Monday, December 04, 2006

Sloppy reporting about Wal-Mart

Last Thursday's New York Times included some very sloppy reporting about Wal Mart Stores Inc (WMT). See Side Effects at the Pharmacy. (The story was widely syndicated, so here's an alternate link: Side Effects at the Pharmacy.)

The article questions the profitability of Wal-Mart’s program by incorrectly interpreting prescription data and then quoting a “consultant” with an undisclosed bias against Wal-Mart. This type of shoddy reporting only further confuses the debate about health care spending.

Since the New York Times’ editors read this blog, allow me to clear the air a bit by answering four questions:

  1. How busy is an average Wal-Mart pharmacy? (A: A lot less than an average Walgreens)
  2. How many more prescriptions did the $4 generic program generate? (A: About 16% more)
  3. Did Wal-Mart have $31.5 million in extra dispensing costs? (A: Nope.)
  4. Why was the Times so unbalanced? (A: Piling on?)

Q1: How busy is an average Wal-Mart pharmacy?

As a baseline, let’s estimate the typical volume at a Wal-Mart pharmacy in 2005.

  • According to Drug Store News, Wal-Mart’s 2005 Rx sales were $11.036 billion.
  • The average price per script in the mass merchant pharmacies was $62, implying that Wal-Mart dispensed 178 million prescriptions in 2005.
  • Wal-Mart had 3,289 stores with pharmacies (per DSN).

After a little math, I estimate that the average Wal-Mart store dispensed 148 prescriptions per day in 2005 (assuming 365 selling days per year). For comparison, the same calculation for Walgreens yields an estimate of 270 prescriptions per pharmacy per day in 2005.

Q2: How many more prescriptions did the $4 generic program generate?

According to Wal-Mart’s Nov. 16 press release: “To date, as new states have been added to the program, 2.1 million more new prescriptions have been filled in those states as compared to the same time periods last year.

  • As of November 15, the generics program was available in 2,507 Wal-Mart stores.
  • Stores were added on four different days (9/21; 10/6; 10/19; and 10/26). A calendar and some math shows that Wal-Mart had almost 65,000 total available selling days for the $4 generics program in these stores.
  • Wal-Mart’s claim of “2.1 million more new prescriptions” translates into almost 15,000 new prescriptions per available selling day, or 32 new prescriptions per store per available selling day.

In other words, the average Wal-Mart pharmacy’s daily volume has increased by 22% (32/148) from September 21 to November 15.

However, IMS data indicates that total prescription growth was 6% from mid-September to mid-November 2006 versus the same period last year.

Therefore, it appears that Wal-Mart’s $4 generic program has added about 16% in real incremental prescription volume to the typical Wal-Mart pharmacy.

Q3: Did Did Wal-Mart have $31.5 million in extra dispensing costs?

The New York Times pooh-poohs the program, noting “…Wal-Mart might be able to declare the overall program profitable only by spreading the costs well beyond its pharmacy ledger.” The reporter then quotes “a pharmacy consultant in Stoughton, Wis.” named Ed Heckman: “But other costs, including store overhead and pharmacists’ paychecks, can add as much as $15 to the cost of dispensing a prescription, Mr. Heckman said. ”

Let’s see…2.1 million prescriptions @ $15 equals …$31.5 million!! So the program must be a boon for all of those pharmacists who are working extra hours, right?

Wrong. Total volume at a Wal-Mart pharmacy has gone up by about 32 new prescriptions per day – about 2 per hour given typical store hours. Marginal (incremental) overhead costs are probably $0.00 for an average Wal-Mart pharmacy. Following Mr. Heckman’s quote, the reporter notes that “selling drugs at $4 might be well below cost for many pharmacies.” Perhaps, but probably not for Wal-Mart.

Q4: Why was the Times so unbalanced?

I’m afraid I can’t really answer this question. Perhaps they are piling on after the post-election bashing given by Senator Barack Obama and former Senator John Edwards?

Nevertheless, I feel compelled to note that the New York Times failed to disclose a major conflict behind the quote above about costs. Mr. Heckman is not just a “pharmacy consultant,” but also President of PAAS National, a company that is "supported and endorsed by the NCPA” (the National Community Pharmacists Association). According to its website, PAAS also operates the Community Pharmacy Contract Clearinghouse for NCPA.

I note this lack of disclosure because NCPA has been a very outspoken critic of Wal-Mart. Check out the rather unambiguous titles of NCPA’s press releases "analyzing" Wal-Mart's $4 program:

Hmmm, wonder what NCPA really thinks?

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Anyway, this point of this post is simply to highlight that sometimes what passes for analysis in the mainstream media is really just opinion. Or as U.S. Senator Daniel Patrick Moynihan famously quipped: "Everyone is entitled to his own opinion, but not his own facts."

4 comments:

  1. Good analysis but you ignore the fact that WMT gave up at least $4 in Gross Profit (assuming an $8 price per generic before the change) on over 20% of its current scripts (using its own numbers that these drugs represent 20% of total scripts). Using your numbers of 148 scripts per day, that would mean the program has cost each WMT store 30 scripts x $4 in lost gross profits = $120 / store / day in order to gain 32 new scripts @ $4 (which assuming an ingredient cost of $2 per script) or $64 in new gross profit = net loss in gross profit of $56 ($120 lost less $64 in new). Even excluding filling costs, WMT has lost money on this program unless they have made it up elsewhere in the store.

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  2. Rob,

    Yes, you are correct about the net profit impact.

    Wal-Mart disclosed that it is prevented from selling below acquisition cost in certain states with "predatory pricing." Script prices are as high as $9, implying that acquisition costs are more than twice what WM was charging -- and that Wal-Mart has had a genuine gross profit loss on ingredient cost.

    My post was just about the total prescription impact, which appears to be significant for Wal-Mart but not so large that any single competitor will feel the impact.

    Thanks for posting!

    Adam

    ReplyDelete
  3. your Dec 2006 blog about Walmart and $4.00 generics was correct with the math - but now that the program has been out for almost a year Walmart maybe having trouble staffing their pharmacies with Pharmacists. I now of areas where they are having to drive in Pharmacists to work at almost twice the rate they normally pay. I believe that the word will spread about working conditions at a WalMart pharmacy and the trend will continue to worsen - or WalMart will end up having to pay more to attract Pharmacists-and if they do so will the other chains. In the end when everyone has everything on sale(discount) then there is no marketing advantage. Wait another year to see how this plays out. The consumer is the winner here....

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  4. Anonymous (11/28) --

    Is Walmart having more trouble than anyone else given the pharmacy shortage? Do they need more pharmacists because of volume increases?

    To be honest, I have no idea what the working conditions at Walmart are like, but I'm not surprised to learn they are worse than at a dedicated pharmacy (chain or independent).

    I'd welcome any links or news cites on this issue.

    Adam

    ReplyDelete

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