Here are some high level points about Wal-Mart’s generic program.
More Volume = Lower Cost of Dispensing. Way back in my still-valid December 2006 analysis, I predicted that Wal-Mart would benefit from the program by generating incremental prescription volume for its relatively underutilized pharmacies. Wal-Mart senior vice president John Agwunobi confirmed my view yesterday in this Associated Press story, saying: “It also offers us the ability to add capacity to our pharmacies without adding people."
Wal-Mart’s generics are not loss leaders. Last October, I compared Wal-Mart’s retail generic prices to average acquisition costs and found average gross margins of 24%. These calculations dramatically underestimate Wal-Mart’s actual gross margin because Wal-Mart's product acquisition costs are much lower than the independents, supermarkets, and small chains that buy through wholesalers.
State governors love this program. Medicaid does not pay more than a cash customer at a given pharmacy because a pharmacy can not be reimbursed by Medicaid for more than its Usual & Customary charge. Thus, states pay less whenever Wal-Mart fills a Medicaid generic script for which Wal-Mart’s retail price is below the Medicaid reimbursement rate. State revenues are declining due to the economic slowdown, making Wal-Mart look good.
Cash-pay customers also love the program. Wal-Mart is offering a great value for uninsured and under-insured patients, a point that I made in the Financial Times on Monday. In contrast, consumers with third-party insurance do not save much versus standard co-pays, which is why chains such as CVS Caremark (CVS) or Walgreens (WAG) are not very vulnerable to Wal-Mart’s program.
Price shoppers are fans, too. There are wide and apparently persistent variations in pharmacy prices for many common, high volume generics. (See The Price Might Be Right.) Wal-Mart’s program simplifies the search process, especially for elderly Part D participants trying to stay below the donut hole. (See Part D and Generics.)
Curiously, NCPA declined to issue its usual denunciation about how Wal-Mart’s program is a “classic bait-and-switch” (9/28/06) or “devaluing and destroying the practice of pharmacy” (9/27/07). Perhaps the surviving independents have figured out how to coexist with Wal-Mart, as implied by 2007’s unexpected growth at independent pharmacies?