Wal-Mart + Caterpillar: The Future of PBM & Pharmacy?

Implications: Wal-Mart Stores (WMT) announced an innovative new program with Caterpillar (CAT) that provides $0 co-pays on 2,500 generic drugs for 70,000 beneficiaries (employees, retirees, spouses, dependents). As I see it, the deal does not represent a direct frontal assault on PBMs such as Express Scripts (ESRX) or Medco Health Solutions (MHS). Instead, Wal-Mart is subtly undermining the PBM’s economic model, which is overly dependent on margins from generic drugs by mail. Wal-Mart’s program highlights these “excess” margins by offering an alternative channel choice. I’m also intrigued by the competitive comparison with CVS Caremark (CVS). Many of CVS Caremark's new benefit options try to create channel neutral choices (my terminology) within a restricted retail network. For example, Maintenance Choice is their drug benefit option that lets patients choose a 90-day supply from mail order or a local CVS retail outlet at the same cost or co-pay.

Analysis: Note that Wal-Mart is not giving these drugs away, despite the Reuter’s statement that Wal-Mart “will fill certain generic drugs for free.” Only the co-pay for beneficiaries is $0. Caterpillar’s health plan still pays for the drugs, but now negotiates directly with Wal-Mart rather than using a PBM intermediary.

This plan is offers a “restricted network” trade-off:
•    Give your beneficiaries freedom of pharmacy choice and pay $X for drugs.
•    Restrict choice to a more efficient channel, e.g., Wal-Mart pharmacies, and pay less than $X.

Restricting the network to Wal-Mart pharmacies won’t work in many geographies, limiting the impact on urban/suburban chain pharmacies such as Walgreens (WAG) or Rite-Aid (RAD). However, there are 12 Wal-Mart stores near the Peoria, IL, headquarters of Caterpillar, making it a more realistic option. View a map of WMT stores in Peoria.

See Walgreens’ $4.33 Surrender to Wal-Mart (Council site) for more on the retail pharmacy impact of Wal-Mart.