Arthur C. Sturm, Jr.
On Sept. 22, the retail drug industry stirred the healthcare pot once again.
It dipped its strategic oar a little deeper into the troubled waters of healthcare pricing. On that day, Wal-Mart (Bentonville, Ark.), the nation's largest retailer, announced it was cutting the prices of 300 generic drugs to just $4 for a month's supply. And the price was available to any customer regardless of insurance status, age, or other qualifiers. "The move was copied by rival Target Inc., and hammered the prices of drug retailers. As an illustration of Wal-Mart's clout in dictating suppliers' prices, shares of some generic drug producers also fell," said a Reuters news item on Oct. 5.
We should look at this strategy from a couple of different viewpoints. As an isolated play, it could be considered insignificant. But when we connect it to other initiatives, different scenarios emerge, many with interesting consequences for the provider community. Could this initiative be the first domino that begins the long-awaited cascade of price shopping in health care?
From Pills to Procedures?
Let's look at the initial activity. Wal-Mart and Target were quick to match each other. But other national chains such as CVS and Walgreens greeted the play with a big yawn and said their pricing would remain unchanged.
Providers have long procrastinated about publicizing prices, but retailers, especially Wal-Mart, may be the catalyst for health care as it has been for other industries. Every category Wal-Mart has entered has seen pricing, competition, and fortunes change greatly.
Take toys, for example. Wal-Mart decided to make a major push into Toyland in the late 1990s and ended up controlling about one-third of the U.S. toy market, according to The Washington Post (May 31, 2004). Other consequences? Well, haven't KB Toys and Toys R Us become almost irrelevant?
Wal-Mart's reputation as "category killer" is well founded.
We may not expect Wal-Mart to enter the hospital business (and we may be praying that it doesn't). But its actions cause one to reconsider just where pricing plays fit. Four-dollar prescriptions could be a loss leader for Wal-Mart to get consumers into the store to buy other stuff, but then again, it could be part of a growing trend of consumer empowerment that started with choice and is now moving into price.
Why Is This Important?
Let's look at how other market forces may be maturing at a rate that deserves attention.
At the core of this discussion is the growth of consumer-directed health plans. Their acceptance and growing availability are noteworthy: As of January, 3.2 million people are covered by these types of accounts. Projections, considered overly optimistic, expect that number to reach 10 million in the near future ("CDHPs and Provider Marketing Strategies," presentation by David Marlowe, Society for Healthcare Strategy and Market Development, 2006). Similarly, 22 percent of large employers (20,0001 employees) report offering them, but the number drops significantly for smaller employers (only 5 percent of firms with 5001 employees offer them).
Certainly there is cause for skepticism. Aetna, Inc. (Hartford, Conn.) reports that its test of providing a list of negotiated fees in Cincinnati last year did not result in much of a change in the way consumers choose physicians or treatments. A new initiative by Indianapolis-based insurer WellPoint, Inc., offers a comprehensive online price shopping tool for 70,000 General Motors employees in Dayton, Ohio. But even GM admits it's not sure how much of an impact that will have given the low level of copayments its various plans require (The Wall Street Journal, Sept. 25, 2006).
But perhaps we should start the analysis at a more basic level: We just don't buy that much "big ticket" health care on a regular basis-but we do buy prescriptions with some frequency. The logic goes like this: If people get used to receiving discounts and negotiating prices at lower levels, it's only a matter of time before they escalate their expectations to bigger-ticket items. And there is some evidence to suggest this is already happening in health care. But let's play "what if" and see if any of these scenarios resonate.
Scenario 1: Like Airline Fare Wars
It's not uncommon to see airlines raise or lower prices by a few dollars to see if they can build some short-term market share. Often the play is a little bit of a "dare" to the other airlines to match the price point so the whole market moves in the same direction. So far, only two national chains, Wal-Mart and Target, have made the move with prescription drugs. Everyone else is sitting on the sidelines.
The cynic could say this is a necessary move for Wal-Mart, the chain that played the strategy first. Its same-store sales have not been keeping pace with historical levels (a current growth rate of
3.5 percent versus 9 percent in prior years), so a cheap drug price could be perceived as a loss leader to build overall sales. But the play was matched by rival Target, which enjoys growth and margins and likely joined in the fray to protect its market share.
If it's just a promotional play, the lower pricing means little.
Scenario 2: Part of a Strategy to Move the Lower End of Primary Care to Retail
Retail drug chains have already staked out primary care strategies through the development of retail miniclinics, which provide a nurse practitioner in the store to treat minor illness, dispense vaccines, and write prescriptions for nonnarcotic agents. Lowering the prices of generic drugs, such as penicillin, raises the possibility of creating a stronger value proposition: lower-priced care and lower-priced medications.
Scenario 3: Part of a Strategy to Move Consumer-Driven Pricing from Drugs to Procedures
Don't forget that the feds have successfully signed up 30 million consumers for Medicare Part D, which gives those consumers access to virtually any pharmaceutical product at a highly competitive price. So seniors are getting a taste of lower prices, courtesy of the U.S. government. And the soon-to-be seniors promise to be a handful with their demands for price, value, and accessibility.
Two additional data points add credence to the trend. A Harris Interactive survey in December 2005 reported that about 10 percent of survey respondents report negotiating with hospitals on price. Custom research by consultant David Marlowe shows a range from 9 percent to "the low twenties" of individuals who say they will be motivated by price in their selection of hospital services.
Is It Time Yet?
Has the consumer-driven "buy price" phenomenon finally arrived? No. But growing evidence suggests the trend could start to accelerate. And those who plan wisely now will reap their just rewards.
Arthur C. Sturm, Jr., is president and CEO, SRK, Chicago (email@example.com).
Preparing for a Price-Driven Market
Consultant David Marlowe, principal, Strategic Marketing Concepts (Ellicott City, Md.) suggests the following initiatives to prepare for a more price-driven market:
- Get familiar with overall "pricing."
- Market factors (local, national, international)
- Legal issues
- Insurance trends
- Identify and designate an internal expert on market-driven pricing issues.
- Get a handle on local market factors.
- How many employers are going over to health savings accounts, high deductibles, or no insurance at all?
- To what degree are consumers price shopping now, and for what?
- Are any local providers initiating pricing-related strategies?
- Get a handle on internal factors.
- How many inquiries for price are coming in now? For what services?
- How are these inquiries being handled?
- What is the organization's mindset toward pricing as a strategy?
- What are the legal or contractual limitations?
- Put forth some initial pricing efforts.
- Are there any services that are "ready for prime time"?
- Actively discuss price as a strategy, not as a by-product or accident.
- Look into methods to provide price information to consumers.
- Start to monitor the price/value equation, not just the consumer impression of "quality."
Publication Date: Wednesday, November 01, 2006