Hot on the heels of Walgreens potential cost-plus deal, Wal-Mart just announced a new mail pharmacy pilot in Michigan. The program offers a 90-day supply of 300 generic prescriptions for $10 each via free mail delivery. Official details:- New Walmart Program Broadens Access to Affordable Prescriptions in Michigan (official press release)
- http://www.walmart.com/pharmacyhomedelivery (Wal-Mart's mail pharmacy web site)
Although this is just a pilot, we have no reason to assume Wal-Mart will stop with Michigan. I bet Pharmacy Benefit Manager (PBM) executives tipped back a few extra margaritas during Cinco de Mayo yesterday.
Some observations on this latest move:
Wal-Mart wants to be the low-cost pharmacy. Wal-Mart keeps leveraging its scale and logistics to undermine the traditional retail drug distribution business. Every one of the company's major pharmacy initiatives – the $4 program; the cost-plus Caterpillar deal; the new mail pilot – seeks to offer a lower-cost option for consumer fulfillment of prescriptions.Wal-Mart has two big advantages in this generic drug price war: a low cost of dispensing and a willingness to accept lower-than-normal profits on generic scripts. Moving the battle to mail is the next logical step in their strategy.
Wal-Mart does not want to be a PBM. I still maintain that Wal-Mart has no interest in a direct frontal assault on the benefits management business of PBMs such as CVS Caremark (CVS), Express Scripts (ESRX), or Medco Health Solutions (MHS). Wal-Mart would not be competitive when dealing with complexities such as formulary development, claims administration, or selling benefit management services to payers. Consider the Caterpillar deal. Caterpillar uses a Pharmacy Benefits Administrator (called RESTAT), so there are fewer business issues compared to a traditional PBM relationship.
Low-price home delivery will undermine the PBM economic model. Home delivery of generic drugs is the most profitable part of a PBM's business. Whereas the original $4 retail model put some indirect pressure on PBM margins, Wal-Mart is now attacking a fundamental cross-subsidy baked into the current PBM business model. That said, I suspect that a consumer's out-of-pocket cost for a 90-day script at most PBMs is probably comparable to Wal-Mart's price already – or will be soon.
A mail pharmacy will lead to more direct-to-payer deals. By eliminating the geographic barrier, Wal-Mart can now pursue new direct-to-payer deals with U.S. employers that fund their own health-insurance plans. According to the Reuters article that I cite in Wal-Mart's Next Move, the company estimates that there are 75 million Americans in these plans. Hmmm, are there any struggling industries based in Michigan that might be open to a deal that would save money? (Hint: Rhymes with stars.)
Retail pharmacies should be worried. The growth of insurance plans for drugs has turned store-based retail pharmacies into fulfillment channels for third-party payers. As a result, payers often see costs go down on when consumers choose to fill their prescriptions for the 300 generic drugs on Wal-Mart's list. The mail pharmacy heightens the competition because it looks like Wal-Mart will fulfill by mail for any plan (or cash). In contrast, PBMs use mail pharmacy as an adjunct to their benefits management business.
As they say in the Borg collective: Resistance is futile.
