Monday, October 04, 2010

Walmart-Humana: An Inevitable Surprise for Pharmacies and PBMs

On Friday, Walmart (NYSE:WMT) and Humana (NYSE:HUM) announced the “Humana Walmart Preferred Rx Plan,” a new Medicare Part D prescription drug plan (PDP) with lower consumer co-payments for prescriptions filled at Walmart pharmacies. Click here to read the official press release or get full details in Humana’s 2011 Summary of Benefits document for its Prescription Drug Plans.

Well, well, well. Looks like Walmart’s appetite for the pharmacy industry has reignited after a long hibernation. The company is once again challenging the conventional wisdom about profitability and market share with a lower cost, consumer-driven plan design. Once you understand this “incentivized preferred network design” (my words), then you’ll grasp its disruptive potential for retail and mail-order pharmacies.

  • The $14.80 monthly premium makes it the low-cost PDP in every U.S. state (per Kaiser’s October 2010 Fact Sheet).
  • The discount retail prescription pricing will influence pharmacy choice while simultaneously undermining the economic model of the Big Three PBMs—CVS Caremark (NYSE:CVS), Express Scripts (NASDAQ:ESRX), and Medco Health Solutions (NYSE:MHS).
The announcement is also an “Inevitable Surprise”—the predictable outgrowth of Walmart’s observable actions and statements about the pharmacy and PBM industries. Exhibit A: Wal-Mart's PBM Game Plan from January 2008. (Alternative hypothesis: Nobody expects Walmart!)

Read on for more details. I include many links to older Drug Channels posts on Walmart’s strategy as background for the many new readers in 2010.

AN INCENTIVIZED PREFERRED NETWORK DESIGN

Regular readers know my perspective. If you are spending your own money, then by all means choose your own pharmacy. But if you ask someone else—such as the American taxpayer—to pay for your drugs, don’t be surprised if they want you to save them money.

Pharmacy network design is one of the possible tools to achieve such cost savings. A preferred network gives the consumer a choice of pharmacy but provides financial incentives to use the particular pharmacies that offer lower costs to the payer.

In the Humana Walmart Preferred Rx Plan, a Part D beneficiary’s out-of-pocket costs are higher at a non-preferred, i.e., non-Walmart, pharmacy. There are 4,200 preferred pharmacies (including Walmart, Sam’s Club, Neighborhood Market, and Humana’s RightSource mail-order pharmacy) and 58,000 non-preferred retail pharmacies in the Humana network for this plan.

For example, once the annual $310 deductible is met:

  • The cost-share percentages for brand-name drugs are 20% to 35% at a Walmart pharmacy but 37% or 50% at non-preferred pharmacies.
  • The co-payment for a 30-day supply of preferred generics at a Walmart pharmacy is $2 and $0 through Humana's RightSource mail order, but $10 at a non-Walmart pharmacy.
This arrangement hearkens back to the original Walmart-Caterpillar preferred network model announced in September 2008. (See WMT + CAT: Pharmacy's Future? although I inaccurately refer to it as a "restricted network" in the original post.) The WMT-CAT deal only focused on 2,500 generics, whereas the new program includes all Part D eligible drugs.

Note that the new program is not the so-called access-based design touted by Walmart in a June 2010 white paper. (See Walmart's Pitch for Smaller Pharmacy Networks). Payers have been reluctant to embrace highly restrictive models with the notable exception of CVS Caremark’s Maintenance Choice program. Walmart has never provided any data to justify its unsubstantiated claim of “8-12% cost savings from an access-based network with no more than 20,000 pharmacies nationwide.” Perhaps there are also Any Willing Providers (the other AWP) issues in the Part D program.

A LOSS LEADER?

I’ve been warning the pharmacy industry for years that they should prepare to compete on price, not just customer satisfaction. Excessive margins on generic prescriptions created an inevitable opportunity for Walmart and others to disrupt the pharmacy industry’s economic model. PBM mail-order pharmacy margins are next.

Walmart explained its health care strategy last year in the fascinating Health Affairs article Removing Costs From The Health Care Supply Chain: Lessons From Mass Retail. Here’s a telling quote:

“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.”
Translation: Walmart is willing to accept lower (but still positive) profits on generic scripts in exchange for market share. Walgreens jumped into this game after losing significant market share to Walmart in Illinois. See CAT + WAG = More Momentum for Cost Plus.
  • Does Walmart lose money on prescriptions with its discount generic program? Doubtful. I discuss the economics behind Walmart’s $4 generic program in Sloppy reporting about Wal-Mart (Dec. 2006), Wal-Mart's Gain is not Walgreen's Pain (Oct. 2007), and Pharmacy Profits and Wal-Mart (Jan 2009).
  • Is this a cost-plus, direct-to-payer arrangement? Walmart has not publicly confirmed that Humana is reimbursing preferred Walmart pharmacies on a cost-plus basis rather than list-price or MAC-based models. As I point out in Industry Impacts of Cost-Plus Reimbursement, cost-plus models are a lower risk/lower return model for pharmacies, not a “loss leader” model.
  • Will Humana lose money? Carl Mercurio at the Corporate Research Group cites a conversation with William Fleming, vice president of Humana Pharmacy Services, stating that the plan is expected to generate a 5% operating margin for Humana, which is the average for all Humana Part D plans.
WHAT’S NEXT?

I predict that Walmart will win significant market share in regions where it has sufficient retail coverage—primarily the Southeast, Southwest, and Midwest. Walmart will also overtake Rite-Aid (NYSE:RAD) to become the third biggest pharmacy chain in 2011.

Other payers will contemplate preferred networks, especially if Humana picks up significant share of Part D plans. At a minimum, we could see significant auto-assignment of dual eligible Low income Subsidy (LIS) enrollees to the Walmart-Humana plan.

And PBM executives on their way to the PCMA Annual Summit today should be very, very nervous. See you there!

P.S. As a reminder, Walmart's chief weapon is surprise and fear. No, wait, their two weapons are fear, surprise, and ruthless efficiency. No, no, their *three* weapons are...Wait, I'll start again...

17 comments:

  1. While staying at a Marriott I struck up a conversation with the corporate accounts team one day. I asked about how special discounts given to corporations and if they looked at the total book of business (rooms, AND food/beverages). They looked at me like I was crazy. They only looked at the room business and never included the food/beverage business. I'm thinking that if you have groups staying they are more likely to eat at least breakfast if not room service and have meetings/gatherings in the bar, too. I'd want to know how valuable the WHOLE book of business is. I share this because I suspect WalMart is looking at the whole book of business. Get them into the store for pharmacy and how that adds to sales of all the other items they offer. I would not call the pharmacy a loss leader but you have to know they are playing a different game than the rest of those in the pharmacy business. I'm surprised that the grocery chains didn't pick up on this years ago and work with employers.

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  2. Adam,

    Is this plan only available in Pennsylvania and West Virginia?

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  3. sucks for all of us little guys

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  4. Hi adam

    You focused on the negative aspects of wmt/hum for pbms in your post. If more payors were willing to narrow retail networks it would give them more leverage when creating benefit design/negotiating against retailers?

    Re wmt profitability, they are reducing price but getting volume. Pharmacies are high fixed cost - so isn't that incremental script very high margin?

    Just thinking through some other aspects of the issue.

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  5. I agree that there might be some incremental leverage, but I view low-price retail fulfillment as a threat to mail profits especially as the number of generic launches starts to decline post 2013.

    Re: profitability
    Marginal cost is how Walmart can make this model work. Many pharmacy owners focus on average cost. Plus, we are in an era of cheap drugs, where the costs of distribution + dispensing are much greater than cost of the drug. This a dramatic reversal from the historical situation during which the industry was built.

    Adam

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  6. Some other responses...

    Al: Yes, of course, there is a front-end angle here. But some people claim that Walmart loses money on these scripts, which I don't think is accurate.

    Anonymous #1: As far as I know, the plan is national.

    Adam

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  7. Sucks more for the LIS patient previously getting brand name meds for $3.30. Congratulations, you saved $10 on the five generics medications but now owe us $40 for the brands. I can't wait for the 1st patient who was auto-assigned to the plan, thereby having no clue as to what his/her benefits are, to start screaming in January when their brand name medication comes back with a 37% copayment. Good times.

    I wonder how this does not qualify as steering. As a pharmacist I cannot endorse a specific Medicare Part D plan for my own financial benefit but this seems to be exactly what Walmart is doing.

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  8. Adam -

    How is this legal under Medicare Part D marketing rules? Pharmacies are not allowed to endorse any particular plan, but here you have Walmart and Humana entering into a preferred provider relationship? Does anyone else remember a few years back when CMS made Humana take Walmart's name off of their insurance cards? Isn't this even more egregious?

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  9. Hmmmm, not sure. I assume that it's OK because CMS appears to have formally approved the plan and its marketing, but I'm not a lawyer nor an expert in the fine legal points of Part D.

    Adam

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  10. "Does anyone else remember a few years back when CMS made Humana take Walmart's name off of their insurance cards? Isn't this even more egregious?"

    Very good point from Anonymous above...

    CMS is very clear in that a pharmacy provider cannot in anyway steer patients to one PDP over another, regardless of price/margin/marketing programs.

    Though the HUM/WMT program would save money, it is very much out of bounds.

    CMS was (again) asleep at the switch on this one!

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  11. Excellent analysis, Adam.

    But I don't understand the photo.Maybe I'm just getting too old to get your jokes?

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  12. The photo comes from a Monty Python sketch called The Spanish Inquisition.

    It's really quite silly.

    Adam

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  13. The era of cheap generic drugs are coming to an end very quickly. How long do you think generic manufactures are going to sit on the sidelines watching their brand name counterparts continue to roll in the big bucks. Adam, I can count at least 20 major generic's that have gone up in price by a couple thousand percent since the beginning of the year, and I'm not just talking about the colchicine URL labs colcrys fiasco. Check out the prices of generic flonase, feldedne k-dur, ramipril. Etc. Let's see how walmart deals with TEVA and mylan as they continue to merge with the little guys. 2011 is going to be very interesting!!!!!

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  14. Here is statement provided to me by a spokeperson from Walmart in response to comments above regarding the legality of this arrangement:

    "CMS reviews all Medicare marketing materials before health plans such as Humana use them. That's certainly the case with the Humana Walmart plan. If you or your readers have questions about CMS's review of marketing materials, I'd suggest contacting CMS directly. Everything out there on the Humana Walmart plan has been approved by CMS."

    Adam

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  15. Lynn J. Everard, C.P.M.October 07, 2010

    I believe that soon, maybe real soon, operational efficiency, not product profit margin, will become the key to survival for all pharmacies including hospital pharmacies.

    Lynn

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  16. Hey tell the whole story you left out the $310.00 deductible for the plan. What deductible means is the

    plan pays nothing until the deductable is meant. Its great if you don't need to use it. Do the math

    $310.00 divided by 12 months plus the premium of $14.80 per month equals $40.63 per month. Does your

    current plan have a deductible the average plans are $36.00 a month with no deductable. Find yourself and

    independent agent who has more than one plan. Please correct your article this is why the public have such

    an ill opinion of insurance agents.

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  17. This is great news. A prescription drug plan will help lots of consumers to save some cash and make it low-cost and affordable for all. In this way, those who are sick wont be worrying too much about their expenses.

    ReplyDelete

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