An interesting item in this week’s news: Wal-Mart has announced plans to make over 300 generic drugs available to the public for $4 a month. Wal-Mart plans to roll out the new pricing soon in their Tampa, Florida stores, but will eventually expand it to every store in the United States. (In a later development, Target stores pledged to match Wal-Mart’s pricing).
Behold the latest turn in the serpentine path of health care in the United States. It is also the opening foray of deep-discount retail into the medical business: One might think of it as Wal-Mart’s version of the McDonald’s 99-cent menu. Although low drug prices are always welcome, there are cynical ways to read this. For example, this could be Wal-Mart’s effort to deflect criticism from the fact that the majority of its employees do not get health insurance. Or this effort could share qualities with the 99-cent menu gambit – people will come in for the great deal and end up walking out with a more expensive (and profitable) alternative.
But setting cynicism aside, there is something else worth considering. Does this dramatic markdown suggest that the free market is finally influencing health care costs, or is it a window into our health care future, one that may be less happy than we would like it to be?
It is easy to see how this could be construed as a great victory for free markets. A huge retailer strikes a mega-deal with generic manufacturers to buy 300 common medications at a deep discount. It then passes the savings on to patients. Low prices for medical care is a good thing, and the goodness of it should not be discounted (no pun intended).
On the other hand, I can see long-term effects on the horizon that may not be so positive. Patients start showing up at their doctor’s offices asking to have all their medications switched to the Wal-Mart $4 plan. Then, the next step: HMOs start adapting Wal-Mart’s $4 menu as their own preferred drug formulary. This would be an interesting and dramatic change. Suddenly the marketing department at Wal-Mart, Inc. becomes a major player in U.S. health care policy.
In setting this pricing, Wal-Mart has placed itself in what may be an impregnable position in the pharmacy retail business. I cannot in my experience ever remember a patient of mine ever filling a prescription for less than $4. It may be that a few large drugs store chains will be able to match this pricing, but no one will undercut it. Mom-and-pop pharmacies will rapidly disappear in this environment, leading to a steady consolidation of the pharmacy business.
This consolidation, which is already underway, will accelerate under the pressure of Always The Low Price. As the number of retail pharmacies dwindle the market will be increasingly dominated by fewer and fewer companies. Over time, possibly over very short time, a retailer that was never a major player in health care before could end up in control of the national market on drug sales, and possibly setting the pace for HMO, Medicaid, and Medicare formularies to boot.
Insurance companies save money by creating drug formularies, or lists of medications they prefer their patients to take. Insurers negotiate with manufacturers to get a cheaper price, or identify drugs with the lowest cost, make up a list of thes drugs, and then use financial incentives to get patients to buy the drugs on the list. Usually this is done by requiring patients meet a higher co-payment for drugs not on the list. (Sometimes it is also done by burying the prescribing doctor in so much paperwork to get approval for drugs that are not on formulary that the doctor just gives up and prescribes what the insurance company wants.)
With the $4 menu, Wal-Mart has created a ready-made generic formulary. Insurers can encourage their patients to use drugs on the Wal-Mart list by offering a copay of pennies, or even offering the medication for free. Because Wal-Mart has gone through the hard work of making up the list, negotiating wholesale prices, and setting the retail pricing, all insurance companies have to do is adapt the list. For insurers, simply picking up the list without question is so easy and so profitable, that there is no reason insurance companies will not do it.
So what’s the problem, critics may ask. Cheaper drugs for more people. The American way. But there is a possible problem. If Wal-Mart’s list becomes everybody’s list, that means Wal-Mart is setting national health care policy. Put another way, someone at Wal-Mart will be deciding if your blood pressure will be treated with atenolol or metoprolol. Or if, after a root canal, your dentist will send you home with Lortab or Darvocet. In that light, it may matter just a little.
Am I overreacting? Maybe, but I can offer an historical comparision — the Panic of 1907. Prior to the Federal Reserve Act of 1913, the United States had no central bank. Before the Federal Reserve Bank, the U.S. monetary system – and by extension, the economy – was controlled largely by a combination of private banks. In 1907 the U.S. stock market entered a major selling crisis and there was great concern that the country would plunge into a recession. J. Pierpont Morgan, the legendary banker, stepped in and lined up bank loans and credit to stabilize staggering companies, thus preventing a major depression.
The Federal Reserve Bank was established in response to the Panic of 1907. When American politicians realized that the stability of the U.S. economy depended on the goodwill of a small group of bankers to bail it out, they pushed for a federal bank. This kept the stability of the money supply out of the hands of people like J.P. Morgan and under the control of the people.
There was not necessarily anything wrong with what Morgan did. The U.S. economy was in deep trouble, and he stepped in to avert a disaster. But for the leaders of the day, the Panic of 1907 raised an important question: Do we want to depend on a small cadre of private bankers for the stability of the national economy?
I think the heath care system in the U.S. is much as the banking system was in 1907. It is controlled by a combination of public and private interests, and specific private interests have a lot of control. That is what concerns me about the Wal-Mart announcement. I have nothing against Wal-Mart’s action in itself — in fact, many people stand to benefit from cheap medications. But it is easy to foresee that a huge retailer like Wal-Mart, or a combination of retailers including Wal-Mart, Target, and Walgreens, could gain tight control the generics market with programs like the $4 generic plan. They could, as a group, strongly influence what medications millions of Americans take. This influence would be subtle, hardly as dramatic as a national banking crisis. But as any educated observer knows, sometimes very subtle influences can be the most profound.
We need to be very careful about underestimating this influence. Most people in 1907 had no idea one man like J.P. Morgan had the power to avert a major stock market collapse. They were shocked when Morgan emerged from the shadows and set the entire financial industry back on its feet, almost single-handedly. We need to do some careful thinking about how this lesson applies to us; and we should do it now, before it becomes a problem, rather than after.
I pose the larger question again: To what degree do we want large corporations setting health care policy in this country?
Behold the latest turn in the serpentine path of health care in the United States. It is also the opening foray of deep-discount retail into the medical business: One might think of it as Wal-Mart’s version of the McDonald’s 99-cent menu. Although low drug prices are always welcome, there are cynical ways to read this. For example, this could be Wal-Mart’s effort to deflect criticism from the fact that the majority of its employees do not get health insurance. Or this effort could share qualities with the 99-cent menu gambit – people will come in for the great deal and end up walking out with a more expensive (and profitable) alternative.
But setting cynicism aside, there is something else worth considering. Does this dramatic markdown suggest that the free market is finally influencing health care costs, or is it a window into our health care future, one that may be less happy than we would like it to be?
It is easy to see how this could be construed as a great victory for free markets. A huge retailer strikes a mega-deal with generic manufacturers to buy 300 common medications at a deep discount. It then passes the savings on to patients. Low prices for medical care is a good thing, and the goodness of it should not be discounted (no pun intended).
On the other hand, I can see long-term effects on the horizon that may not be so positive. Patients start showing up at their doctor’s offices asking to have all their medications switched to the Wal-Mart $4 plan. Then, the next step: HMOs start adapting Wal-Mart’s $4 menu as their own preferred drug formulary. This would be an interesting and dramatic change. Suddenly the marketing department at Wal-Mart, Inc. becomes a major player in U.S. health care policy.
In setting this pricing, Wal-Mart has placed itself in what may be an impregnable position in the pharmacy retail business. I cannot in my experience ever remember a patient of mine ever filling a prescription for less than $4. It may be that a few large drugs store chains will be able to match this pricing, but no one will undercut it. Mom-and-pop pharmacies will rapidly disappear in this environment, leading to a steady consolidation of the pharmacy business.
This consolidation, which is already underway, will accelerate under the pressure of Always The Low Price. As the number of retail pharmacies dwindle the market will be increasingly dominated by fewer and fewer companies. Over time, possibly over very short time, a retailer that was never a major player in health care before could end up in control of the national market on drug sales, and possibly setting the pace for HMO, Medicaid, and Medicare formularies to boot.
Insurance companies save money by creating drug formularies, or lists of medications they prefer their patients to take. Insurers negotiate with manufacturers to get a cheaper price, or identify drugs with the lowest cost, make up a list of thes drugs, and then use financial incentives to get patients to buy the drugs on the list. Usually this is done by requiring patients meet a higher co-payment for drugs not on the list. (Sometimes it is also done by burying the prescribing doctor in so much paperwork to get approval for drugs that are not on formulary that the doctor just gives up and prescribes what the insurance company wants.)
With the $4 menu, Wal-Mart has created a ready-made generic formulary. Insurers can encourage their patients to use drugs on the Wal-Mart list by offering a copay of pennies, or even offering the medication for free. Because Wal-Mart has gone through the hard work of making up the list, negotiating wholesale prices, and setting the retail pricing, all insurance companies have to do is adapt the list. For insurers, simply picking up the list without question is so easy and so profitable, that there is no reason insurance companies will not do it.
So what’s the problem, critics may ask. Cheaper drugs for more people. The American way. But there is a possible problem. If Wal-Mart’s list becomes everybody’s list, that means Wal-Mart is setting national health care policy. Put another way, someone at Wal-Mart will be deciding if your blood pressure will be treated with atenolol or metoprolol. Or if, after a root canal, your dentist will send you home with Lortab or Darvocet. In that light, it may matter just a little.
Am I overreacting? Maybe, but I can offer an historical comparision — the Panic of 1907. Prior to the Federal Reserve Act of 1913, the United States had no central bank. Before the Federal Reserve Bank, the U.S. monetary system – and by extension, the economy – was controlled largely by a combination of private banks. In 1907 the U.S. stock market entered a major selling crisis and there was great concern that the country would plunge into a recession. J. Pierpont Morgan, the legendary banker, stepped in and lined up bank loans and credit to stabilize staggering companies, thus preventing a major depression.
The Federal Reserve Bank was established in response to the Panic of 1907. When American politicians realized that the stability of the U.S. economy depended on the goodwill of a small group of bankers to bail it out, they pushed for a federal bank. This kept the stability of the money supply out of the hands of people like J.P. Morgan and under the control of the people.
There was not necessarily anything wrong with what Morgan did. The U.S. economy was in deep trouble, and he stepped in to avert a disaster. But for the leaders of the day, the Panic of 1907 raised an important question: Do we want to depend on a small cadre of private bankers for the stability of the national economy?
I think the heath care system in the U.S. is much as the banking system was in 1907. It is controlled by a combination of public and private interests, and specific private interests have a lot of control. That is what concerns me about the Wal-Mart announcement. I have nothing against Wal-Mart’s action in itself — in fact, many people stand to benefit from cheap medications. But it is easy to foresee that a huge retailer like Wal-Mart, or a combination of retailers including Wal-Mart, Target, and Walgreens, could gain tight control the generics market with programs like the $4 generic plan. They could, as a group, strongly influence what medications millions of Americans take. This influence would be subtle, hardly as dramatic as a national banking crisis. But as any educated observer knows, sometimes very subtle influences can be the most profound.
We need to be very careful about underestimating this influence. Most people in 1907 had no idea one man like J.P. Morgan had the power to avert a major stock market collapse. They were shocked when Morgan emerged from the shadows and set the entire financial industry back on its feet, almost single-handedly. We need to do some careful thinking about how this lesson applies to us; and we should do it now, before it becomes a problem, rather than after.
I pose the larger question again: To what degree do we want large corporations setting health care policy in this country?