Thursday, January 24, 2008

Wal-Mart Takes on Big Pharma?

A potentially important development was announced today in The Wall Street Journal. Apparently, Wal-Mart Stores Inc. is stepping into the highly lucrative pharmacy-benefits arena.

In a speech yesterday before 7,000 Wal-Mart store managers at a meeting in Kansas City, MO, Wal-Mart CEO Lee Scott said the company is initiating a pilot program to help "select employers ... manage how they process and pay prescription claims."

Pharmacy benefits managers (PBMs) have a sometimes little-recognized, but hugely important role in the pharmacy benefits chain operating in the United States. PBMs are the third-party administrators of prescription drug programs. These companies, dominated by just a handful of companies (see here for market share information), including Medco Health Solutions, CVS Caremark Rx, and Express Scripts/CuraScript, are primarily responsible for processing and paying prescription drug claims for healthcare providers. These include insurance companies, health maintenance organizations and even some government plans. PBMs may own their own mail-order pharmacies, and increasingly make much of their profits from big markups on generic drugs. PBMs are also responsible for developing and maintaining the drug formularies, contracting with pharmacies, and negotiating discounts and rebates with drug manufacturers.

PBMs use their collective bargaining power for prescription drugs, therefore PBMs are able to negotiate huge rebates and discounts on behalf of their clients. It is estimated that PBMs manage about 70% of the more than 3 billion prescriptions dispensed in the U.S. each year, and cover roughly 95% of all patients in the U.S. today (although only about 46% of prescription drug expenditures are paid for via PBMs, partially a function of the huge discounts PBMs are able to command).

This is a big reason there is such a huge difference in the prices the uninsured pay for drugs relative to the prices paid by those who have insurance (co-pays aren't even factored into the equation). Based on IMS Health data, excluding the effect of rebates, the typical cash customer pays nearly 15% more for the same medicines than do customers with third-party coverage. For a quarter of the most common drugs, the price difference between cash and third-parties is even higher - over 20%.

According to the article, "Wal-Mart wouldn't name the companies, and details of how this would be achieved were sketchy. But Mr. Scott said that by taking out unnecessary costs he believes Wal-Mart can save employers more than $100 million this year alone."

Wal-Mart is known for its efficiency -- the company has used its massive buying power to push vendors for ever-lower prices and more efficient distribution systems, and the company also accelerated the drive to manufacture products in Asia, driving countless small shops out of business as part of that process. But a recent article questions whether this is the end of the Wal-Mart era. And there is no guarantee Wal-Mart will be as successful here, in part, because PBM's are already far more efficient than the traditional outlets Wal-Mart was largely responsible for putting out of business. And, again, as the WSJ article noted, Wal-Mart will still have convincing to do. Says David Veal, PBM analyst at Morgan Stanley: "Traditionally, employers are risk-averse; they're hesitant to move just on price."

Others joke that selling drugs is not the same thing as selling toilet paper. The company is already the third-largest pharmacy in the U.S. in terms of sales, after CVS and Walgreen Co., so its unclear whether there's as much room as there was when Wal-Mart wreaked havoc on Main Streets across America. But there is no denying when Wal-Mart speaks, much of the world still listens. Things could get interesting!

Author Postscript, January 25, 2008: The Wall Street Journal's Health Blog written by Jacob Goldstein commented on the announcement which was made yesterday in his posting entitled "Should PBM Investors Worry About Wal-Mart?". In essence, he agrees with my assessment, saying: "Don’t panic. (But don't rush to buy more shares in PBMs, either.)"

On January 30, 2008, the blog Drug Channels, written by Dr. Adam J. Fein, further investigated the potential economic impact that Wal-Mart's PBM announcement could have.

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