Drug prices: Wal-Mart/Caterpillar plan may drive down employer health-care costs

Drug prices: Wal-Mart/Caterpillar plan may drive down employer health-care costs - Program with Caterpillar aims to reduce employer health-care costs while increasing traffic to stores
By Sandra M. Jones
Copyright © 2009, Chicago Tribune
March 28, 2009
http://www.chicagotribune.com/business/chi-sat-wal-mart-pharmacy-mar28,0,1451349.story


Diapers. Barbies. Lettuce. Now medicine.

Wal-Mart Stores Inc., the world's largest retailer, is aiming its economic might at the health-care industry with a program that lowers prescription drug prices for employers. A pilot program with Caterpillar Inc. to streamline the way drugs are purchased has shown enough promise that Wal-Mart is in talks with several other firms to do the same, the companies said Friday.

"We hope we will drive down costs for the entire health-care industry," Michael Struhs, director of business development at Wal-Mart, said during a Webcast hosted by the Pharmacy Benefits Management Institute. "That is what we do. We operate efficiently and that allows us to lower costs, and those savings are passed on to our customers."

The discount chain has already shaken up the retailing landscape in recent years, rising to become the biggest seller of apparel, groceries and toys. But it is hungry for more growth and sees a chance to bring its extraordinary size and clout to bear on rising health-care costs.

The Wal-Mart contract waives the $5 co-payment for Caterpillar employees on any generic drugs if they purchase them at a Wal-Mart or Sam's Club pharmacy. By giving workers an incentive to fill prescriptions at Wal-Mart rather than another pharmacy, the retailer not only beefs up its pharmacy business, but also attracts more shoppers into the store, where they might make other purchases.

The most radical aspect of the test, however, is the threat of unraveling how the health-care industry buys and sells prescription drugs.

Under the initiative that began in October, Peoria-based Caterpillar has a contract to buy prescription drugs for employees directly from Wal-Mart and has a third-party audit system in place to make sure that prices aren't inflated.

That process contrasts with the way most employers purchase drugs, through a middleman, known as a pharmacy benefit manager, or PBM. The pricing system is complicated and filled with opportunities for handlers to inflate prices, experts say.

For example, the markup on prescription drugs starts with the average wholesale price, a figure similar to a list price on a car. Caterpillar was fed up with rising health-care costs, said Todd Bisping, pharmacy benefits and informatics manager at the construction- and mining-equipment manufacturer, which estimated there was as much as 20 percent waste in the supply chain that was "not adding value, but just higher prices," he said on the Webcast.

"As I talk to other companies there's a lot of confusion and complexity in this," he said. "And I just think a lot of people don't understand it. The easiest thing to do is look at the number the PBMs spit out. As more and more companies realize we just can't blindly assume what's going on is best for us, they're going to start digging into it and find the same thing."

He said others are examining Caterpillar's program with Wal-Mart.

"I have talked to multiple large companies who called me because they are interested in learning more about this concept," Bisping said.

What Wal-Mart is doing isn't the only way to lower prescription drug prices, said Michael Polzin, spokesman for Deerfield-based Walgreen Co.

"We're going down a similar path by going directly to employers, but we have a more comprehensive offering," he said. Walgreens started a program in January offering lower drug prices, health and wellness clinics, and retail clinics on corporate campuses.

The price Wal-Mart charges Caterpillar for drugs is based on the price it paid the drugmaker, plus a markup for overhead and profit. Caterpillar doesn't know the price Wal-Mart paid the drugmaker but relies on an independent auditor to make sure the retailer begins with the actual price it paid, Bisping said.

Caterpillar declined to disclose how many of its 70,000 employees and retirees are using the program, but the company said it is more than expected. Caterpillar still has a contract with its PBM for the business of handling claims, an arrangement it intends to keep, Bisping said.

Wal-Mart set off a wave of price competition in 2006 when it began offering a range of generic drugs for $4 a month.

smjones@tribune.com