Tuesday, September 26, 2006

Wal-Mart and drugs, revisited

Walgreen, while announcing their quarterly results, commented on Wal-Mart's plan to reduce the price of some generic drugs:
"Rick Hans, Walgreen's director of finance, said during the call that he believed Wal-Mart's low-price plan for some generic drugs 'won't significantly impact [Walgreen's] business.'

The Wal-Mart plan covers 291 drugs, while Walgreen pharmacies stock about 1,800 generic drugs, he said.

'About 95 percent of our pharmacy patients have prescription insurance coverage and they are only responsible for a small co-pay,' Hans said.

He added that for the drugs that Wal-Mart will sell for $4, the initial average co-pay at Walgreen is $5.30, and $3.18 for Medicare Part D prescription coverage."
This nicely - although unintentionally - demonstrates a key part of what is wrong with the way we pay for a lot of our health care. Hans is comparing the total cost that Wal-Mart is charging with the portion of Walgreen's price that consumers have to pay (i.e. the co-pay). What he is obviously ignoring is the additional amount, above the co-pay, that the insurance company or the government is paying to Walgreen as well.

Separate those who make the decision from those who pay for the decision, and you shouldn't be surprised that costs tend to rise. The interesting thing to watch here will be if insurance companies start to either require or encourage (perhaps through the waiving of co-pays?) their members to use Wal-Mart where the program is available. Given that type of development, will Walgreen then drop its prices as well? It certainly hopes not:

"'Our convenience, locations and services have proven to be bigger factors for our patients than a few dollars in price difference,' he said."
That is a reasonable and - in my mind - rather optimistic hypothesis. It is also one that seems about to be tested.

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