Wal-Mart Explains Its Healthcare Strategy

The latest issue of Health Affairs has a fascinating insider’s view on how Wal-Mart views healthcare services (including pharmacy dispensing). Read it here: Removing Costs From The Health Care Supply Chain: Lessons From Mass Retail

The article's subtitle says it all: “Many standard health care products and services should be ‘commoditized’—and priced accordingly.”

Translation: Pharmacies should be ready to compete on price, not just customer satisfaction.

It’s important to understand Wal-Mart's message although I doubt many pharmacy owners (and even some PBM executives) will agree with it.

THE LOW-COST MINDSET

The article is written by John Agwunobi, senior vice president and president of Wal-Mart Stores’ Health and Wellness Business Unit, along with a former government official/Wal-Mart consultant.

As the authors explain, Wal-Mart’s core premise is that many standardized healthcare products and services are priced as if they are customized items. But for many patients and situations, healthcare products and services are undifferentiated—and should therefore be priced as commodities.

Sounds like heresy, right?

Wal-Mart is reminding the pharmacy industry that some dispensing situations do not require extensive services and counseling, or perhaps only require on-demand counseling. The distribution system for these situations requires efficient, low-cost fulfillment. (This is partly the rationale for mail-order pharmacies, too.)

YES, BUT…

Wal-Mart is NOT saying that all prescription drugs should be dispensed without pharmacist counseling or appropriate medical attention. (Neither am I.) Certain products and situations will always require advice and high levels of service. They write:

“Not everything in our health care system can or should be sourced, supplied, or priced as if it were a commodity (for example, high-risk medical procedures, complex diagnostics, and specialty pharmaceuticals).”

MAKING PRICE MATTER

Where does this line of reasoning lead? From the article:

“Generic drugs cost pennies per pill to produce, but drugstores have traditionally priced generics in relation to the price of their brand-name equivalent, rather than their cost of acquisition.”

Like it or not, Wal-Mart has made price matter by starting a generic prescription price war. Wal-Mart is willing to accept lower-than-normal profits on generic scripts in exchange for market share. Walgreens is moving in this direction, too. (See CAT + WAG = More Momentum for Cost Plus.)

SHOULD SATISFACTION MATTER?

While I understand Wal-Mart’s message, it is important to separate the rhetoric from the reality regarding customer satisfaction. Independent pharmacists correctly point out that consumers are generally unsatisfied with Wal-Mart’s pharmacies. The most recent J.D. Power survey supports their view.

• Wal-Mart ranked dead last among other mass merchants with pharmacies. Target took top honors in the category. View Results
  
  
• Franchises of independent pharmacies (Health Mart and Medicine Shoppe) received five stars in the chain pharmacy category. Nice job! View Results

If consumers are spending their own money, then the pharmacy choice can be entirely at their own discretion and based on satisfaction, location or just personal preferences. But as long as 90%+ of drug costs are paid by a third-party and not the consumer, then we can expect an acceleration of the low-cost Wal-Mart mindset.

P.S. You win, Twitter. I will now be twittering new Drug Channels posts at http://www.twitter.com/DrugChannels.