WMT + CAT: Pharmacy's Future?

Yesterday, Wal-Mart Stores (WMT) announced an innovative new program with Caterpillar (CAT) that provides $0 co-pays on 2,500 generic drugs for 70,000 beneficiaries (employees, retirees, spouses, dependents). See Caterpillar in prescription drug trial with Wal-Mart.

Well, I can’t resist pointing out that my January post Wal-Mart's PBM Game Plan predicted Wal-Mart’s strategy. Give the post another read because the economic logic is still generally accurate, plus there is a good discussion in the comments below the post.

HERE COME RESTRICTED NETWORKS

Note that Wal-Mart is not giving these drugs away, despite the Reuter’s statement that Wal-Mart “will fill certain generic drugs for free.” Only the co-pay for beneficiaries is $0 -- the same as your Drug Channels subscription fee. Caterpillar’s health plan still pays for the drugs, but now negotiates directly with Wal-Mart rather than using a PBM intermediary.

This is precisely the “restricted network” trade-off that I described in my January post:

• Give your beneficiaries freedom of pharmacy choice and pay $X for drugs.
• Restrict choice to a more efficient channel, e.g., Wal-Mart pharmacies, and pay less than $X.

Restricting the network to Wal-Mart pharmacies won’t work in many geographies, limiting the impact on urban/suburban chain pharmacies such as Walgreens (WAG) or Rite-Aid (RAD). However, there are 12 Wal-Mart stores near the Peoria, IL, headquarters of Caterpillar, making it a more realistic option. View a map of WMT stores in Peoria. See Walgreens’ $4.33 Surrender to Wal-Mart for more on the retail pharmacy impact of Wal-Mart.

COMPETITIVE IMPACT

As I see it, the deal does not represent a direct frontal assault on PBMs such as Express Scripts (ESRX) or Medco Health Solutions (MHS). Instead, Wal-Mart is subtly undermining the PBM’s economic model, which is overly dependent on margins from generic drugs by mail. Wal-Mart’s program highlights these “excess” margins by offering an alternative channel choice.

I’m more intrigued by the competitive comparison with CVS Caremark (CVS). Many of CVS Caremark's new benefit options try to create channel neutral choices (my terminology) within a restricted retail network. For example, Maintenance Choice is their drug benefit option that lets patients choose a 90-day supply from mail order or a local CVS retail outlet at the same cost or co-pay.

Final thought: The economics of the branded drug supply chain make it essentially impossible for Wal-Mart to offer the same deal for drugs with marketing exclusivity – for now. I expect that barrier to fall within the next few years.