05/22/2009 05:12 am ET Updated May 25, 2011

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.