Can Wal-Mart save the American health care system?
September 21st, 2006 by 
David E. Williams of the Health business blog
Can Wal-Mart save the American health care system?
No one seems to have an answer to high and rising health care costs. A parade of solutions –managed care, disease management, health care IT, pay for performance, consumer directed care and so on– are tried, but nothing really works. Costs continue to rise at double digit rates with no end in site.
A big problem with health insurance now is that it covers everything, from the most routine items like checkups to the most expensive, like transplants. That coverage for everything has a way of distorting the market. If car insurance paid for gasoline, oil changes, wiper blades and car washes it would likely dull consumers’ shopping skills and boost costs by adding an administrative layer. Initiatives like “consumer driven auto care” wouldn’t change things that much.
Wal-Mart seems to have a strategy that could fundamentally shift the market: it’s making routine items cheap enough that insurance for them isn’t even worth the hassle. Today’s announcement of $4 generics is an important step in that direction. It makes the cash price lower than the typical co-pay. In-store clinics with low prices are the other component.
Why did Wal-Mart’s generic price announcement put such a dent in the stocks of pharmacy retailers and mail order players? It’s because those companies have been making very juicy profits on generics while payers weren’t noticing. Because of the dynamics of the insurance market, payers focus on getting patients switched over to generics from high-priced branded products. They haven’t really paid attention to the fact that while generic wholesale prices have been sliding due to the entry of many new players, prices haven’t been dropping at the retail level and payers haven’t been ratcheting down reimbursement.
Generics are a great market for Wal-Mart to play in because it can use its traditional supply chain management, scale and negotiating expertise. Even before today’s announcement Wal-Mart was selling many generic drugs below its competitors’ cost of acquisition, just like it does in other segments. It’s true that only cash customers –a small segment of the market– are directly affected by the announcement. But the long-term implications are significant.
In-store clinics are the other area where we can expect some serious moves by Wal-Mart. The typical independent physician office is a lot less efficient than the mom and pop stores Wal-Mart has buried. Physicians aren’t exactly like store owners, but in some parts of the country they will have plenty to fear as Wal-Mart (and maybe others) pull away patients for routine services and minor ailments. That will encourage patients to drop coverage for routine services (if they can) and enable health plans to set lower rates. I wouldn’t be at all surprised to see Wal-Mart start to hire significant numbers of doctors and put them to work in its stores.
If Wal-Mart can spur significant reductions in the cost of routine services and products, it will go a long way to cutting overall costs. It may also enable the emergence of appealing catastrophic insurance policies.
Posted in Economics, Pharma | 
10 Comments »
September 23rd, 2006 at 7:54 am
I think the trend you described could be accelerated if insurance plans took the following simple actions: (1) change the current co-pay from flat dollar (ie, $10) to flat dollar or actual cost of the drug, whichever is less and (2) proactively make members aware when such low cost alternatives as $4 generics are available and where.
Personally, I would rather see a more widespread shift to percentage of the cost co-pay from flat dollar in order to encourage differential pricing among retailers for higher cost brand name drugs. Percentage of the cost co-pay is one of the things that I think Medicare Part D actually got right.
September 24th, 2006 at 9:39 pm
In-store clinics sounds logical and follows CVS et al. But hard to see how Wal-Mart would be allowed into the insurance market given the trouble they had with the ILC in Utah.
BTW, I posted two analyses of the Wal-Mart situation on my blog:
http://drugchannels.blogspot.com/2006/09/wa-marts-generic-pricing-will-trigger.html
http://drugchannels.blogspot.com/2006/09/reconsidering-wal-mart-but-just-little.html
Adam
January 19th, 2007 at 3:32 pm
[...] I’d like to see insurance for routine care done away with. Instead, allow a more efficient market to develop where people pay directly and doctors don’t spend so much trying to collect payment from third parties. Walmart, Walgreen, CVS and others are starting down this path. Physician practices could begin to do the same. If we hope to have affordable care, this is a more promising path than spreading insurance around to everyone. +del.icio.us +Digg it [...]
January 19th, 2007 at 5:28 pm
[...] I’m sure they have some great ideas, but I wish he could have hinted a little at how they’ll work. Hopefully they’re not proponents of a system that will be too comprehensive and cost too much. It just sounded a bit too cheesy and lacked a lot of substance… Legislation will be introduced this year to cover all children. Our children deserve no less! Then the coalition will present a new system of health care for all to the Health Reform Commission. We can achieve health care for all in Colorado. We must achieve health care for all. We will achieve health care for all! [...]
April 24th, 2007 at 2:55 pm
[...] As I’ve written on the Health business blog, I’m hopeful that Wal-Mart can save the US health care system by making it unnecessary to have health insurance for routine expenses. I’m looking forward to the speech. [...]
April 24th, 2007 at 3:10 pm
[...] As I’ve written on the Health business blog, I’m hopeful that Wal-Mart can save the US health care system by making it unnecessary to have health insurance for routine expenses. I’m looking forward to the speech. [...]
March 21st, 2008 at 3:18 pm
[...] When Wal-Mart introduced $4 generics, most analysts played down the impact. After all it only affected certain products and wouldn’t matter to people with insurance. I’m happy to say that since the time of the announcement I’ve noted the potential implications (Can Wal-Mart save the American health care system?): [...]
July 15th, 2009 at 6:13 am
I agree completely that Walmart has the potential to deliver a free market solution to healthcare. This could mean the best healthcare at the lowest prices in the world. Walmart has already demonstrated that they know how to deliver quality products at the least cost. What other institution in the US can say that ? Neither the government, hospitals, nor insurance companies have any expertise in delivering quality products at low prices.
August 26th, 2010 at 8:02 am
[...] This item originally ran on September 21, 2006. I saw the $4 generic announcement as a big deal at the time, and still do. If you’d like to leave a comment please do so on the original post. [...]
August 26th, 2010 at 9:10 am
[...] This item originally ran on September 21, 2006. I saw the $4 generic announcement as a big deal at the time, and still do. If you’d like to leave a comment please do so on the original post. [...]