Walmart’s Booming Preferred Network Models

Remember Walmart’s (NYSE:WMT) quest to dominate the pharmacy industry using price as a competitive weapon? Well, it’s gaining momentum based on an industry presentation made this week.

Walmart now claims to be working on preferred network models with 400 employers directly as well as with 20 Pharmacy Benefit Managers (PBMs). These network design models encourage or require consumers to use Walmart pharmacies and narrower pharmacy networks in exchange for lower costs to the plan sponsor.

Walmart states that employers see average savings in the 13-18% range, but savings "can be as high as 45%." As far as I know, this is Walmart’s most detailed public statement on its success with these models. Read on for more on these newly-released details.

WALMART'S GROWTH

The information comes from Network Redesign: What is it worth?, a presentation delivered by a Walmart employee at the 2011 Pharmacy Benefits Academy (PBA). I am not attending the PBA, so my comments below are based only on the information in the slide deck posted to the Internet.

Page 1 tells the big story. In Walmart’s words:

“To date, we are a part of almost 400 Preferred Networks working directly with employers. We also participate (and in many cases, helped build) Preferred Networks for over 20 Pharmacy Benefit Managers and Managed Care Organizations (in both the Commercial & Government portions of the business).”

Comments about savings and market share appear on page 7.

As usual, Walmart doesn't provide any client names (beyond a few big ones), so it's not possible to verify their claims about savings with actual customer testimonials.

THE MANY FLAVORS OF ASSIMILATION

Walmart now segments its various models into three categories. There are no descriptions on the slides, so here’s my interpretation.

Incentive-Driven Networks: The consumer can choose any pharmacy, but pays a lower price at a Walmart pharmacy.

The most prominent example so far is the Walmart-Humana Part D network, which I discussed last October in Walmart-Humana: An Inevitable Surprise for Pharmacies and PBMs. The success of this approach was apparent when the Humana Walmart-Preferred Rx Plan went from start-up in October 2010 to the fifth-largest Medicare Part D plan PDP by January 2011. See 2011 Part D Market Share: A Win for Humana and Walmart.

The original Caterpillar model from September 2008 also falls into this category. See WMT + CAT: Pharmacy's Future?.

Limited Networks: In this model, the typical pharmacy network size is reduced by 50% to 80%. Thus, the consumer can choose any pharmacy within the network, but the network only has 10,000 to 30,000 pharmacies (versus about 60,000 total retail pharmacies.)

An example of this approach is Restat’s Align network. It includes the usual suspects—Walmart, Target, and many supermarkets—along with a number of regional chains. Surprisingly, the Restat network also includes at least 2,800 independent pharmacies through the participation of McKesson’s Health Mart franchise members.

A Restat-sponsored study estimated big savings for plan sponsors, along with a corresponding big decline in pharmacy profits. See Pharmacy Profits in Preferred Networks with PBM Transparency.

Hybrid Networks: As the name implies, these models appear to be some combination of the above two models. Here’s where Walmart classifies Caterpllar v2.0, which brought Walgreens (NYSE:WAG) into the network. See CAT + WAG = More Momentum for Cost Plus.

RESISTANCE IS FUTILE

As I have noted many times before, Walmart can undertake this strategy due to the extraordinarily low pharmacy acquisition costs for most oral solid generics.

Consider simvastatin, which is now the most prescribed cholesterol-lowering drug in the U.S. Pharmacy acquisition costs are average about $0.035 per pill, so a 30-day supply costs about one dollar. (For example, see page 15 of the NADAC deck.) Thus, third-party reimbursement goes primarily to pay the pharmacy’s overhead and operating expenses, not for “ingredient costs."

Keep in mind that Express Scripts' (NASDAQ:ESRX) recent letter to its clients tries to leverage the preferred network momentum in its dispute with Walgreens. See Express Scripts preparing for network without Walgreens from Drug Store News.

And a friendly message to the pharmacy industry: Don’t bother complaining about “monopolies” and “loss of customer choice.” Walmart’s behavior is precisely the sort of thing that both the Federal Trade Commission (FTC) and many employers consider to be pro-competitive.

Or as Locutus of Walmart once said:

"We are the Borg. Lower your shields and surrender your ships. We will add your biological and technological distinctiveness to our own. Your culture will adapt to service us. Resistance is futile."