Rerun: Can Wal-Mart save the American health care system?

The Health Business Blog is on summer vacation until Labor Day, and will be re-running some classic posts from now till then.

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.

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.

If you’d like to leave a comment please do so on the original post.

August 26, 2010