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
March 28, 2009
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.
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
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
"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
"I have talked to multiple large companies who called me because
they are interested in learning more about this concept,"
What Wal-Mart is doing isn't the only way to lower prescription
drug prices, said Michael Polzin, spokesman for Deerfield-based
"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.