Monday, May 04, 2009

Is Walgreens planning a direct-to-payer deal?

This morning's Wall Street Journal article about Wal-Mart's (WMT) pricing model with Caterpillar (CAT) drops a bombshell in the last paragraph. According to Wal-Mart Expands Drug Program:

"Walgreen has a growing relationship with Toyota, operating about a half dozen pharmacies at the auto maker's U.S. work sites. The car maker is discussing with Walgreen the possibility of setting up a program similar to Wal-Mart's project with Caterpillar, in which Walgreen would expand its drug program for Toyota employees."
If I am interpreting this paragraph correctly, then Walgreens (WAG) is proposing a direct-to-payer model (my term) with Toyota. FYI, Walgreens picked up Toyota's work site pharmacies with its acquisition of I-Trax in 2008. (Press Release)
Like it or not, Wal-Mart appears to be setting the new low-cost rules for the pharmacy industry. Direct-to-Payer is more than just a promotional price – it's a whole new revenue and profit model for a retail pharmacy. Wal-Mart's reimbursement for generic drugs from Caterpillar is explicitly cost-plus and based on Wal-Mart's actual invoice prices. No AWP or MAC required.
While we don't have details (or even confirmation that a Toyota-Walgreens deal will happen), Walgreens would surely sacrifice generic drug margin in exchange for volume. I wonder if Walgreen will now concede that a generic drug price war is underway. See Walgreens vs. Reality for January's denial.
And for the record, my April Fool's post was supposed to be a joke!
There may be some new visitors today since Drug Channels is mentioned by name in the WSJ article. (Thanks, Ann!). Here are quick links to four popular articles from the blog about Wal-Mart's strategy:


  1. scripkillaMay 04, 2009

    I think people in the hospital system knew this would eventually stop being their little secret. Business savvy hospitals have for years built their own retail pharmacies and created self-insured pharmacy programs incentivising their use (by employees). The main difference is that hospitals create a closed profit system by outsourcing the beneftis admin only. In this system, they pruchase drugs at hosptial costs and then the pharmacy gets AWP/MAC reimbursement from the PBM admin. Since it's self-insured, the hospital pays itself (the pharmacy) the PBM contraced rate (which they agreed to). Oh and they also get rebates. Wal-Mart is running very close to that model minus the PBM middleman. I'd be curious how the FTC will rule once they see this becoming more common. For instance, since Wal-Mart is not owned by the company in the relationship (i.e. CAT) could there be a violation of the Robinson-Patman Act? Is creating these closed loop systems viewed by some as anti-competitive? This is cost plus we're talking about.

  2. Al GodleyMay 04, 2009

    Adam thanks as always for keeping us posted. I am amazed that so many people are still puzzled by some of the happenings. I was talking with a manufacturer earlier this year and they were/are much focused on CVS/Caremark, to the point of virtually excluding everything else. My comment to them was to watch Wal-Mart. They change the game because they understand that there is more money to be made than just on drugs and they'll go after it. Clearly the $4 generic was a game changer and it seems others are moving to capitalize on the Caterpillar move, too. In the meantime, CVS, while having a lot of potential, has not really taken advantage of its size/opportunity. We saw this before when Merck bought Medco. Some things are just more difficult to do than others.

    Keep on keeping us posted!

  3. AnonymousMay 04, 2009

    Interesting stuff. I read and enjoyed your notes this morning, but I seriously doubt that Walgreens will copy the Wal-Mart model.

    I’m sure that WAG has made an attractive deal with Toyota for its on-site pharmacies, but I doubt that WAG will try to extend the same deal for its retail stores, for several reasons:

    1. Conflicting messages as to their PBM division
    2. Network reactions if their PBM goes too far to ‘favor’ Walgreens stores
    3. Danger of setting a precedent for accepting lower margins at retail.
    4. Reactions from other PBMs as to what the PBMs pay Walgreens
    5. Inability to have adequate coverage with just an all Walgreens network.

    Also, if I’m not mistaken, the WAG initiative for Toyota includes the Walgreens clinical capability, so the ‘package’ is a bit different.

  4. AnonymousMay 04, 2009

    I bet Warren Buffet thinks this is a great business model. This past weekend Mr. Buffett gave us his opinion on the newspaper business -- how I wish someone would have asked him about the retail pharmacy business and their current strokes of genius.

  5. AnonymousMay 05, 2009

    Do you still think that Walmart is not planning a direct frontal assult on pricing among the PBMs after this morning's mail order release?

    Granted, this is a trial, but so was the $4 generic program. Why wouldn't this be used in conjunction with their PBM offering?

  6. To the most recent comment:

    Stay tuned to Drug Channels tomorrow morning!