How Wal-Mart Schooled Health Insurance Companies

Two years ago Wal-Mart launched their $4.00 prescriptions. In a matter of months they changed the game and took the value proposition away from health insurance companies and PBM's (Pharmacy Benefit Managers) who for the most part failed to notice they were being marginalized.

How did this happen? I can tell you a simple story that illustrates what has happened. I saw a patient recently in the office who was complaining about the cost of her medications. I went over them and all three were on the Wal-Mart $4 list, so by my calculations she should have only been spending $12 per month. I asked how much her medications were costing her and was shocked to find out that she had a $10 co-pay for each one making her out of pocket costs $30 per month. On top of that the pharmacy was billing her insurance company.

I told her the solution was obvious, stop using her insurance for her pharmacy purchases and instead just pay cash at Wal-Mart or one of the other stores matching Wal-Mart's offer. She would save $16 per month or $192 per year. It took a while to get through to her that the insurance she was paying for each month was actually causing her out of pocket pharmacy expenditures to go up.

I then spent a little more time figuring out how to save her more money. All of her medications were available in doses twice what she was taking so I suggested we change to the higher dose and split her pills bringing the monthly cost down to $6. She could save even more if she bought 90 for $9. Her annual bill then would be $54 versus $360 if she used her insurance.

More patients are figuring this out either on their own or with the help of their physician. At the same time the number of medications on the $4 list is growing. Health Insurance companies will struggle to match Wal-Mart's offer as their administrative cost for processing a pharmacy claim adds so much cost to the medication that they cannot be competitive. This is triple bad news for them.

One, employers and patients will rightfully question the value the insurance companies bring. What is the purpose of insurance if you can purchase medications on your own for less.

Two, the insurance company "rebates" aka kickbacks from the pharmaceutical companies will dry up. For those who do not know, a major source of insurance company revenue are the rebates pharmaceutical companies pay for getting their medications on the insurance company formulary (list of approved drugs).

Three, pharmacy data is the only decent clinical data insurance companies have. Insurance companies judge the illness of a patient and the premium they charge based partially on the medications a patient takes. The insurance companies also use the prescription information to offer modestly effective disease management programs. If the patients do not use their insurance when purchasing medications then this source of information will disappear.

There is yet one more negative for the insurance industry from Wal-Mart's pharmacy program. Many insurance companies require step therapy before they will pay for a more expensive drug. The means that the patient has to try and fail on a less expensive drug. Without the pharmacy information on the less expensive drug the insurance company will deny the more expensive one. This will get appealed and overturned but in the process will add administrative costs which are already too high.

This is probably the best current example of competition working in health care. Too often regulations prevent effective competition. I my next blog I will talk about how competition could save billions in a fairly short period of time with little change.

Paying for the wrong behavior and getting it

Why do so many proposals to fix our health care system completely fail to address the twin problems of rising health care costs and uneven quality? Other items that we purchase have improved in quality and many have come down in cost. We have not seen the same results for our health care purchases.

For years we have depended on the insurance industry to manage one of our most significant costs, with dismal results. We have turned over to the insurance industry our most important business tool - the selection of what we want to purchase and how much we are willing to pay, because somehow we think they know best. There is enough data now for us to know this is not the case.

Furthermore, there is abundant data on which services we should value if we want lower cost and higher quality. By looking at the Medicare population researchers have found that the more primary care physicians there are per 10,000 enrollees the better the quality and the lower the cost (See research paper). In fact what these researchers found was that the more you spend the worse the results.

The cost benefits of quality are well known, so this is no surprise. What is a surprise is that with this knowledge we continue to leave the purchasing decisions to insurance companies who have proven for 30 years that they cannot control cost or improve quality. We also pursue regulations and policies that prevent physicians from providing cost effective alternatives to our present broken system. This has to change and the change has to be led by those of us who are paying the bills.

It is no longer acceptable to pay physicians for activity. Put a patient in the hospital where they are exposed to high risks of medical errors and the physician gets paid along with hospital. Preventing the hospitalization pays much less. Which behavior do we want? Why do we pay more for the behavior we do not want?

As long as we pay a lot for a behavior we are going to find plenty willing to behave in that manner. We have to decide what behaviors we want from our health care system and start paying well for those and less for the behaviors we do not want. This is the approach we take with employee compensation and it is time to apply the same incentives to physician pay.