Saturday, September 23, 2006

The Opening Salvo in a New Health Care Battle?

I am most intrigued by WalMart's new drug-pricing strategy: $4 per prescription for up to a 30-day supply for a generic version of the drug. The program is being rolled out in Florida, but the company appears to have plans to go nationwide. Right now there are almost 300 drugs available at the $4 rate, covering some of the more common ailments (diabetes, cholesterol, high blood pressure, depression).

Many people are focusing on the "corporate social responsibility” aspects of WalMart's move. Under pressure from commentators for its "poor" treatment of employees (not providing health care for part-time employees, for example), this move certainly will give the company some community goodwill. That is fine. But I suspect there is more to the story than that. And I suspect there is more to this than simply WalMart's ability to cut costs out of the chain of distribution.

What intrigues me the most about this pricing program is precisely that it has the hallmarks of a PROGRAM: it is almost like consumers are enrolled in a WalMart prescription drug insurance plan or program. Many health insurance plans offer similar sorts of prescription drug policies --– for instance, each prescription will cost $5, or $15. But those deals have traditionally only been offered with health insurance, which of course requires a large up front cost. Here is WalMart essentially offering Blue Cross- level prescription drug pricing, but offering it to anyone, including the uninsured, without any subscription price!

The other programmatic aspect of the pricing policy is that all drugs are being offered at the same low price of $4. From WalMart's point of view, that cannot be optimal pricing when you look at it on a drug-by-drug basis. Some drugs have higher marginal costs to WalMart and should be priced higher, again if you were looking at the drugs individually. Clearly, WalMart is viewing this as a package deal, and they must have some research supporting the idea that consumers will value greatly the certainty of the $4 price for any drug.

With more consumers going to WalMart pharmacies, the company will have even more bargaining power with the pharmaceutical manufacturers: the ability to move WalMart-level volume from one manufacturer to another does wonders for the ability to extract price concessions. But the real question is to what extent this represents WalMart taking a shot at the United States' very high-cost health care business model? Maybe as they move beyond just 300 drugs, they will start charging a monthly premium in order to get the $4 per prescription pricing? That starts sounding like an insurance plan, but of course it is really not different from Net Flix' DVD plans or even Amazon's new pricing for shipping (pay an annual amount and get free two day shipping). And what if WalMart decides that it could also start hiring doctors and nurses and providing basic health services? Wouldn'’t that be something? Anyone want to bet that WalMart could provide many health care services at much lower prices than our nearby hospital or doctor’s clinic -- with probably very similar quality?

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