Tuesday, October 02, 2007

Wal-Mart's Gain is not Walgreen's Pain



Walgreen’s Pain




Wal-Mart's Math


Still not sure? Then let’s do some math!










  1. Yes, there is margin there but I would disagree with your comment that they have minimal dispensing cost. Depending on who you believe the cost s of dispensing range from $4-$ per RX, and that would wipe out the margin.

  2. Actually, my comments above do consider Wal-Mart's *incremental* costs of dispensing, which are not equivalent to the average costs you are citing.

    A simple numerical example will show what I mean.

    Assume a pharmacy has 1,000 scripts per week and fixed pharmacy costs (rent, salaries, etc) of $10,000. The average dispensing cost is $10 per script, excluding ingredient costs.

    Now let’s say that the pharmacy increases volume by 15%, which Wal-Mart has done. Marginal (incremental) overhead costs are probably $0.00, but average costs drop to $8.70 per script because fixed costs are utilized more efficiently.

    Most studies of dispensing costs compute average cost, which is meaningless for analyzing the profits of a growing pharmacy. I showed the fallacy of average cost thinking for Wal-Mart last December in Sloppy Reporting about Wal-Mart.


  3. Your point about incremental cost of dispensing is accurate unless the volume dictates that they add people. I wonder if the additional volume is causing misfills? Do you have any insight into how their rank and file RPh feel about the program? Medicaid official who are thinking about adjusting dispensing fees to offset the impact of AMP can use this to go no higher than $4 thus potentially harming the industry. Finally, the dollars that WM is quoting as saving the healthcare system ($600million and counting) is actually coming directly from their bottom line which should give shareholders another reason to be concerned. (as if they need another reason) Is is being offset somewhere else----hopefully.

  4. Are you really suggesting that pharmacy benefit managers are just now recognizing the generic profit potential? Since they own their own mail order pharmacies they have been aware of generic profitability for sometime, hence the maximum allowable cost (MAC). The real question is: Have the PBMs kept the profit or passed on the savings to the payers? You are predicting a large change in generic reimbursement; therefore, the answer must be (not really a surprise) that they did not pass on the savings.

  5. To the commenters above:

    Here's a good article from the Chicago Tribune that sheds some light into the pricing dynamics over time.

    Generic Zocor reduces profits

    As I wrote in my original post, insurers and PBMs are pushing sooner and harder than ever with MAC for retail.


  6. As independent pharmacy owners, we are dispensing more and more prescriptions that are adjudicated at the $8 or less level. Many are adjudicated below $4. Some do not even cover the cost of goods dispensed much less the average cost of $10 to dispense a prescription.

    Pharmacists have become insurance brokers 80% of the time. They are no longer allowed the time to spend with their patients. They are too busy dealing with the patient's insurance requirements and calculating whether they got paid enough to cover the net cost of goods.

    The pharmacy infrastructure in this country is being crippled on all levels. Pharmacy is a vital part of our heallth care system and deserves to be treated as such. It can not survive with the shrinking margins legislators are imposing on it.

    Many would challenge that the average retail script generates $60 in revenue at an independent pharmacy. The cash customer is gone and the PBM's adjudicates the payment.

  7. You keep commenting on the excessive profits in generics. I would place blame on this system on the retail pharmacies themselves. They have allowed the PBM's to reimburse brands at a margin of 10-11% and think they were being smart be taking the enormous profits in generics to make up he difference. What a stupid business plan. How did they think it would last. The whole payment structure needs to be tossed. I would think that it should be AMP plus a gross profit margin of 23-25% across the board.
    In effect no shell games being played by anyone!!!!

  8. Regarding the "incremental cost" per script: At some break-point in volume, it is true that additional headcount would be required and avg cost would thus increase in a significant leap. This is what my econ/acctg prof would have called "stepwise fixed" costs. While avg cost jumps, it also begins to immediately go back down again with each unit increase in production over the capacity range of the added unit of labor. WalMart are well-invested in workforce optimization techniques, and with their size have many tasks assignable to keep staff from lying idle during slack times, thus I am confident that their true step-cost is much smaller than the cost of a FTE associate.

    Further, I would assume that WM distribute these generics in a very efficient manner. I have no factual evidence but I would be shocked to find that they do not have a standard one month course of drugs such as erithromyacin pre-packaged and ready to be labeled with your Dr's orders.

    Classic story of commoditization- the locals must find a value they can uniquely add and a way to translate it into profits or else convert the floor space to (in my locale) swim suit sales...