Wal-Mart solidifying claim as health leader

BENTONVILLE, ARK. —No retailer has felt the impact of rising health care costs in recent years more than Wal-Mart. With more than 1 million employees in the United States alone, Wal-Mart’s cost structure was impacted by the twin forces of escalating health care costs and pressure placed on the company to improve affordability and expand coverage to more of its workers.

Now the tables have turned. Wal-Mart is exerting a tremendous impact on the health care industry, improving its financial performance and at the same time positioning itself as an agent of change by pressing forward with aggressive prescription drug pricing programs.

The latest example came earlier this month when Wal-Mart amended its $4 generic drug program that has roiled the marketplace since its introduction in September 2006. In addition to continuing to offer a 30-day supply of more than 350 generic drugs, Wal-Mart will also allow customers to purchase a 90-day supply of most of those medicines for $10. In addition, medicines frequently used by women for the treatment of osteoporosis, breast cancer and hormone replacement were added to a list of drugs Wal-Mart sells for $9 for a 30-day supply. The company even extended the flat-rate pricing philosophy to the nonprescription category, where approximately 1,000 products, primarily private labels, are sold for $4. That’s roughly one-third of the retailer’s entire assortment of nonprescription products.

“This expansion comes at a time when families need it most,” said Dr. John Agwunobi, president of WalMart’s professional services division, during a conference call. Agwunobi is a medical doctor Wal-Mart lured away from the U.S. Department of Health and Human Services last year to assume oversight of its health care businesses. He filled a slot vacated by Bill Simon who was promoted to coo of Wal-Mart’s U.S. stores division shortly after he implemented the $4 program.

According to Simon and Agwunobi, since the introduction of the $4 program, Wal-Mart’s customers have saved more than $1 billion, a figure that is a reflective of WalMart’s old price compared to the new $4 price, and does not factor in the response of any competitors who have matched the $4 offer or introduced other value pricing schemes.

“I don’t know of any other program, government or non-government, that has actually removed costs from the system,” Simon said. “We are not trying to shape public policy, we are just doing what we do best and that is taking costs out of the system and passing the savings on to the customers.”

Since the program’s inception, Wal-Mart has taken the moral high road and positioned itself as a difference maker in the health care system, whose efforts are guided by a philosophy to save customers money so they can live better. That message has clearly served the company well in the minds of consumers and won it some favorable media coverage, but the bottom-line impact is less clear. Wal-Mart shares little information about its pharmacy business and doesn’t disclose sales beyond noting in its annual report filing with the Securities and Exchange Commission that a category defined as “health and wellness” accounted for 9% of the U.S. Stores division’s sales of $239.5 billion for the fiscal year ended Jan. 31, 2008.That is the same percentage as the company reported for the fiscal year ended Jan. 31, 2007, when the Stores division’s sales were $226.3 billion.

When Wal-Mart held its annual analysts meeting last fall, at which time the $4 program had been in place for a year, Agwunobi disclosed the company’s prescription unit volumes had increased 30% year-to-date, but that only 17% of the retailer’s customers who have prescriptions filled had them filled at Wal-Mart. The company hasn’t updated those figures since that meeting, but on a recent conference call,Agwunobi did not say that the 17% penetration rate is now significantly higher.

That’s likely due to the fact that it is impossible to set foot inside a Wal-Mart store and not be reminded of the pharmacy programs. Extensive signage throughout stores is intended to encourage those customers who may be having prescriptions filled elsewhere to take advantage of WalMart’s pharmacy prices.

According to Simon, even though Wal-Mart disclosed pharmacy markdowns of more than $1 billion, the $4 program is accretive and continues to be very positive as Wal-Mart has maintained pharmacy margins. “When our volume goes up, we are able to buy better; when we buy better and we move it better, we become more efficient and we pass those savings on to our customers,” he said.

Amending the program to add a 90-day supply for $10 could actually improve the financial performance and productivity of the pharmacy. Wal-Mart has indicated that it didn’t require additional labor to implement the program initially and the addition of the 90-day offer will actually improve the capacity of its pharmacies without additional labor expense.

“It offers us the ability to add capacity to our pharmacies without adding people or costs. When you go from filling a prescription every 30 days times three, to filling a prescription once in the course of 90 days, it adds significant capacity as we continue to grow,” Agwunobi said.