, Pessina speaks from experience having run Alliance Boots pharmacies in Europe and its government-run health systems. In the U.S., the government has expanded health insurance under the Affordable Care Act by expanding Medicaid coverage to more poor Americans and subsidized coverage to eligible uninsured people via private insurance companies.
“This market, the American market, is ready for another round of consolidation,” Pessina, Walgreens Acting CEO and executive vice chairman, told analysts last week on Walgreens Boots Alliance second-quarter earnings call. “Because the margins are squeezed everywhere; the government is more and more in charge for the costs of the healthcare business and so for sure they will exercise their power to squeeze the cost as much as possible, as we have seen in Europe for decades.”
Under the ACA, payments are more based on quality and costs, moving health care payment away from the traditional fee-for-service approach that leads to overtreatment to value-based medicine. Pharmacies are more involved in coordinating care and have to keep a close eye on costs, urging use of cheaper generics while helping providers adhere to more effective and often less costly medicines.
“The complex structure of delivering the medicines to the patients will have to be rationalized,” Pessina said. “And as a consequence, it’s easy to believe that we will have additional synergies coming from M&A activities.”
For now, consolidation at Walgreens will from cutting $1.5 billion in costs across the company. The bulk will be pared from the U.S. retail pharmacy operation from overhead and closing 200 stores to be more agile in global expansion. (See Pessina’s video interview on global expansion from the 2012 Forbes Healthcare Summit at the end of this story)
There has been much speculation lately that Walgreens may be interested in Rite Aid, which has more than 4,500 stores in 31 states. Though Walgreens will be spending the next two to three years integrating Walgreens and its more than 8,000 stores with the global operations of Alliance Boots, Pessina and his team haven’t ruled out adding additional stores. CVS Health (CVS) has about 7,800 stores.
“It’s very likely that we will see also vertical consolidation, and the opportunities are there for everybody, and we will see what happens,” Pessina told analysts. “We want to be, as we have been in the past, at the forefront of changes. So if this need for consolidation will be confirmed, we will try to be part of it.”
Wondering how Obamacare affects your health care and neighborhood drugstore? The Forbes eBook Inside Obamacare: The Fix For America’s Ailing Health Care System answers that question and more. Available now at Amazon andApple.
Source: Forbes Health