A Way to Save Billions and Improve Healthcare

Does anyone know a way to quickly reduce America's health care costs by billions of dollars while improving the Nation's health? The answer is "yes" and it may be starting to happen. Some prescription drug purchasers, many without drug insurance, are saving billions of dollars already although only a small percentage of Americans currently can take advantage of this approach.

The facts are straightforward. In September 2006, Wal-Mart cut prices on a list of over 300 generic prescription drugs at its thousands of pharmacies to $4 for a month's supply at common dosages. This was a 50 percent reduction in Wal-Mart's "usual and customary" prices for these drugs. Two of Wal-Mart's largest competitors, Target and the Kroger grocery chains, quickly followed suite at thousands more pharmacies. Like Wal-Mart, these competitors made the low prices for generics on their lists available to all their customers, those with and those without insurance. Commentators said this was the beginning of a "price war" that would be of great benefit to consumers, and they were right.

So far, however, pharmacy outlets with 80 to 85 percent of prescription sales have been able to avoid matching Wal-Mart, Kroger's, Target and the few others who have joined them. Walgreens, CVS, and Rite Aid with about 40 percent of the prescription drug market have not followed because insurers, including Medicaid and Medicare, continue to pay them higher prices for these same drugs. Smaller independents and mail order pharmacies with another 40 percent of the market also have been able to keep prices much above those of their price cutting competitors and insurers have continued to pay them these prices as well.

There are signs, however, that the drug chains are feeling the pressure because they are trying to appear to match the low-cost programs. When Wal-Mart announced its low-cost program in 2006, the drug chains said it was not important based on two arguments: one was that most of their customers had either public or private drug insurance and that their insurance co-payments were at most a dollar or two higher than $4, and they said that the prescription drugs on the low-cost lists were older and usually less expensive anyway.

But the big drug chains recently have instituted $4 programs that look like those of Wal-Mart, Kroger's and Target, which suggests that competitive pressures are building. Why "look like?" Because the drug chains do not allow customers with insurance to use the programs and therefore these programs do not lower drug costs for the roughly 85 percent of Americans who have private or public drug insurance. So while the Wal-Mart, Target and Kroger's programs pass on the lower costs to insurers which should lower the cost of drug insurance, the look-alike programs do not.

Wal-Mart asked me to study the programs of its competitors and to estimate how much these programs were saving their customers. Wal-Mart's $4 program -- now expanded to include more generics and three month prescriptions for $10 -- has saved its customers over $2 billion through March 2009. Between the end of December 2008 and the end of March 2009, I calculate that savings for Wal-Mart customers were accumulating at the rate of $900 million a year.

Based on the rough estimate of market shares that is available, I believe that the programs at Target, Kroger's, and a few other grocery chains are saving consumers another $900 million per year. The total savings of $1.8 billion a year from Wal-Mart and the other programs, however, is just a start.

These companies have only about 15 percent of the prescription drug market. If insurers, private companies that insure their employees, Medicaid and Medicare insist that the drug chains, smaller and mail order pharmacies give them deals comparable to the deal they get when their insurees buy at Wal-Mart, the reduction in health care costs could be five or six times as large as $1.8 billion.

But savings could be much larger still. If public and private insurers find ways to steer those they insure to low cost drugs at low cost pharmacies, the competition will create pressure to lower prices of hundreds of other generics for the same conditions. Similarly, lower costs for generics will put pressure on the prices of brand name products that often serve the same needs. This is how competition works.

And there would be savings even beyond this. Low cost drugs improve patient compliance with doctors' recommendations. Doctors usually will be able to find effective treatments for most conditions on these lists if they know prices make a difference to their patients and their insurers. High prices prevent many people, even those with insurance, from following their doctors' advice. Changing this so that patients are not priced out of doing what their doctors recommend is where the big bonus in health comes.

The low-cost lists include effective treatments for allergies, colds and flu, a range of antibiotics, medicines for arthritis, asthma, cholesterol, diabetes, ear health, fungal infections, gastrointestinal health, glaucoma and eye care, heart health and blood pressure, depression and other mental health illnesses, skin conditions, thyroid conditions, viruses, vitamins and nutritional health, women's health and several other medical conditions. Imagine how much money would be saved if Americans with high blood pressure, diabetes and similar chronic diseases could manage them for just a few dollars a month.

The bottom line is that there is a way to both improve health care and reduce its costs by tens of billions of dollars. It is already starting to happen, but it needs a push from both private and public insurers to save additional billions. This is a low-hanging fruit of health care improvement and savings, and Americans ought to be picking it.

Comments

[John Graham]

How did they let this chap write in HuffPo? Doesn't he realize that HuffPo gospel is that savings come from government power, not competition?
But kidding aside, he has fingered the culprit: "insurance" inhibits savings by insulating patients from using price as an element in decision-making. Most Americans are over insured, not uninsured or underinsured.
Hospitals are a little different but the government should still stop fixing hospital price-codes and allow them to charge one price for an "episode of care" and allow insurers to let patients choose hospitals based on prices (but not exclusively on prices, of course) and share the savings with the insurer.

[Jessica313]

I'm really surprised that this doesn't reference Pharamcy Benefit Managers as an important player in the industry. This really distorts the picture you're painting of pharmacy costs.

You say insurance companies and employers needing to "steer" patients away from certain pharmacies. First of all, most insurance companies don't contract with pharmacies to provide prescription drugs to their plan members. Plan sponsors contract for this purpose with Pharmacy Benefits Managers or PBMs -- like CVS Caremark, Express Scripts, and Medco (some insurance companies have segments of the business that handle these transactions, they are all separate segments that largely function independently from the rest of the company, like WellPoint's PBM arm, Next Rx, which is being sold to Express Scripts). This is a pretty glaring omission.

Moreover, these companies actually control, through contracting, what the patients they cover will pay the pharmacy for prescription drugs. Mom and Pop drug stores are not gouging the consumer -- if you can't get a discount on your meds, it is because these multibillion dollar companies that control them have set the reimbursement rate at an unreasonable amount. They are actually almost completely unregulated by the government, spend millions each year lobbying congress to maintain that status, and can make up to 75% profit on each drug transaction that they handle (that's 75% extra which is charged to the plan sponsor).

I'm shocked that you would post a story like this online without even bothering to look up the basic structure of the industry on

[Ben Dixon]

This is not the end all be all solution but it does show how the free market and competition can lower the cost of health care if we let it. Can the free market fix everything, no, but its time we stopped acting like its an either or (ie all private health care or all single payer government run health care) in this nation.

[LeftRight]

Okay, that's great, there will be an eventual reduction in the cost of prescription drugs to consumers who are using the drugs that would have cost them less anyways.

On the other hand, there was the circumstance that my family found itself in last year where my daughter had appendicitis. My wife initially took her to the closest emergency room, where they stabilized her, and then our doctor recommended that we transfer her to a different facility because the close one had some issues. When the bills came in from both hospitals we found that the ER visit cost almost $9,000 and the appendectomy cost more than $19,000. Luckily our insurance was able to reduce both of those to less than $100 each. Care to explain how this will reduce the ridiculous costs like that??????