When Todd Bisping was asked to help put the brakes on Caterpillar Inc.’s drug spending, he didn’t know much about health insurance or prescriptions.
But after 16 years at Caterpillar, mostly in its parts business, he knew plenty about squeezing costs.
“We just looked at it as a supply-chain issue,” said Bisping, an engineer with an MBA and a background in information technology.
He helped Caterpillar wield a combination of size and pricing savvy to negotiate directly with pharmacy giants Walgreen Co. and Wal-Mart Stores Inc., eliminating industry middlemen called pharmacy benefit managers.
In exchange for more business from Caterpillar, the two pharmacy chains agreed to price cuts expected to slash the company’s $150 million annual prescription drug bill. Bisping would not say how much Caterpillar will save, but analysts peg the figure as high as 25 percent, or about $37.5 million, even as drug prices are expected to rise next year by 5 percent nationwide.
It’s not huge money for Peoria, Illinois-based Caterpillar, which is expected to post profits of $1.7 billion next year.
But it will save money for the 120,000 employees, retirees and family members covered by Caterpillar’s health plans. And it could show other companies a path to savings in the $300 billion U.S. prescription drug market, which has defied even government efforts to restrain rising costs.
“[Caterpillar] has cut some new territory here,” said Larry Boress, CEO of the Midwest Business Group on Health, a Chicago-based trade group.He said many of the organization’s 100 or so big companies are considering following Caterpillar’s example by negotiating directly with pharmacy chains.
But a model based on exclusive contracts withbig pharmacies such as Deerfield, Illinois-based Walgreen squeezes out smaller pharmacies, which already are losing ground to big chains, supermarkets and mail-order distributors.
“It could be devastating,” said Mike Patton, executive director of the Illinois Pharmacists Association in Springfield, which counts about 500 independent pharmacies among its 2,000 members, as well as big chains such as Wal-Mart and Walgreen.
Some employees are unhappy about having to choose between their traditional pharmacies and co-pays that double if they don’t use Walgreen or Wal-Mart.
Caterpillar is unapologetic, saying the changes have allowed it to keep drug co-pays flat since 2003 overall, while eliminating them altogether for some prescriptions.
“The solution isn’t just to pass on a larger and larger percentage of the cost to employees,” said Bisping, who was named Cat’s pharmacy and informatics manager in 2005.
At the time, Caterpillar’s overall spending on employee health care was rising by more than 10 percent annually. Savings on drugs are helping the company close in on its goal of bringing those increases in line with inflation by 2010.
“By 2005, we hadn’t made much of a dent in that goal,” Bisping said. “Now, it’s in line of sight.”
First, Caterpillar increased the use of generic drugs, from about 50 percent to 70 percent. Then Bisping turned to the supply chain, trying to lower drug costs.
“No one could explain to me where the money was being made or spent,” he said.
He turned to former Pfizer Inc. pharmacist Josh Bellamy of the Peoria-based consulting firm Health Strategy. They scrapped a murky drug industry pricing benchmark called “average wholesale price” in favor of the “cost-plus” pricing method used in Caterpillar’s own tractor business.
Caterpillar also decided to negotiate directly with pharmacies rather than through a pharmacy benefit manager. The company still uses a PBM to administer claims.
At first, Arkansas-based Wal-Mart was the only pharmacy chain willing to deal directly with Caterpillar. But after Wal-Mart and Caterpillar staged a successful pilot program, Walgreen was ready to sign on this summer when Caterpillar looked for bidders on a two-year contract.
“What better blunt instrument to disrupt a system than Wal-Mart, right?” Bellamy said. “Walgreen had the same problem as Wal-Mart: seeing margins go down and volume go down because of mail-order programs. This could give them market share without opening more stores.”
Hal Rosenbluth, president of Walgreen’s health and wellness division, said he’s discussing similar deals with about 50 companies.
“It’s a new model,” he said. “What you lose in margin, you make up in volume.”