Obamacare is putting a big crimp in Wal-Mart’s lucrative pharmacy business

Not the money-making scene it used to be.
Not the money-making scene it used to be.
Image: Reuters/Jessica Rinaldi
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It was not an especially good quarter for Wal-Mart, and one pain point that will continue to hurt the company is a downturn in its large in-store pharmacy business in the US. On a media call yesterday (Aug. 18), executives in part blamed the company’s reduced profit outlook on a change in the way Americans are paying for drugs.

“We are seeing less cash and more reimbursements from insurers,” CFO Charles Holley said. 

In other words, the rapid fall in uninsured Americans after passage of the Affordable Care Act has led to more drugs being paid for by insurers, and fewer being paid out of pocket. That squeezes profit margins, particularly for a company like Wal-Mart with one of the biggest drug stores in the country (it brings in about $19 billion in annual revenue).

In the US, full retail prices paid by the uninsured are substantially inflated compared to what private insurers reimburse. Unlike the average healthcare consumer, private insurers know the market, whether generic or cheaper options are available, and they have the leverage of scale to negotiate prices.

Government programs like Medicare and Medicaid, which cover many Wal-Mart customers, are prohibited from negotiating on price with drug makers. But they are also legally required to only reimburse the drug maker a certain percentage over the average wholesale price.

Pharmacy benefit managers, which administer drug benefits for employers and insurers, have also consolidated (pdf), leaving three firms (ExpressScripts, CVS, and UnitedHealth) to cover most Americans. The bump in scale has boosted their negotiating power on drug prices.

Formerly uninsured Wal-Mart customers are also likely to be entering into lower-tier health insurance plans that don’t cover an ever-growing list of expensive drugs, instead favoring cheaper, clinically-equivalent alternatives.

Pharmacies that have overcome these changes, like CVS, have tended to focus on offering expensive and often high-margin specialty drugs that require extra service to administer (such as chemotherapy drugs and arthritis drugs).

Wal-Mart says it has no intention of selling off its pharmacy business. As for solutions, on its Aug. 18 earnings call it offered up only that it is taking a “number of actions to lessen the impact.”