Loblaw Cos. Ltd. is teaming up with some major firms to provide their employees with breaks on their prescriptions as the grocery titan gears up for battle with conventional drugstores.
In a deal announced Tuesday with human resources consultancy Towers Watson, the supermarket chain will become the "preferred pharmacy services provider" for a network of seven private-sector drug plan sponsors. The initiative is aimed at motivating the 30,000 employees to head to Loblaw to get discounts under their benefit coverage on their prescription purchases, along with other health services. If they buy their drugs at Shoppers Drug Mart Corp., the country's largest in the sector, or other pharmacies they may have to shell out more.
"We are seeing more and more of these deals," said Wendy Poirier, leader of the Canadian health and group benefits practice at Towers Watson.
Traditional drugstores, whose sales already are under siege from provincial governments that are slashing generic prescription prices, now face players such as Loblaw and discounter Costco Wholesale Corp. that are moving to shore up their prescription business. They're partnering with private-sector companies that are seeking to shave their mounting health care bills.
In providing incentives for employees to purchase their prescriptions at retailers other than conventional drugstore chains, they're putting pressure on traditional players to develop their own alliances with private-sector plan sponsors.
Shoppers could eventually feel the pinch in its business, some observers warn. "We see this move as a continuing trend by companies to reduce their drug costs," said Robert Gibson, analyst at Octagon Capital. "If Shoppers does not align itself with employee benefits managers, the company risks losing significant market share."
Even so, Domenic Pilla, chief executive officer at Shoppers, dismissed so-called preferred pharmacy networks as "a disguised form of discounting" and an incorrect way of solving Canada's rising health-cost problems.
"We don't believe it's the right business model," he told an analysts' conference call. "We don't believe it adds a lot of value to patients or employers."
Instead, his team is engaged in "rich and progressive dialogue" with benefit payers and some employers to find a different solution that will be a win-win for everyone, he said. "What we are building as a value proposition ... is around total health and total health benefits," he said. "We're very bullish on those discussions."
The drawback of a network such as the one at Loblaw is that history has shown that consumers ultimately prefer to shop at the most convenient pharmacy for their prescriptions, or to deal with a familiar pharmacist, said Mike Jaczko, partner at drugstore consultancy KJ Harrison & Partners Inc.
Attempts by players to create preferred provider networks or mail order services about 20 years ago fell through in Canada, he said. These kinds of strategies haven't been as successful as they are in the United States where patients are more used to having to switch pharmacists and even physicians to get financial breaks, he said.
And the Loblaw effort is relatively tiny in the scheme of things: Its network's seven private-sector plan sponsors, such as WestJet Airlines, cover $20-million of drug spending – compared with $14-billion of total private payer drug spending in Canada, Ms. Poirier said.
Still, "pharmacies across Canada are really feeling the effects of generic drug reform," she said. "As such, they have to revamp or revise or revisit their business plans."
In the case of Loblaw, which is set on expanding it health and wellness business, "they know they're not going to grow it through the government programs and so they're really looking to the private plan sponsor as an area of growth."
Pharmacies are negotiating with the provinces for payments for their pharmacists to administer additional services such as vaccinations and prescribing rights. Mr. Pilla said other expanded pharmacist practice areas could be treating minor ailments and helping manage chronic diseases.
In its third quarter, Shoppers' profit slipped to $168-million from $172-million a year earlier, while sales rose 3.2 per cent to $3.2-billion. The latest results included a $13 million restructuring charge. Excluding the charge, profit was in line with analysts' estimates.