Wednesday, May 07, 2008

Wal-Mart Redux

Wal-Mart Stores (WMT) latest expansion of its generic drug program represents more of the same despite the company's promise on Friday to make a “major health care announcement.” Nonetheless, the company’s latest comments shed additional light on the true economics of the program.

Click here to see the complete list of eligible drugs.

Here are some high level points about Wal-Mart’s generic program.

More Volume = Lower Cost of Dispensing. Way back in my still-valid December 2006 analysis, I predicted that Wal-Mart would benefit from the program by generating incremental prescription volume for its relatively underutilized pharmacies. Wal-Mart senior vice president John Agwunobi confirmed my view yesterday in this Associated Press story, saying: “It also offers us the ability to add capacity to our pharmacies without adding people."

Wal-Mart’s generics are not loss leaders. Last October, I compared Wal-Mart’s retail generic prices to average acquisition costs and found average gross margins of 24%. These calculations dramatically underestimate Wal-Mart’s actual gross margin because Wal-Mart's product acquisition costs are much lower than the independents, supermarkets, and small chains that buy through wholesalers.

State governors love this program. Medicaid does not pay more than a cash customer at a given pharmacy because a pharmacy can not be reimbursed by Medicaid for more than its Usual & Customary charge. Thus, states pay less whenever Wal-Mart fills a Medicaid generic script for which Wal-Mart’s retail price is below the Medicaid reimbursement rate. State revenues are declining due to the economic slowdown, making Wal-Mart look good.

Cash-pay customers also love the program. Wal-Mart is offering a great value for uninsured and under-insured patients, a point that I made in the Financial Times on Monday. In contrast, consumers with third-party insurance do not save much versus standard co-pays, which is why chains such as CVS Caremark (CVS) or Walgreens (WAG) are not very vulnerable to Wal-Mart’s program.

Price shoppers are fans, too. There are wide and apparently persistent variations in pharmacy prices for many common, high volume generics. (See The Price Might Be Right.) Wal-Mart’s program simplifies the search process, especially for elderly Part D participants trying to stay below the donut hole. (See Part D and Generics.)


Curiously, NCPA declined to issue its usual denunciation about how Wal-Mart’s program is a “classic bait-and-switch” (9/28/06) or “devaluing and destroying the practice of pharmacy” (9/27/07). Perhaps the surviving independents have figured out how to coexist with Wal-Mart, as implied by 2007’s unexpected growth at independent pharmacies?


  1. AnonymousMay 07, 2008

    Dr Fein -This may all be true, but my customers appreciate that I can spend time with them rather than trying to increase volume. We are less than 2 miles from a Wal-Mart but have not lost any business because of this program.

  2. AnonymousMay 08, 2008

    Waiting to see if there is a mass exodus of pharmacists from Wally World. This could be interesting since corporate's point of view is "to add capacity to our pharmacies without adding people."

    More Volume + No New Staff(pharmacists) = lots of overworked pharmacists looking for greener pastures and therefore many more unhappy customers and liability issues for the big W.

    Just my 2 cents.

  3. AnonymousMay 08, 2008

    In addition, your calculation of gross margin, 24% of $4.00 ain't much profit if you ask me. Especially considering cost of dispensing anywhere between $5 to $10 per Rx (depending on who's doing the study). But I'm not a "Dr." of economics, so what do I know.

  4. Marc,

    Yeah, 24% of $4 isn't much -- but it's not negative as some claim. Also, Wal-Mart buys much better than the average data that I scraped together using public sources.

    In previous posts, I've discussed why the average COD is a very misleading figure when assessing pharmacy economics. The key number is the *marginal* COD, which is something that economists know all about.

    Judging by the latest Consumer Reports story, people don't seem to like the service experience at a Wal-Mart pharmacy -- but that's not how they compete.

    Thanks for the comments,

  5. AnonymousMay 08, 2008

    A three month supply of an antibiotic is unnecessary. I think it is added to the formulary so they can have an inflated number of meds offered making it seem as though they carry more meds than they actually do. After a typical 2 week therapeutic regimen, the remaining 60 capsules will just sit in the patients medicine cabinet until he or she decides to self diagnose and medicate for symptoms they previously had. God forbid the patient diagnoses their son or daughter and starts playing doctor to friends and family members. I can understand the benefit of maintenance meds such as blood pressure and cholesterol, but antibiotics, creams, and anti-fungals should be offered in relevant quantities. Just a thought. Great site, very informative.

  6. AnonymousMay 11, 2008

    You nailed it. As usual!

  7. AnonymousMay 12, 2008


    The newest pharmaacy offering by Wally World is a way to cut the number of prescriptions being filled at the store level.(one fill for 90 days instead of 3 for 30 days and the same level of profit)-- I believe they are realizing that they have created a nightmare in the pharmaacy department for the staff and that morale is very low.

  8. AnonymousJuly 14, 2008

    I work at a big box pharmacy and when I look up the cash prices I can also see the gross margins. On generics the gross margins are more like 55-70% while the brand name margins are 5-20%. Our daily overall margins usually sit at around 17-23%. There are a few generics such as Pencillin 500mg that are sold at a very small loss (less than a $1 loss). Also remember that pharmacists get paid around $40-$55 per hour and the technicians make between $7-$13 per hour, so the overall pharmacy profits are not as large as you think.