Well, I can’t resist pointing out that my January post Wal-Mart's PBM Game Plan predicted Wal-Mart’s strategy. Give the post another read because the economic logic is still generally accurate, plus there is a good discussion in the comments below the post.
HERE COME RESTRICTED NETWORKS
Note that Wal-Mart is not giving these drugs away, despite the Reuter’s statement that Wal-Mart “will fill certain generic drugs for free.” Only the co-pay for beneficiaries is $0 -- the same as your Drug Channels subscription fee. Caterpillar’s health plan still pays for the drugs, but now negotiates directly with Wal-Mart rather than using a PBM intermediary.
This is precisely the “restricted network” trade-off that I described in my January post:
- Give your beneficiaries freedom of pharmacy choice and pay $X for drugs.
- Restrict choice to a more efficient channel, e.g., Wal-Mart pharmacies, and pay less than $X.
Restricting the network to Wal-Mart pharmacies won’t work in many geographies, limiting the impact on urban/suburban chain pharmacies such as Walgreens (
WAG) or Rite-Aid ( RAD). However, there are 12 Wal-Mart stores near the , headquarters of Caterpillar, making it a more realistic option. View a map of WMT stores in Peoria. See Walgreens’ $4.33 Surrender to Wal-Mart for more on the retail pharmacy impact of Wal-Mart. Peoria, IL
As I see it, the deal does not represent a direct frontal assault on PBMs such as Express Scripts (
ESRX) or Medco Health Solutions (MHS). Instead, Wal-Mart is subtly undermining the PBM’s economic model, which is overly dependent on margins from generic drugs by mail. Wal-Mart’s program highlights these “excess” margins by offering an alternative channel choice.
I’m more intrigued by the competitive comparison with
CVS Caremark ( CVS). Many of CVS Caremark's new benefit options try to create channel neutral choices (my terminology) within a restricted retail network. For example, Maintenance Choice is their drug benefit option that lets patients choose a 90-day supply from mail order or a local CVS retail outlet at the same cost or co-pay.
Final thought: The economics of the branded drug supply chain make it essentially impossible for Wal-Mart to offer the same deal for drugs with marketing exclusivity – for now. I expect that barrier to fall within the next few years.