Wednesday, May 06, 2009

Wal-Mart Aims at PBM Mail Profits

Hot on the heels of Walgreens potential cost-plus deal, Wal-Mart just announced a new mail pharmacy pilot in Michigan. The program offers a 90-day supply of 300 generic prescriptions for $10 each via free mail delivery. Official details:

Although this is just a pilot, we have no reason to assume Wal-Mart will stop with Michigan. I bet Pharmacy Benefit Manager (PBM) executives tipped back a few extra margaritas during Cinco de Mayo yesterday.

Some observations on this latest move:

Wal-Mart wants to be the low-cost pharmacy. Wal-Mart keeps leveraging its scale and logistics to undermine the traditional retail drug distribution business. Every one of the company's major pharmacy initiatives – the $4 program; the cost-plus Caterpillar deal; the new mail pilot – seeks to offer a lower-cost option for consumer fulfillment of prescriptions.Wal-Mart has two big advantages in this generic drug price war: a low cost of dispensing and a willingness to accept lower-than-normal profits on generic scripts. Moving the battle to mail is the next logical step in their strategy.

Wal-Mart does not want to be a PBM. I still maintain that Wal-Mart has no interest in a direct frontal assault on the benefits management business of PBMs such as CVS Caremark (CVS), Express Scripts (ESRX), or Medco Health Solutions (MHS). Wal-Mart would not be competitive when dealing with complexities such as formulary development, claims administration, or selling benefit management services to payers. Consider the Caterpillar deal. Caterpillar uses a Pharmacy Benefits Administrator (called RESTAT), so there are fewer business issues compared to a traditional PBM relationship.

Low-price home delivery will undermine the PBM economic model. Home delivery of generic drugs is the most profitable part of a PBM's business. Whereas the original $4 retail model put some indirect pressure on PBM margins, Wal-Mart is now attacking a fundamental cross-subsidy baked into the current PBM business model. That said, I suspect that a consumer's out-of-pocket cost for a 90-day script at most PBMs is probably comparable to Wal-Mart's price already – or will be soon.

A mail pharmacy will lead to more direct-to-payer deals. By eliminating the geographic barrier, Wal-Mart can now pursue new direct-to-payer deals with U.S. employers that fund their own health-insurance plans. According to the Reuters article that I cite in Wal-Mart's Next Move, the company estimates that there are 75 million Americans in these plans. Hmmm, are there any struggling industries based in Michigan that might be open to a deal that would save money? (Hint: Rhymes with stars.)

Retail pharmacies should be worried. The growth of insurance plans for drugs has turned store-based retail pharmacies into fulfillment channels for third-party payers. As a result, payers often see costs go down on when consumers choose to fill their prescriptions for the 300 generic drugs on Wal-Mart's list. The mail pharmacy heightens the competition because it looks like Wal-Mart will fulfill by mail for any plan (or cash). In contrast, PBMs use mail pharmacy as an adjunct to their benefits management business.

As they say in the Borg collective: Resistance is futile.

6 comments:

  1. Al GodleyMay 06, 2009

    Love the picture and the Borg reference! The "collective" is at it again.

    This move is interesting because this takes Wal-Mart somewhat out of the "bring them into the store" model that the $4 generics and the deal with Caterpillar had done. I say "somewhat" because I think they are building loyalty AND they can offer "either" service...mail or store. If you get your generics from them via mail there is always the branded items that you could get in the store which increases traffic, especially with national companies. What I find interesting is how well this plays into e-prescribing. If doctors e-prescribe and it goes directly to Wal-Mart then they can have drugs delivered (free shipping) very quickly and certainly before samples run out.

    Wal-Mart has historically been on the leading edge of technology. They were early adopters of EDI and more recently RFID. I think there is more to this than we see. I’ll watch for more news from them.

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  2. AnonymousMay 06, 2009

    Wal-Mart is starting to do this because HealthWarehouse.com is starting to take over their 'generic turf'.

    HealthWarehouse has cheaper generic drug prices than Wal-Mart and they already ship them for free.

    Wal-Mart acts like they're a leader in this...they're really just a follower who is now trying to play catch up...

    Wal-Mart may be able to compete on prices and free shipping, but they can't compete on customer service...

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  3. AnonymousMay 06, 2009

    Walmart is still flitting around the periphery. ~80% of drug spend is on branded rx and they have nothing to help payers there. The PBMs have the scale to generate rebates for their clients. Restat is not giving Caterpillar the savings Cat believes it's getting and Walmart offers only transparency. There are not that many foolish payers of size out there to make this a common solution.

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  4. AnonymousMay 06, 2009

    Not futile -- necessary! We pharmacists must resist wal-mart's attempts to cheapen our profession and the value of our services. Not everything in the world is about price.

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  5. AnonymousMay 06, 2009

    Bring it on, I have owned a pharmacy for 28 years, never made more $$ than 1st quarter 2009...Within 2 miles I have 2 CVS, Walgreens, Walmart, Stop and Shop, Walmart, Rite Aid, and we are #2 in scripts per week, service wins.

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  6. AnonymousMay 06, 2009

    Well….aren’t YOU a little ray of sunshine, when PBM stocks are the only thing in my portfolio that haven’t been burned to the ground in the last six months…..Ouch! But of course you’re right (as usual), and the traditional PBMs will have to continue to add value beyond mere generic savings to keep moving forward. I think they can do that, at least for the foreseeable future.

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