Human Capital & Careers

Wal-Mart Could Spark Wider Drug Saving

The retail giant's cost slashing might prompt employers to squeeze savings out of the healthy profits of pharmacy benefit managers.
David KatzSeptember 25, 2006

Wal-Mart’s move last week to curb the cost of nearly 300 generic drugs in Tampa Bay, Florida to $4 for a month’s prescription could start a chain reaction that some say could cut employer pharmaceutical expenses across the nation.

While Wal-Mart’s initial thrust was limited to 65 Wal-Mart, Neighborhood Market, and Sam’s Club drugstores in Tampa Bay, the retailing giant will expand the program into all of Florida next January and plans to take the program to as many states as it can next year.

Pharmacies wary of losing market share could follow suit. “Fifty-bucks for a year’s supply of prescription drugs is a pretty darn good deal for consumers,” U.S. Senator Bill Nelson, a Florida Democrat, said in a Wal-Mart press release. “Because Wal-Mart has the ability to shape the market, maybe other retailers will follow suit.”

But another link in the pharmacy supply chain should soon be undergoing price pressure as a result of the retailing giant’s move. The price spreads that highly profitable pharmacy benefit managers (PBMs) parlay in handling employers’ drug plans and dishing out discounts on prescription drugs are ripe for a squeeze, at least one benefits consultant thinks.

Wal-Mart’s move “will be a catalyst for employers to put pressure on PBMs to provide similar generic pricing,” says Edward Kaplan, a senior vice president and head of the national health practice at The Segal Company, a benefits-consulting firm. In addition to handling brand-name drug purchasing for benefit plans, PBMs make big chunks of their net incomes from transactions involving generics.

That’s because PBMs, which act as intermediaries between employers and drugstores, have wide leeway in the prices they can provide for generic pharmaceuticals to their employer clients. In a typical arrangement, the PBM strikes a deal with a corporate client on a guaranteed price that the client will pay for a given drug. If the PBM can haggle out a lower price with the drugstore chain, the PBM pockets the difference.

Such negotiations have spawned lucrative profits—profits that have sparked loud criticism and quite a few lawsuits. In a study of the prices charged by three PBMs that Kaplan put together as part of a request for proposal for an international multiemployer union in May, for example, he found that the highest PBM bids on 800 drug transactions tended to be 40 percent more than the lowest. (For the study, which involved two of the largest PBMs, the transactions sometimes included different dosage units of the same drug.)

Employers thus have plenty of room to bargain their PBMs down to Wal-Mart levels. Since there are often different generic versions of the same drug, however, the drug chains move won’t create wide ripples unless the PBM-drugstore market extends the price-slashing much more widely than to the 291 generics included in Wal-Mart’s program. The effectiveness of the effort, says Kaplan, “is predicated on deep discounts of all generics.”