The Wal-Martization of
Healthcare: The Growing
Role of Value for Consumers

By Jane Sarasohn-Kahn, Health Economist and Forecaster, THINK-Health

The news that Wal-Mart will discount generic drug prescriptions to $4 is yet another signpost on Americans’ migration toward consumer-directed healthcare. While forecasts for consumer-directed care have been plentiful and bullish, this marketplace wild card directly impacts pharmaceutical marketing. As other pharmacy retailers fall domino-like into Wal-Mart’s discount tactic, healthcare marketers should realize the importance of this event, understand its implications and plan for market impacts: consumer perception of the value of pharmaceutical drugs; the demand for transparency; and consumers’ retail mind-set.

Brave New World: Consumer-Directed Healthcare

To place Wal-Mart’s move in a larger context, let’s take a step back to see the landscape: Americans are being thrust into a new healthcare environment referred to as consumer-driven healthcare (CDHC). The objective of CDHC is to help plan sponsors – employers, who foot the bill for private-sector employees, and the public sector (federal and state governments) – stem the rising costs of healthcare. The tactics of CDHC include having consumers put more financial “skin in the game.” Thus, over the past year, a growing number of employees covered by health insurance are paying more out of pocket for health premiums, co-pays for office visits and greater co-pays for prescription drugs.

The latest report from Kaiser Family Foundation on employer-sponsored health benefits found that insured workers are faced with increasing differences between tiers. In 2006, generic drugs (first-tier) are on average an $11 co-pay; preferred drugs are $24; and the third-tier, non-preferred drug co-pay is $38. In 2001, the difference between tiers two and three was $5; in 2006, the difference is $14.

The differences between generic drugs and non-preferred are dramatic: In 2001, the difference was $12; in 2006, the difference is $27. This difference will be greater when the consumer can access a $4 generic, when available, at a discount store, where the consumer will be happy to spend that $27 “savings” on other consumer goods (a notion clearly understood by all retailers).

Coupled with increased financial responsibility for healthcare is, theoretically, greater access to information that enhances consumers’ ability to make rational healthcare decisions. In the early days of CDHC, this information has been, at best, fragmented and often low quality. Nonetheless, the march toward CDHC is inevitable, at least for the next several years as employers seek to better manage their costs in an ever-globalizing marketplace.

Wal-Mart in Healthcare

Thus, Wal-Mart’s $4 Rx program did not come out of nowhere. The first trillion-dollar corporation, Wal-Mart disrupted toys and food, and is aiming squarely at pharmacy as a category killer. According to the latest available data, prescription sales at Wal-Mart account for 4 percent of total revenues: In the United States alone, Rx revenues rose above $9.1 billion in 2004. The company is now the industry’s fourth-largest pharmacy retailer behind Walgreens, CVS and Rite Aid.

As Americans take more interest in their personal health, they’re also spending more money in the health and beauty aisles. Wal-Mart’s 176-million-customers-per-week metric means the company also extracts major dollars from consumers’ pocketbooks for OTC medicines, vitamins/minerals/supplements, and the growing array of health-oriented foodstuffs and beauty aids incorporating health attributes (such as SPFs in moisturizing creams on the expanding cosmeceutical shelf).

The $4 Domino

Wal-Mart’s fourth position in retail pharmacy makes it a considerable market force. The company announced that it would introduce the $4 generic drug program first in Florida – where 20 percent of the population is over age 65. Just days later, the company announced that it would roll out the cheap generics program nationally by early 2007, beginning with 14 more states.

The program has become a domino in the pharmacy marketplace. Target quickly followed, matching Wal-Mart’s pricing.

While the fact is that the Wal-Mart program generally covers only older, generic products such as Fluoxetine (antidepressant), Lisinopril (ACE inhibitor) and Atenolol (beta blocker), these are very commonly prescribed medications in a wide range of therapeutic categories. People will save money, and it’s also great PR for the retailers sponsoring the programs.

Here’s something value-conscious parents will really like: Meijer and Giant Eagle grocery chains announced that they will fill, without charge, prescriptions for seven generic oral antibiotics. The programs cover at least one antibiotic from each major antibiotic classification. They make up at least 70 percent of the generic antibiotic prescriptions for children that Meijer fills, including Amoxicillin, Cephalexin, SMZ-TMP, Ciprofloxacin, Penicillin VK, Ampicillin and Erythromycin.

Latest to join the discount fray is Medco, the first Pharmacy Benefit Manager (PBM) to come out with its version of a low-cost generics plan, Generics First – featuring a $10 co-payment for a 90-day supply of generic drugs. The public affairs director of Medco said, “We believe our job is to get the generic drugs out there.”

People Like Generics

The fact is that Wal-Mart and Target have made going cheap, chic. Witness the number of Lexus and Volvo SUVs in the parking lots of these discount stores, and you begin to understand that the search for value crosses all socio-economic classes.

According to a recent Wall Street Journal online healthcare poll, the low-cost generic drug programs that Wal-Mart, Target and Kmart are launching will attract “a big share” of the market for prescription drugs. The survey found that while most adults who buy prescription drugs currently do so at a chain drug store such as Walgreens, CVS or Eckerd, many consumers would migrate to the big discounters, attracted by the low-cost generics plans.

One-half of those who purchase prescription drugs said they would be likely (17 percent), very likely (20 percent) or absolutely certain (13 percent) to fill their prescriptions at the megastores, compared to 26 percent who said they are not at all likely to do so.

The poll found that 93 percent of American adults purchase prescription drugs. Of those, the preference for generic over brand-name drugs is already part of the consumer landscape. Two-thirds (68 percent) of those who purchase prescription drugs would choose generic more often than brand-name drugs.

Brand-name drugs that account for about $30 billion in annual sales are expected to lose patent protection over the course of the next two years. Consumers will see themselves as benefiting from newer drugs going off patent such as Ambien, used to treat insomnia; Coreg, for heart failure; and Norvasc, a blood-pressure medication that was No. 10 among last year's top-selling drugs. Those to benefit most will be the uninsured and those covered by the Medicare Part D drug benefit.

Slowing Down the Approach of the Donut Hole

Seniors who have opted in to the Medicare Part D prescription drug program are learning about the donut hole – that is, the coverage gap between $2,250 and $5,100. In the first year of Medicare Part D implementation, it’s clear that many seniors are opting for generics, where available, to help control their out-of-pocket costs up to the gap. Mail order houses, driven by savvy CFOs at pharmacy benefit management companies, are also providing incentives for enrollees to choose generics where available.

Based on the first nine months of Part D’s going live, most plans have implemented aggressive prior authorization and step-therapy requirements. The Centers for Medicare and Medicaid Services have given plans freedom to design drug formularies, many of which have developed multi-tiered pricing strategies that are driving seniors to generic drugs versus the more expensive brands.

While seniors enrolled in Part D have a reason to better understand drug prices, younger consumers, too, are demanding more price transparency.

A Growing Demand for Rx Price Transparency

There are many places the curious consumer can go to find pricing information for prescription drugs. For years, health policy analysts have complained that there wasn’t a “Consumer Reports” for healthcare. Well, now there is. One of the most comprehensive drug price sources for consumers is Consumer Reports Best Buy Drugs, a Web site that, unlike Consumers Union’s (CU) other products, is absolutely free of charge. Consumers can access reports on a broad range of Rx drug topics, from ACE inhibitors and antidepressants to statins and triptans. The reports compare the drugs, both branded and generic, in terms of effectiveness, price and value. In these reports, the more expensive drug can be considered a “Consumer Reports Best Buy” if CU’s consulting physician panel agrees that the drug is more efficacious.

The health information space has also created opportunities for entrepreneurial new players, such as Subimo (which as of this writing was slated to be acquired by WebMD for $60 million in cash and stock). Among this company’s many health information modules is PharmaAdvisor, which helps consumers decide whether to buy a generic or branded drug. Health plans and self-insured employers license PharmaAdvisor and operate it as part of a health benefit portal for consumers to use when they are prescribed a particular drug by their physician. By accessing the Subimo content, the consumer is prepared in advance of purchasing the drug and knows the price to be paid for either the prescribed brand, competing brands or the generic, based on his or her health plan’s formulary. This prevents consumer “sticker shock” at the pharmacy point-of-purchase.

Citizens in New York state can take advantage of a drug pricing Web site spearheaded by activist Attorney General Eliot Spitzer. The Web site is based on drug pricing information for 150 of the most commonly prescribed drugs provided through surveys of thousands of pharmacies operating in the state. The project found that the retail price for commonly prescribed drugs can vary greatly across the state and even within the same community, with the highest surveyed price as much as 17 times the lowest surveyed price.

It’s the Value, Stupid

The growth of consumer-directed healthcare is driving consumers to seek information on price. But value-conscious consumers – like the physicians who consult with Consumer Reports Best Buy Drugs – can also be attracted to various attributes in a product. Why do so many consumers favor an Apple iPod versus other less expensive MP3 brands? Why do millions of people still purchase Procter & Gamble’s Tide detergent when Consumer Reports claims the Costco Kirkland brand is equally effective and much less expensive per laundry load?

Why will a consumer opt to buy a branded pharmaceutical drug versus a generic when a generic might be available? What is the value-add in the eyes of the consumer? The answer will lie at the marginal cost and marginal benefit as perceived by the consumer. Perhaps your product has a proprietary delivery mechanism that makes administration of a drug more convenient. Perhaps your product can be formulated with a tasty flavor (think: Starbucks tie-in?). Consider wraparound services you can offer the consumer to help her manage a tough chronic condition. You then create trust, a bond, and a true value to that consumer willing to pay more for your product.

A consumer-centric mind-set has become a critical success factor for healthcare, and particularly for the pharmaceutical industry. The value-conscious consumer will only grow more so as he wrestles with higher gas prices, economic uncertainty and global unrest. At the same time, we’ve entered a kind of market surge of more than $45 billion in branded medications going generic through 2010. Pharmaceutical manufacturers must understand the demands of consumers and meet them where and how they want to be met. I’m confident that Wal-Mart, Target and P&G can do this; can Big Pharma?


Jane Sarasohn-Kahn, MA, MHSA, is a health economist and forecaster. She works with healthcare stakeholders in the U.S. and Europe. Jane founded THINK-Health, a strategic health consultancy, in 1992 after spending 10 years as a healthcare consultant with firms in the U.S. and Europe. She is a frequent speaker and writer on the subjects of health policy, health economics, and scenario planning in healthcare. She can be reached at jane@think-health.net.