The first anniversary of Wal-Mart's $4 generics program is approaching, and supermarkets report that service is an effective counter-measure
Eleven monthly refills have passed since Wal-Mart Stores' disruptive decision to offer certain generic drugs for $4 per 30-day supply.
Although many supermarkets have matched the scheme or devised plans of their own, industry consequences are far-reaching.
For starters, supermarkets have learned that their biggest asset is personalized service.
“The expansion of $4 programs continues to influence a lot of the marketplace. However, we have taken the approach of explaining the value of the services we provide and the way we price to our customers,” said Donald Clark, vice president of pharmacy operations, K-VA-T Food Stores, Abingdon, Va. “We've been somewhat successful with that.”
Bi-Lo, Greenville, S.C., doesn't advertise $4 generics, but “if people said they were leaving because of the $4, we'd match the prices,” said Curtis Hartin, senior director of pharmacy. “We have no intention of being a low-price offering. We're going to be convenient and we're going to give personal service. Our customers are more than just numbers.”
Generally, Bi-Lo's pharmacists aren't trained to fill so many prescriptions in a tight time period that they can't get to know their customers. “[The Wal-Mart model] is a different model, and that's not the model that we're pushing,” Hartin said. In addition, most of the customers at Bi-Lo are insured, so the $4 plan isn't a huge savings over their usual co-pay, he added.
“We don't advertise being the low-price leader, because we're not.”
Still, the reaction of many customers when the Wal-Mart plan was introduced in each state was one of excited curiosity. “There were some customers that moved,” said Ron Peters, vice president, pharmacy, Minyard Food Stores, Coppell, Texas. “Because first of all, they thought they were going to get $4 on everything, which was not true.”
WAITING IT OUT
Wal-Mart and most other programs offer 143 compounds in a variety of dosages. Although these represent commonly prescribed formulas, they don't encompass the full drug regimen of many families.
In addition, the buzz created had its downside. “They went to locations where they were waiting two to three hours to get their prescriptions filled, because of the type of response that generated. And so they ended up coming back,” Peters said. “They felt like it just wasn't worth the level of service they were getting.”
Other retailers responded with low-price programs of their own to win customers back more quickly. “When it was announced, everyone was up in arms and wanting to respond to it. My idea was not to respond to it with a ‘me too’ program,” said David Chan, director, pharmacy, Scolari's Food & Drug Co., Reno, Nev.
Instead, Chan developed a loyalty program where Scolari's will pay for a customer's co-pay in part or in full on every 12th prescription.
“The outcome is, we were not impacted by their action too much. From the get-go, we lost a few customers. People react to that information initially, but there is not even talk about it anymore, and it is business is usual,” Chan said.
Scolari's also has gained back some customers who were not satisfied with Wal-Mart's level of service.
Meijer and Publix now offer a variety of common generic antibiotics free with a doctor's prescription. Publix will also match the $4 price upon customer request. H.E. Butt Grocery Co. offers many generics for $5 with its RxRewards card. Giant Eagle, Costco, Target and Southeast discounter Fred's have matched Wal-Mart. Kmart offers 90-day supplies for $15.
“The generics programs are actually kind of a two-edged sword, because we're noticing that our sales totals are getting lower because generics are less expensive, but our margin dollars are getting higher,” said Randall Smith, district pharmacy manager, Sweetbay Supermarket, Tampa, Fla.
“So we're picking up one or two points in margin, but our sales are reflecting a lower total sale, because some of the top items have gone generic — so we're missing those dollars that we were seeing last year.” However, at Sweetbay, which will match a competitor's pharmacy pricing upon request, cash-paying pharmacy customers are only about 8% of the total customer base.
“I don't know what kind of profit hit Wal-Mart took to do this, but I think the reason Wal-Mart did this was to generate traffic into their store, because Wal-Mart is Wal-Mart. If customers come in for one thing, they're going to buy a lot more,” said Minyard Food Stores' Peters.
For supermarkets, having the food side of the store is an advantage when offering low prices at pharmacy, said John Fegan, senior vice president, pharmacy, Ahold USA, Quincy, Mass. “We have the traffic because many people choose supermarket pharmacy based on convenience or geographic location.”
Bashas', Chandler, Ariz., began its pharmacy loyalty rewards program, which offers up to 60% off certain prescriptions, about a year before Wal-Mart's plan. “I believe the generic discount plans have brought heightened awareness to the affordability of generic medications,” said Dan Milovich, director of pharmacy operations.
While many retailers have, like Bashas', put forth some kind of discounted generic drug pricing, others, including a few supermarkets and all the major drug chains, have decided to continue offering the drugs at market prices.
“Your traditional drug stores have said they are competitive and don't need it, and that is probably true, but you can't ignore what's going on in the marketplace,” said Fegan.
“You have to make sure you do a full analysis and evaluate where you stand in comparison to competitors.”
Another approach is to serve customers first, said Milovich. “We look at what our customers' needs are and go from there.”
As for Wal-Mart, the retailer credited with starting the discount drug trend, “The $4 generic programs have been wonderful for our customers,” said Bob Dufour, director of professional services and government relations, Wal-Mart Stores, Bentonville, Ark. “It's been saving them a lot of money.”
Dufour said the program has been well received by customers, and the company is pleased with the progress it's made so far.
“At Wal-Mart we're always continuing to try to find value for our customers in any way we can, and we're certainly looking at how we can bring more value to our customers.”
For the future, this trend may have opened the door for a new pharmacy format, said Sweetbay Supermarket's Smith.
“I really think there is a space now for a generic-only, cash-only pharmacy format where the consumers that don't have a lot of money, or aren't covered by insurance, get a lower-cost product and leave with more of their dollars in pocket.”
Additional reporting: Dan Alaimo
Although supermarkets seem to have weathered the low-priced generic storm, a new challenge has more recently presented itself in the form of the Medicaid generic drug reimbursement formula, released on July 6 by the Centers for Medicare & Medicaid Services [CMS], Baltimore.
The payment method, part of the Deficit Reduction Act of 2005, will use the Average Manufacturer Price [AMP] of drugs to establish a reimbursement formula. The old calculation used the Average Wholesaler Price [AWP].
The AMP is a lower number, because it includes, in its average, prices manufacturers give to mail-order pharmacies. Since mail-order pharmacies have a much lower overhead cost than retail pharmacies, they can generally accept a lower reimbursement.
A study by the Government Accountability Office, Washington, found that retail pharmacies will be reimbursed, on average, 36% below acquisition cost for drugs under the rule.
In response, Reps. Nancy Boyda, D-Kan., and Jo Anne Emerson, R-Mo., have introduced The Patient Access to Medicaid Generic Prescription Drug Act of 2007, which would provide a benchmark that more accurately represents retail pharmacy's drug acquisition costs.
In this case, the generic discount programs might possibly work against retail pharmacy. “The jury is still out on the Medicaid reimbursement formula, but the government has to be looking at the outlets who sell these drugs so cheaply, and yet we are asking for more reimbursement,” said John Fegan, senior vice president, pharmacy, Ahold USA, Quincy, Mass.
“But they do have to temper that by considering the drugs that aren't in the $4 program.”
AMP concerns Donald Clark, vice president of pharmacy operations, K-VA-T Food Stores, Abingdon, Va., more than any competitor's pricing strategy. “That's definitely something that could impact everybody. AMP could drastically reduce payments.”
Government is more focused on the cost of drugs at retail and not the cost incurred by the producer, said consultant Jim Wisner, president, Wisner Marketing Group, Libertyville, Ill.
“So in an attempt to keep prices down, pharmacies are being hurt, but the greater benefit would be obtained by finding a way to address price at the producer level.”
Regardless, supermarket pharmacies will have to continue to cope by beefing up their service offerings, retailers said. “Pharmacies will continue to look for other means, or revenue streams such as Medication Therapy Management, specialty pharmacy products and immunizations to help level out these cuts,” said Dan Milovich, director of pharmacy operations, Bashas', Chandler, Ariz.
— W.T. and D.A.