Wednesday, September 16, 2009

The Impact of Walmart's National Mail Pharmacy

Walmart just went national with its mail pharmacy program, an outcome that I had predicted in May when the company launched its initial trial in Michigan. Details here: Walmart Expands Access to Affordable Prescriptions Nationwide. Walmart is offering 300 generic prescriptions for $10 each and more than 3,000 other brand and generic prescriptions with free mail delivery.

This announcement expands the retail pharmacy price war over generic drugs, puts further pressure on pharmacy margins from cash-pay customers, and sets the stage for more cost-plus deals. More intriguingly, it portends an emerging strategic convergence between Walmart and CVS Caremark. Yes, you read that correctly.


My comments in Walmart Aims at PBM Profits still hold, so you may want to reread that post before reading further. Some additional observations:
  • The price war expands. Retail pharmacies are engaged in a generic prescription price war that began when Walmart initiated its $4 generics program in September 2006. This price war has encouraged pharmacies, particularly supermarkets and other mass merchants, to sacrifice some margins from cash customers and payers in exchange for growing (or maintaining) market share. The big drug store chains have also joined in (CVS Escalates the Generic Price War), although they sometimes claim the opposite (Walgreens vs. Reality). For now, Walmart's mail expansion seems to be directed at the underinsured/uninsured customers that are the core of Walmart's low-cost generic program, which means…

  • Goodbye to generous cash-pay margins. Pharmacies earn more from cash-pay customers, whereas the pooled negotiating power of third-party payers and PBMs limits the profitability of pharmacy prescriptions for consumers with insurance. As I show in Pharmacy Profits and Wal-Mart, consumer-paid prescriptions have average gross margins of 42.4%, which is more than twice as large as an independent pharmacy's margins for prescriptions covered by a third-party payer. (BTW, these economics partially explain the non-stop litany of complaints about PBMs from pharmacy owners.)

  • Mail pharmacy enables more cost-plus deals. Walmart does not have full geographic coverage with its stores, which is one reason why Caterpillar added Walgreens to its cost-plus network. By expanding mail order, Walmart is positioning itself to pursue more cost-plus, direct-to-payer deals because mail order eliminates the geographic requirement to use a Walmart store. Presumably, this offering will augment all of the top-secret cost-plus clients that Walmart has allegedly signed up.

  • Walmart is legitimizing mail pharmacy. Walmart's low-price home delivery service puts additional (albeit indirect) pressure on PBM mail margins. On the other hand, Walmart's mail order expansion could help PBMs by improving consumer perceptions of mail order pharmacy. Walmart is legitimatizing the concept, which could increase overall mail utilization.

If we extend Walmart's mail strategy to its logical conclusion, then we should expect cost-plus deals that designate Walmart as an exclusive pharmacy network provider. In other words, a payer would require consumers to get maintenance medications from either a Walmart retail pharmacy or via Walmart mail dispensing. This model would permit consumer choice of pharmacy channel (mail or retail), but would not provide choice of the specific outlet.

Sound familiar?

Yup, I just described how CVS Caremark's Maintenance Choice program works, although Maintenance Choice does not rely on cost-plus pricing for payers … yet. Ironically, Walmart and CVS Caremark (with Maintenance Choice) are now both pursuing strategies that eliminate the traditional out-of-pocket cost difference for consumers between mail and store-based pharmacy.

So, how long before independent pharmacists begin complaining to the FTC about Walmart's "anticompetitive" behavior?


The graphic above comes from the completely awesome Mental Floss t-shirt collection. Check it out!


  1. Great- Walmart makes the pharmacy profession even more of a commodity. The service levels at the pharmacy counter are just not as good at Wally World. What makes you think that the mail will be any better? People need to learn that they get what they pay for.

  2. "So, how long before independent pharmacists begin complaining to the FTC about Walmart's "anticompetitive" behavior?"

    Ouch Adam. A direct hit to our heart.

    Competition is what makes America great! Price vs service tradeoff. Let the consumer make the decision.

    In all sincerity though, it's the next generation who will feel this the most. It is our children who will be the ones which no longer have a choice on where to shop because of the rapid growth of certain providers (and we'll be saying way back in the late 20th and early 21st century.

    It's OK though, the pills are all the same.

    And we will have the internet to learn about the product ourselves.

    Gosh, wasn't there some anitrust regulation that prohibited something like this?

  3. When Walmart merges with one of the largest PBMs in the nation and uses anticompetetive tactics to force consumers to use a pharmacy that don't want . . . then independent pharmacists will probably start complaining to the FTC.

  4. Adam, as a side note....

    I got a feeling that you know our writing style well enough to identify plenty of us!

    Good chag to you and your family.

  5. Any sense of the pricing for the 3,000 other affordable brand and generic prescriptions?

    Will be interesting to see stats on Wal-Mart's dispensing quality and turnaround time.

  6. nice t-shirt link!

  7. The depth of your disdain for independent community pharmacy and your PhRMA, PCMA spin never ceases to amaze me. Fortunately for our side the patients by and large prefer to utilize the services of independent pharmacy and the only way chains & PBMs can win them over is to give them no alternative. So much for competition! Richard Beck

  8. Adam - I hope you ignore the previous comment. I have been reading you for more than a year and know that you try to be fair. I don't always like what you say but you always back it up with the facts. Keep up the good work!

  9. FYI, Mr. Medsaver points out that Walmart actually charges prices that are extraordinarily high for many medications that are not on their deeply-discounted list. See Walmart Will Now Mail Deeply-Discounted Generics.


  10. Been a pharmacist for 34 years, 8 years at a chain and 24 years as independent owner. Retired at 55 for 7 months, economy dumped, now reliever for independents. Used to be health care professional, now feel like high paid tech. Thanks to Wally World, CVS, Caremark and all the other big buck operations, but bottom line, we have met the enemy and they is US!