A $1.1 Billion Error…Math Models Are Not Perfect

A billion-dollar forecasting error in Walgreen Co. ‘s Medicare-related business has cost the jobs of two top executives and alarmed big investors.

At an April board meeting, Chief Financial Officer Wade Miquelon forecast $8.5 billion in fiscal 2016 pharmacy-unit earnings, based partly on contracts to sell drugs under Medicare.

Last month, directors got a shock. Mr. Miquelon suddenly cut that forecast by $1.1 billion.

In early August, the CFO of the nation’s largest drugstore chain was gone. Walgreen said several days earlier that its pharmacy chief, Kermit Crawford, would retire at year-end.

Behind the botched numbers and management shake-up are Walgreen’s efforts to capture a larger role as a middleman dispensing prescription drugs under Medicare’s Part D, which subsidizes costs for the elderly and disabled. The saga at Walgreen—which derives 25% to 30% of its prescriptions from Medicare Part D plans—shows the broader risks for those operating in the Medicare ecosystem.

The bottom line: Walgreen hadn’t factored in, among other things, a spike in the price of some generic drugs that it sells as part of annual contracts.

WSJ Aug. 20, 2014

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