PBM Price Wars - Walmart's Greatest Hits
Posted by Roy Wilkinson on Thu, May 07, 2009 @ 08:01 AM
"You say you want a revolution, well you know we all want to change the world..." Or so the Beatles wrote and it seems like Walmart has been listening. The result will be an altered PBM pricing landscape.
Their latest salvo in an escalating price war on traditional PBM pricing was announced in a Walmart press release yesterday describing a new pilot program in Michigan for mail-order home delivery. The program:
- covers 300 generics
- provides a 90-day supply for $10
- provides free home delivery
Keep in mind that the "300 generics" program pilot is the same model they initiated in Florida when they first launched the $4 generics initiative. The generics list and the geography grew quickly after introduction. I expect a similar growth pattern with this program across America.
Let's review the Walmart "Greatest Hits" strategy in its chronological progression:
- $4 generics introduced in Florida; expanded nationally
- Pilot direct contracting program with employee population at Caterpillar
- Expansion of direct contracting to other employers
- Mail-order home delivery pilot in Michigan
Make no mistake, the traditional PBMs want no part of this direct contracting, i.e., acquisition cost pricing model. Their structure cannot support it, particularly the publicly-traded PBMs who must meet quarterly earnings forecast from Wall Street. The Walmart home delivery generics-at-mail is a direct shot at their life-blood. The traditional PBMs depend on the generics-at-mail as a primary source of net margin. Without it, their toast!
Additionally, the free home delivery option announced by Walmart helps combat the argument that was presented by PBMs that rationalized the direct contracting strategy. They claimed that this approach would create too much employee disruption and have limited appeal to employers based on assuming unfavorable geo-mapping results of employee populations to Walmart store locations. Now, not so much!
The inertia is not being stalled. A WSJ article on 5/4/09 mentions that Walgreen's may be exploring a direct-contracting arrangement with Toyota.
Walmart's attempt to create "a more efficient business model" means only one thing to the PBM industry: squeezed margins. Smaller private PBMs have room to navigate and have demonstrated a willingness to play ball. Their larger public PBM bretheren will be up against a formidable challange.