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AIS's Health Business Daily
Featured Story February 7, 2008 Wal-Mart Signals Its Move Into the PBM Industry; Analysts Have Mixed Reactions to Its Impact Reprinted from DRUG BENEFIT NEWS, biweekly news, data and business strategies for health plans, PBMs and pharmaceutical companies. Wal-Mart Stores, Inc.'s plan to start offering pharmacy benefit services to employers has provoked mixed reactions from PBM industry stakeholders. While some observers contend that any move by the retail behemoth has the potential to be an industry “game changer,” two of the largest PBMs appeared unfazed by the prospect of a giant new competitor. An industry consultant tells DBN that Wal-Mart could challenge PBMs’ deep discounts at mail order, but that any impact would likely be focused on employers located outside of large metropolitan areas. News that Wal-Mart is eyeing the pharmacy benefit arena surfaced in a Jan. 23 speech by Wal-Mart CEO Lee Scott to 7,000 store managers. Scott told his audience that what the U.S. heath care system needs most is affordability, accessibility and efficiency. “We think we can do even more with prescription costs," Scott said. “This year, we will be contracting with select employers in the U.S. to help them manage how they process and pay for prescriptions claims,” he continued. “Our approach will be based on taking out unnecessary costs, while providing high health care quality products and services. With this effort, we believe we can save employers more than $100 million this year alone.” Wal-Mart has not disclosed details of its plan, but two of the largest PBMs moved quickly to downplay any potential threat. In a prepared statement, Express Scripts, Inc. said that Wal-Mart wants to channel traffic into its stores, and not manage drug costs for plans. “It’s a conflicted model that won’t work,” Express Scripts asserted. “Our clients and patients value working with Express Scripts because we are aligned with their interests and independent of retail pharmacies and drug manufacturers.” Medco Health Solutions, Inc. said in a prepared statement that Scott’s speech focused on social responsibility — ranging from installing windmills and solar panels on stores to working with the Chinese government on supplier certification. There was a passing reference to improving health care for Wal-Mart employees “and the suggestion of a pilot program to work with a small number of employers on processing prescription claims,” Medco said, adding that no details were offered and that the PBM couldn’t speculate on Wal-Mart’s moves. Medco also pointed to what it says are its own market-leading strengths, including clinical initiatives in the Medco Therapeutic Resource Centers that are improving patient outcomes and reducing overall health care costs. “That’s a capability no traditional retail pharmacy is capable of offering, and no other PBM has matched.” Medco said. “We are comfortable with our leadership capabilities and our competitive positioning.” Wal-Mart Could Challenge Mail-Order Rates Joshua Golden, a senior pharmacy consultant at Hewitt Associates, says he believes that Wal-Mart’s play is intended to capture as much retail pharmacy utilization as possible. The move also could challenge PBMs’ mail-order pharmacy model, he tells DBN. “With the way they price their products, I think they are positioning themselves as a potential threat to the deeply discounted mail-order philosophy,” he says. If Wal-Mart successfully steals retail utilization, the impact on PBMs would be minor, because PBMs generally have “pass-through arrangements where they don’t make a ton of money on retail network pricing,” Golden says. “But if they start to disrupt utilization that is currently channeling through the PBMs’ mail centers, then you have a situation where they’re going to be at odds with the PBM, and you’ve got some potential conflict.” Golden says Wal-Mart would have to approach a PBM rollout one employer at a time. “Unlike PBMs that market broadly across an entire book of business, or across an entire group of potential prospects, Wal-Mart would need to single out and identify those large employers where there is a good geographical fit, where they can put in either a Wal-Mart-only retail network or an incentivized retail network, and it will make sense geographically for the members of that population.” A Wal-Mart-run PBM, Golden says, may not work for a company with many corporate employees in a large metropolitan area, where there are fewer Wal-Marts and more competing chain drug stores. But it might work in rural or semi-rural areas that have large manufacturing plants located near Wal-Marts, he adds. “That might be their plan. They may have to do some geographical analysis, and identify which large employers out there are good candidates.” Susan A. Hayes, principal of Pharmacy Outcomes Specialists, says Wal-Mart’s announcement was not unexpected, particularly given recent moves by other drugstore retailers to acquire or develop their own PBMs. CVS Corp., for example, made major headlines last year after it acquired Caremark Rx, Inc. And both Walgreen Co. and Rite Aid Corp. have substantial PBM divisions, she notes. “I think they said ‘if CVS can do it, we can do it.’ Wal-Mart is uniquely positioned in rural areas where other PBMs might have gaps in coverage,” Hayes tells DBN. Drugstore chains with PBMs have significant inherent strengths, she adds. “You can trade a slightly lower [copayment] for better discounts from the chain-owned PBM, which is a win for all — members have lower copays, the employer has lower costs and the PBM/pharmacy chain gets additional traffic in the stores,” Hayes says as an example. PBMs Are Not Losing Sleep But she also says that the large stand-alone PBMs are not likely losing sleep over Wal-Mart’s move. “I think they would consider Wal-Mart an upstart,” she says. “When you have as many million lives as they [i.e., large PBMs] have, I don’t think they would feel it is a significant competitor. If five years from now, Wal-Mart has a significant portion of the employer market, that would be shocking. I don’t think they think that is going to happen.” This is not the first time that Wal-Mart has threatened to shake up the drug distribution system. The retailer caused a similar stir when it announced its $4 generics program in September 2006. “While that was effective as a marketing maneuver, many industry experts continue to question the real underlying value of the program,” Golden says. He also says Wal-Mart faces some high hurdles in forming a PBM. “They couldn’t just jump into the swimming pool and do it all,” he says “They don’t have a mail center; they’d have to either build one or buy one. They don’t negotiate rebates with pharmaceutical companies, so they’d have to either start doing that or outsource it. They don’t have a claims-processing engine. They’d have to outsource that to a claims processor, or to one of the major PBMs,” he says. “So you’ve got a situation where they would have to assemble piecemeal, from scratch, a PBM with a whole bunch of different outsourced or co-sourced arrangements,” Golden adds. “I don’t know if that kind of approach can be viable or competitive on a grand scheme.” |
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