Comments on Drug Channels: New Details on WMT-CAT Pharmacy Deal

You raise an important point about the supply side...

2008-11-14T10:53:00.000-05:00

You raise an important point about the supply side of the equation -- pharmacies that make a profit on generics are more incentivized to substitute when possible. However, there is a demand-side consideration in this new concept as well: CAT members are heavily steered toward generics through a copay waiver. I suspect that at least some of the savings that this employer expects to reap are driven by members actively switching to generic therapy to take advantage of this waiver.

Ultimately, we're talking about patient behavior change here -- not pharmacy substitution -- as a driver of utilization shift.

interesting post as always, Adam. Just to clarify ...

2008-11-09T15:23:00.000-05:00

interesting post as always, Adam. Just to clarify I worked at Wal-Mart pharmacy for almost a decade and I'd consider their pharmacy locations off to the side of the store, but far from the front. Customers will usually pass the entire clothing department opposite of the registers, about 5rows of health and beauty, 1-2 books and magazine aisles, 5-7 aisles of food (not just the super Wal-Marts) and THEN get to the pharmacy. That's a lot of opportunity for impulsive shopping. -B

Adam,

The problem is that whatever cost-pl...

2008-11-06T16:20:00.000-05:00

Adam,

The problem is that whatever cost-plus arrangement Walmart has devised will over the long term not be substainable. Look at the original reimbursement contracts offered in the 1970's by that upstart PCS. Walmart has established a ceiling on this pharmacy deal as far as reimbursement goes but there is no floor in the long run.The payor always wants it for zero dollars..

PBMs that own mail order services will be less int...

2008-11-06T12:46:00.000-05:00

PBMs that own mail order services will be less interested in a cost-plus arrangement than PBMs that do not because of the greater profits on generics at mail than at retail. This cost-plus approach could be a competitive advantage for the latter PBMs. Will they be pressured by their mail order vendors to refrain from offering a cost-plus generic arrangement?

Just read the story about Caterpillar & Wal-Ma...

2008-11-06T11:31:00.000-05:00

Just read the story about Caterpillar & Wal-Mart. Medco just announced record earning. So let's see: the PBMs - for the moment - are enjoying record profits, mostly from mail order generics, which they price
at a discount off AWP. Wal-Mart offers cost plus pricing to Caterpillar,along with cheap generics. It looks like this will be adverse to the big
PBMs. But wait..what does cost mean? My guess is that it's the 'landed' cost to the store & not Wal-Mart's actual cost. If I'm right we're looking at Wal-MAC pricing, which, while presumably lower than the going rate, will still yield solid profits for Wal-Mart and the approach is no more transparent than Medco's.

"Oh what tangled webs we weave".

Cynical Old Pharmacist

Cost plus pharmacy models have been going on for y...

2008-11-06T10:48:00.000-05:00

Cost plus pharmacy models have been going on for years, just not at this scale. Physicians often purchase drugs from pharmacies at cost plus along with self-insured health systems that own pharmacies (basically pay themselves vs. an outside retail pharmacy at AWP minus). At any rate, this is pretty scary stuff to the retail pharmacy world. PBMs are already hanging on a thread called 'admin fees' (not that I feel badly for them!).

Wal-Mart is surely using this as semi-loss leader....

2008-11-06T09:22:00.000-05:00

Wal-Mart is surely using this as semi-loss leader. Why not. But in all fairness, pharmacies in Wal-Mart are not "way in the back". They put theirs up front to the side of the entrance. Still, when you are in the store, you are likely to consolidate trips and go ahead and shop.

Given volumes they want, this will likely work for them. I'd be surprised if others don't adopt this strategy as well.

-A

We also recently blogged about this over at
2008-11-06T09:05:00.000-05:00
We also recently blogged about this over at Prescription Access Litigation.

A few thoughts/questions come to mind here:

1. If Walmart is willing to accept lower margins on generics under a cost-plus reimbursement scheme, there are several non-mutually exclusive possible reasons why: (a) They expect that volume will make up for lost margins on each scrip. (b) It's part of a quasi-loss-leader strategy. I think both of these are arguably what were behind WalMart's original $4 generics push. It's safe to say that for those $4 generics, Walmart isn't giving them away or selling them at a loss, but they are foregoing some revenue. But think of how many people it's gotten in the store! There's a reason that the Pharmacy is often waaaay in the back at chains like Walmart -- as you pass all the other aisles, you remember other things that you need (oh, we're out of laundry detergent, let me stop and get some), or see things that catch you eye, and why make another stop?

A zero copayment is an attractive incentive for any Caterpillar employee within a reasonable distance of a Wal-mart, and 70,000 employees is a nice customer segment for Walmart to capture.

2. One can't help but be intensely curious about the details of this deal. How does Walmart disclose the "cost" part of the "cost-plus" equation to Caterpillar? What confidentiality provisions are in place? Can't Caterpillar still use this information to pressure other pharmacies for lower rates, or even seek a better deal from some competitor? Are the cost figures auditable?

interesting times indeed...