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Below you’ll find more details along with some previously unpublished information courtesy of my chat with Michael Struhs, Director of Business Development for Walmart’s Health and Wellness business unit and author of the white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.”
SHOW ME THE MONEY
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.
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.