Thursday, June 24, 2010

EXCLUSIVE: Walmart's Pitch for Smaller Pharmacy Networks

I have a real treat for you today—an honest-to-goodness Drug Channels exclusive.

Walmart contacted your friendly neighborhood blogger and offered to make Drug Channels the launch pad for a controversial Walmart-penned thought leadership piece called Access Based Network Design: A Walmart Low Price Network White Paper. (They obviously realize that you are the smartest and best-looking web audience out there.)

I recommend you read this paper because it provides an especially compelling rationale for narrower pharmacy networks.

At the same time, we all know payers are not yet adopting these networks, despite the impeccable economic logic displayed in Walmart’s white paper. The models are difficult to implement and there is little hard data on actual bottom-line savings. Payers also may perceive bigger savings opportunities in other areas that have less potential beneficiary disruption.

However, I see the pharmacy and Pharmacy Benefit Management (PBM) industries at a tipping point. It is just a matter of time before smaller, preferred networks are a regular feature of the industry landscape.

Below you’ll find more details along with some previously unpublished information courtesy of my chat with Michael Struhs, Director of Business Development for Walmart’s Health and Wellness business unit and author of the white paper. For instance, Mr. Struhs estimates that payers could see “8-12% cost savings from an access-based network with no more than 20,000 pharmacies nationwide.” Hmmm.

I’m curious to know what Drug Channels readers think, especially since you are getting first crack at the paper. Please take a moment to read the seven-page paper and leave a comment.


The Walmart white paper builds the case for narrower pharmacy networks on three “pillars:”

  • Leverage supply and demand to create competition among pharmacy providers resulting in lower costs. Key quote: “It seems there’s a pharmacy on almost every corner. That’s great news for payers because when the supply of vendors is larger than demand, prices can be forced down.
  • Use a ‘bottom-up’ rather than ‘top-down’ approach to network design by building a network based on the number of pharmacies you need rather than the number of pharmacies there are. Key quote: “Force pharmacies to compete against each other to be allowed in this network.
  • Provide financial incentives to plan members to offset any disruption or inconvenience created by network changes. Key quote: “A financial incentive makes any short-term inconvenience easier to swallow.
These principles certainly warm the cockles of my cold, calculating economist’s heart. In The U.S. Pharmacy Industry: 2009 Economic Report and Outlook, I predict the growth of preferred Pharmacy Networks—the establishment of narrower retail pharmacy networks that use financial incentives or explicit restrictions to direct consumers into specific pharmacies or channels.


Despite Walmart's impeccable logic, I am reminded of my most important lesson from graduate school.

In theory, theory and practice are the same.

In practice, they are different.

Walmart’s latest thought leadership piece is very nice, but where are the customers? If these programs are so attractive to payers, why are we not seeing widespread adoption? I was expecting a big client announcement to accompany the release of the white paper.

Mr. Struhs assures me that Walmart has “multiple mid-sized clients” (companies with less than 10,000 employees), but declines to provide a single example beyond the well-known, non-mid-sized Caterpillar-Walmart-Walgreen deal. Caterpillar is a fairly sophisticated payer with geographically concentrated beneficiaries, so it’s not the most general example, IMHO.

Mr. Struhs also claims that existing preferred networks are not sufficiently narrow, which is why payers haven’t seen real savings yet. Alas, he gave me no further details on his 8-12% estimate or whether any client has actually achieved this level of savings.


Despite my misgivings about the lack of evidence to date, I do expect network design to emerge as the next wave of cost-saving strategies by PBMs on behalf of payers. Consider the momentum in 2009-10:

  • CVS Caremark (NYSE:CVS) opened up a debate about the potential financial savings from more limited pharmacy networks during its spat with Walgreens. They were apparently following Rahm Emanuel’s advice: “Never let a good crisis go to waste.” I suspect many payers (PBM clients) saw the move as self-serving and unexpected, but the issue gained a lot more attention.
  • Drug Channels blog sponsor Restat is marketing a turn-key, cost-plus PBM model called Align that features preferred pharmacy networks.
  • Walgreen continues to aggressively market its direct-to-payer model. See Walgreen’s PBM Bypass Strategy.
  • Walmart is turning up the volume with this new white paper.
Most surprising of all? Independent pharmacy owners may want to play, too.

The National Community Pharmacists Association (NCPA), which lobbies for owners of independent pharmacies, cheered a letter from Illinois Democratic Representatives Debbie Halvorson and Phil Hare to Todd Bisping at Caterpillar. The letter, which is posted on the NCPA web site, reads in part:

“We understand Caterpillar’s contract with Walgreens and Walmart expires in 2012 and urge you to allow the participation of many more independent, local pharmacies well before these contracts expire.”
Could the NCPA actually be (gasp!) showing support for Walmart’s network competition philosophy? If so, independent pharmacy owners can look forward to competing with Walmart to be allowed into a network. Be careful what you wish for!

Are these indicators or illusions? Time will tell.


Special thanks to Walmart for letting me bring this white paper to the Drug Channels audience first. In case you’re wondering, I have no business or financial relationship with Walmart beyond shopping at their stores every so often.


  1. Good morning Adam. Thanks for sharing the latest off-the-wall idea from Wal-Mart. There's an expression that "When you have a hammer, everything looks like a nail."

    Wal-Mart's hammer is that they can run their pharmacies as loss-leaders, to build store traffic. But, as destination rather than convenience stores, Wal-Mart, Costo, Target, etc, are never going to replace the more convenient community pharmacies for the bulk of Rx business. There is a long history of attempts to market 'skinny networks' at slightly reduced costs, but the idea has never gotten much traction.

    So the notion that they can change the network paradigm is rather silly. As you know, I've personally developed pharmacy networks on a number of occasions, so I feel my opinion is based on solid experience. At the end of the day, most plans will opt for good access, even though it is slightly more expensive to do so.

    It is also important to note that the Wal-Mart scheme does not address the most important Rx benefit cost components:
    • Drug cost at the wholesale level is, by far, the largest component of Rx benefit costs and the WMSI can't change that. Too bad they can't import Chinese pharmaceuticals.
    • Even though generics now comprise 70% of drug use, brand drugs still account for about 80% of the costs, so the proper management of formularies and rebates is far more important than squeezing a slightly lower network rate;
    • Specialty is the fastest growing segment of Rx benefit costs, and the WMSI cant address that component either.

    PBM services on such matters as benefit design, controls on fraud, waste and abuse and the like are far more valuable than skinny networks.

    Best regards,

  2. AnonymousJune 24, 2010

    I own an independent pharmacy and have been a pharmacist for 35 years. If you honestly believe that I can or want to compete with walmart's low-ball, bait and switch pricing, then you are delusional!

    Good quality pharmacy care requires quality people. I don't want some minimum wage worker dispensing my prescriptions and you shouldn't either.

    I hope that everyone can see through this BS before it's TOO LATE!!!

  3. AnonymousJune 24, 2010

    I agree with one point in Wal-Mart's concept: If you wanted to build a network from the bottom up you would begin at the bottom - with Wal-mart pharmacies.

  4. AnonymousJune 24, 2010

    Decreasing access to decrease cost will achieve only minimal reduction in overall health care cost reduction. An Access Based network as “described by Wal-Mart” is to similar to a National one payer system in that it may be slightly cheaper but will it deliver a quality product to all.

    Wal-Mart compared their limited access model to purchasing janitorial services on bid. Will Wal-Mart stay with janitorial services that do a lousy job of cleaning their bathrooms? No they will not.

    I do agree with Wal-Mart that a limited access network design is the road to take. However, the access should be based on quality and total health care cost reduction, a “Centers of Excellence” (COE) network.

    A network of drug distribution that states it will make prescriptions passing through their portals perform to make the clients healthy and more productive workers. Not Access, Not price, but performance: performance that yields healthy employees, with lower overall health cost.

    Will Wal-Mart guarantee or report if the Cholesterol drugs they are dispensing lower LDL, will they guarantee or report if their hypertensive meds are lowering blood pressures, or if their diabetic medications are lowering the A1C of their patients, no they will not make any such performance guarantees.

    They will fire the cheap janitorial service based on lack of performance but they will never let their own cheap pharmacy network be put to quality assurance program.

    Like a previous blogger I to have built pharmacy networks but my networks of the future will be to meet quality performance guarantees mandated under the PPACA. A “Center of Excellence” network that lowers cost of medications, overall medical cost and performs quality assurance programs on outcomes. These networks perform; look at the Ashville or Ten Cities projects.
    Jim Fields RPh

  5. AnonymousJune 24, 2010

    Howdy! Hope your summer is going well. Great blog on the new W-M white paper. But as you noted, the idea itself isn’t new. We started pushing restricted networks several years ago, but at that time the payers generally didn’t want the disruption. As costs continue to go up, they may change their minds. But mail order for maintenance meds is so much more powerful for cost savings and adherence that it may not make sense to limit retail access for acute meds (ie, often inexpensive generic antibiotics, etc). Payers don’t usually want to hassle their folks who have a kid with an ear-ache -- they are after big ticket savings on big-ticket meds and a more healthy workforce. My two cents!

  6. AnonymousJune 25, 2010

    Come on Adam, you know better!

    Sure we understand that WMT and 4 buck copycats have saved the USA and our various HC systems lots of money. (I'd actually be interested in knowing the rough dollar savings per year....)

    Yet as mentioned time over, the savings is in generic growth, not tighter networks. Why bother saving a point or two on the branded side when certain pharmacy providers are more proactive than others in growing the generic fill rate.

    WMT always will be the low cost provider. But until they figure out how to better utilize their pharmacists and improve communication, there will always be a ceiling to their generic fill rate.....thus limiting the largest potential savings to their clients.

    It's unfortunate that they didn't focus on a 4th piller. The WMT architect makes a strong point with the statement below, yet does not expand on how to really create such a program.

    "Finally, don’t forget to take a pharmacy’s generic conversion capabilities into consideration. Some pharmacies are better at others at moving people from expensive brand drugs to low cost generic drugs. That should be taken into consideration as your PBM builds this network since this will result in
    additional cost savings."

    Best bet for WMT: Keep pushing 4 bucks and leverage their Rx dept in order to sell more Barbie dolls.

  7. Independent Community Pharmacies that understand the evolution of aggressive marketing, creativity, leveraging technology, and exceptional customer service - rise above the "Wally-World Fast Food *Farmacy" business tactics of Walmart. The key is not being complacent. I know too many independents who ARE NOT thinking outside the box. For one: Leverage your community presence, involvement, and knowledge. You ARE PART OF the community. Walmart is just a BIG STORE where people buy their "stuff". TWO: Partner with a PRO-Independent Pharmacy PBM who can come into your community - an approach small businesses with you to provide a pharmacy benefits service that can compete with Medco / Caremark - while making YOUR independent pharmacy the "preferred-provider" of pharmacy services. It's working in several different areas across the country.

  8. AnonymousJune 28, 2010

    Seems like a great idea to limit access, but it does not work because the big chains bundle their stores into one deal. If you are going to have access to CVS in Rhode Island or Walgreens in Illinois then you are going to have to take all their stores into the network. Oh, and mail gets to everyone---so it has the best access. If this is to work, then "unbundling" must occur which is unlikely. The big potential losers of this could be regional chains, independents and yes---Wal-Mart because they are likely to be carved out of networks in metro areas. But wait, they will bundle their rural locations to keep all their stores participating. So, Wal-Mart----time to step up and agree to unbundle your stores for the "common good". We will be watching......

  9. Good post Adam. Not surprised that they would push this to you than to me. I put some comments upon my blog a little bit ago.


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