Thursday, September 24, 2009

Wal-Mart Explains Its Healthcare Strategy

The latest issue of Health Affairs has a fascinating insider’s view on how Wal-Mart views healthcare services (including pharmacy dispensing). Read it here: Removing Costs From The Health Care Supply Chain: Lessons From Mass Retail

The article's subtitle says it all: “Many standard health care products and services should be ‘commoditized’—and priced accordingly.”

Translation: Pharmacies should be ready to compete on price, not just customer satisfaction.

It’s important to understand Wal-Mart's message although I doubt many pharmacy owners (and even some PBM executives) will agree with it.

THE LOW-COST MINDSET

The article is written by John Agwunobi, senior vice president and president of Wal-Mart Stores’ Health and Wellness Business Unit, along with a former government official/Wal-Mart consultant.

As the authors explain, Wal-Mart’s core premise is that many standardized healthcare products and services are priced as if they are customized items. But for many patients and situations, healthcare products and services are undifferentiated—and should therefore be priced as commodities.

Sounds like heresy, right?

Wal-Mart is reminding the pharmacy industry that some dispensing situations do not require extensive services and counseling, or perhaps only require on-demand counseling. The distribution system for these situations requires efficient, low-cost fulfillment. (This is partly the rationale for mail-order pharmacies, too.)

YES, BUT…

Wal-Mart is NOT saying that all prescription drugs should be dispensed without pharmacist counseling or appropriate medical attention. (Neither am I.) Certain products and situations will always require advice and high levels of service. They write:
“Not everything in our health care system can or should be sourced, supplied, or priced as if it were a commodity (for example, high-risk medical procedures, complex diagnostics, and specialty pharmaceuticals).”
MAKING PRICE MATTER

Where does this line of reasoning lead? From the article:
“Generic drugs cost pennies per pill to produce, but drugstores have traditionally priced generics in relation to the price of their brand-name equivalent, rather than their cost of acquisition.”
Like it or not, Wal-Mart has made price matter by starting a generic prescription price war. Wal-Mart is willing to accept lower-than-normal profits on generic scripts in exchange for market share. Walgreens is moving in this direction, too. (See CAT + WAG = More Momentum for Cost Plus.)

SHOULD SATISFACTION MATTER?

While I understand Wal-Mart’s message, it is important to separate the rhetoric from the reality regarding customer satisfaction. Independent pharmacists correctly point out that consumers are generally unsatisfied with Wal-Mart’s pharmacies. The most recent J.D. Power survey supports their view.
  • Wal-Mart ranked dead last among other mass merchants with pharmacies. Target took top honors in the category. View Results

  • Franchises of independent pharmacies (Health Mart and Medicine Shoppe) received five stars in the chain pharmacy category. Nice job! View Results
If consumers are spending their own money, then the pharmacy choice can be entirely at their own discretion and based on satisfaction, location or just personal preferences. But as long as 90%+ of drug costs are paid by a third-party and not the consumer, then we can expect an acceleration of the low-cost Wal-Mart mindset.

P.S. You win, Twitter. I will now be twittering new Drug Channels posts at http://www.twitter.com/DrugChannels.

15 comments:

  1. How do you think the Wal-Mart model - commoditization saves money immediately - will fare against the CVS Caremark model - direct pharmacist contact promotes adherence, which saves total health costs long term?

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  2. Recently, my wife was shopping at Walmart.com for a bicycle for our soon-to-be three-year-old. I was asked "Would you want them to assemble it, or would you want to assemble it yourself." There is no question, really. I wouldn't have my child riding a bicycle put together by the kids working at Wal-Mart.

    I think it is important to note that this dynamic does not exactly translate to pharmacy. There is a pharmacist involved in dispensing medications even at Wal-Mart. The concept of high volume and low quality, though, is unfortunately pervasive. This is not a dig at my fellow professionals working for Wally World. Rather, it is the reality for a system that pushes, in their own words, for "commoditized" dispensing. They key concept that unearths the fallacy is "dispensing". I agree that the medication itself is a commodity. Contrary to the quip of hot-pocket aficionado Jim Gaffigan and countless other comedians, pharmacists should be doing more than taking tablets from the big bottles and putting them into the little bottles. Most states require a verbal offer of counseling with every dispensing. This includes refills. The Wal-Mart concept of "commoditized" dispensing drives volume over quality and does not allow the Health Care component of Pharmacy Practice to occur. This is a problem with mail-order pharmacy as well.

    This isn't my Blog, so I'll leave my comments at that. There is simply too much left to be said about how the third party payer system is not designed to respect a system in which Professional Services are bundled in with the price of a commodity.

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  3. Adherence? Come on! That's simply a term so Pharma and the retail pharmacy chain community can insure that they do not miss a monthly fill.

    Adherence programs ONLY work with patients on insurance, whether private or public. (Yep, public means Gov programs which are clearly out of bounds). Every both checking a low copay patient's medicine cabinet at home who is on an "adherence" program. Lots of inventory, man. Kind of like waiting for the armageddon.

    The proof is in the pudding. It's no secret that Big Pharma has been hit hard by Wal-Mart and others with the advent of 4 buck programs.

    The mass merchants and grocers have educated the consumer, and the consumer has demanded lower priced products. 4 buck therapeutic subbing has created a new mindset for the pharmacy world.

    Just like when going to the supermarket, the patient and consumer simply has to be educated on such alternatives, whether that be self taught.....or possibly from a health care provider who is offering this service.

    Thx Adam....and easy fast.

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  4. Hi Adam.

    Would you mind pls editing my 2nd post in your blog today?

    I'm typing a little fast.

    "Adherence programs ONLY work with patients on insurance, whether private or public. (Yep, public means Gov programs which are clearly out of bounds). Every both.....SHOULD BE "EVER BOTHER" CHECKING....

    THANKS MUCH. BRUCE

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  5. "Wal-Mart is reminding the pharmacy industry that some dispensing situations do not require extensive services and counseling, or perhaps only require on-demand counseling. The distribution system for these situations requires efficient, low-cost fulfillment. (This is partly the rationale for mail-order pharmacies, too.)"

    Here lies the problem, The LAW requires counseling. So if they wish to commoditize prescriptions, they will need to get federal and state laws changed. Can't wait for them to take on the AMA and "commoditize" medical visits at Walmart clinics.

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  6. "Wal-Mart is NOT saying that all prescription drugs should be dispensed without pharmacist counseling or appropriate medical attention. (Neither am I.) Certain products and situations will always require advice and high levels of service."

    They might not be saying it, but the inevitable result of that mentality is the loss of advice and high levels of service in the cases where it is needed. It shouldn't require much of a mental leap to understand that the margins on routine generics subsidize the more complex cases. If you take the profit out of generics and "routine" fills, you kill the golden goose. Unless, of course, you price the high service level fills to relatively astronomical levels.

    Even the rocket scientists at Wal-Mart should be able to understand that.

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  7. I agree with the premise of your article that “pharmacies should be ready to compete on price, not just customer satisfaction”. I also agree that this is the message that Wal-Mart is sending, commodity sales has been the Wal-Mart business model and always will be, they are not going to change regardless of the product. If Wal-Mart brings on a product it becomes a commodity in their world; if the product is not normally viewed as a commodity they will make it one, if they can not make it a commodity then they drop it.
    I agree with your premise today despite the fact that I am the owner of two small pharmacies and a small PBM.
    However, your premise is based on today’s health market parameters where health items for sale are definitely handled as commodities, be it price or a personal relationship between provider and client.
    The future is different, all efforts by governments and private enterprises, such as the X-prize health project, are forcing the parameters in a different direction, making your new translation to read “Pharmacist and all health care providers will compete on price and quality health care outcomes”.
    The future says that yes the price must come down but the commodity aspects of client satisfaction will be replaced with measurable quality health outcomes for the client from the provider and not the quality of bedside manner by provider to the client.
    By looking at qualitative and quantitative outcome numbers instead client satisfaction even the lowly diuretic pill suddenly becomes a non-commodity, a non-commodity rivaling and exceeding even that of the specialty drug. Ask any patient who has experienced renal failure or arrhythmias because of poor adherence to the lowly diuretic, which cost less than a penny a tablet.
    By making this paradigm shift (trite phrase) to quality we have decreased both medical and prescription cost by improving the health of the consumer, the goal of the X-prize and my company. Interestingly this moves prescriptions out of Wal-Mart’s World of Commodities as well as other large box outlets, to an unfamiliar world of quality where they won’t compete, a world they don’t even desire to compete.
    Jim Fields RPh
    CFO ApproRx

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  8. Good column Adam. Wal Mart better be able to compete on price because customer service is certainly not even attempted or in the company vocabulary. No surprises here. Wal Mart would commodotize " heart surgery" if they could.

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  9. Interesting premise, but flawed. When you have a hammer, everything looks like a nail. Wal-Mart has mastered efficient distribution and supply chain management. They can truly offer the lowest prices. But their demographics are awful. They run destination stores that are not convenient. So, while they do drive prices down, they can only capture a give market share. Interestingly, Costco has lower Rx prices -- and has had them for many years. Like Wal-Mart, they use this as a loss-leader and traffic builder. So both can get a given share of the market but cannot dominate.

    I applaud the Wal-Mart executive for promoting his company's business model through this article; it's what he's paid to do.

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  10. As has been stated, not all things fit neatly into the commodity model. Selling 60 garbage cans in 5 minutes does not kill the purchaser who bought the wrong one. Amazing how medicine can be thought of as a commodity until this tragedy happens in the dispensing of this "commodity".

    I often thought of other professions becoming the example of Wal-Marts model. I could see lawyers only making money on specialty cases (deeds and such that the secretary can handle, $4.00). Doctors only making money on specialty surgeries (by-pass surgeries, etc, all other procedures, $4.00). Consultants only charging $4.00 for mundane advice.

    This way of doing business obviously applies across the board.

    If you believe this, I have some land to sell you........

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  11. Walmart recently announced their mail-order program in 22 states. Do
    you see this as their attempt to alleviate the customer service issue
    in their stores or is this reactionary to new emerging "virtual
    retail" pharmacies such as HealthWarehouse?

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  12. Adam: Interesting column,

    This comment needs some comment:
    "Here lies the problem, The LAW requires counseling. So if they wish to commoditize prescriptions, they will need to get federal and state laws changed. Can't wait for them to take on the AMA and "commoditize" medical visits at Walmart clinics."

    How come when I get a prescription filled, the clerk asks me to "sign this slip", which when read says that I don't want counseling. In reality, the law requires an OFFER to counsel and this offer is offered in fine print. A pharmacy filling 500 RXs per day cannot counsel many people due to time demands so, in reality, the non-complicate prescription has already become a commodity.

    My advice: go to the least busy store and get to know your pharmacist. They can provide a valuable service when you need it. A pharmacist's value will be seen when they can treat "routine" prescriptions as a commodity and focus on the patient who needs some help.
    Mike (a pharmacist for 35 years)

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  13. Good job on this. But, OH NO, I see you are giving in to the Twitters!

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  14. Controversial issue.

    As long as the business model is viable (everyone is paid a reasonable wage), and it does not harmful to the society (not limiting the availability of pharmacists), then Walmart's model should be good.

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  15. I read that Health Mart Pharmacies counsel with their patients and they got a J.D Power award for customer service. With my RxDrugCard I pay the same price with them or with Wal-Mart or with any participating pharmacy.

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