The $4 Solution
By: Robert Flaherty, MDPosted on September 12, 2012 FREE Insights Topics:
I saw Dave in my medical office last week. He is a pretty typical 46 year old American. He was laid off and now makes a little money with odd jobs. He has no health insurance and doesn’t qualify for the various government health programs. Also typically, he has high blood pressure, high cholesterol and diabetes. He stopped his medicines last year because he couldn’t afford them. After examining him, I told him that he had three very serious diseases, which would greatly benefit from medications. Then I told him about “The $4 Solution”.
I am referring to the widespread availability of very inexpensive and highly effective generic prescription medications. This is the most important advance in American medicine in the early 21st century. It will change the treatment of the most common fatal diseases of our time, and will improve the quality and duration of life for millions. It is not high tech, nor did it come as a result of government edict. How this came about sheds light on how the medical marketplace can work, if it is allowed to.
In 2006 Wal-Mart saw their pharmaceutical sales making up only 8% of total sales1. They also recognized that in 2004 45.5 million Americans were uninsured and thus had to pay for prescription drugs out-of-pocket, and that that number was rising2. By happy coincidence, many prescription medications had recently become available generically, and at very low wholesale cost. Furthermore, a large proportion of these drugs had been shown to be the most effective treatments for their respective diseases, much more effective than more expensive newer brand name drugs.
It was a perfect capitalistic storm. In September 2006 Wal-Mart began a program in the Tampa Bay, FL area offering nearly 300 generic prescription drugs for $4 for a one month prescription. This was important savings; for example, lisinopril, proven to lower blood pressure and prevent heart attacks and strokes, was $144 per year for the brand name, and $48 per year for the generic3.
Over the next year they expanded nationwide to include all Wal-Mart, Sam’s Club and Neighborhood Market pharmacies, and added additional drugs, including prescription birth control pills at $9 per month. By the end of the first year, pharmaceutical sales had increased to 9% of total sales1 and the program drugs accounted for 40% of the prescriptions filled by Wal-Mart, most of those for uninsured patients. Wal-Mart estimated that they saved their customers $613 million in that first year.4 Subsequently, Wal-Mart began offering the same generic drugs at $10 for a 3 month prescription.
Critics claimed these prescriptions were just loss leaders, to get customers into the store. COO Bill Simon denied that claim, saying, “Even at $4, we are making more money on the generic prescription drugs than we did last year. Each and every one of these products is very profitable for us.”5
The idea has caught on. Several other national drug store chains are offering similar $4 per month/$10 per 3 months generic drug programs, including Kroger/Smiths, Target, and, for a few dollars more, K-Mart, Rite Aid and Walgreens. In an effort to compete, each pharmacy has a different list of available generics. This diversity of offerings is good for consumers because with a little shopping most people are able to get most or all of their prescriptions filled cheaply.
What is going on here? Many health economists claim that health care is “different”, that a true market cannot exist in health care. The truth is that market conditions have not existed in health care for over 50 years. We currently have a medical “marketplace” where typically the end-user of health care (the insured patient) doesn’t pay the cost of purchasing their health care. That payment comes from third-party payers like insurance companies, Medicare and Medicaid.
This separation of the payer from the end-user is the fundamental distortion of the medical market. The patient wants high quality health care; the payer wants the cheapest health care. Since it is the payer, not the end-user, who controls the dollars, the result is, predominantly, near-monopolistic and coercive price controls, whereby the payer tells the physician “If you don’t accept what we are offering, we will take all of our patients somewhere else.” The incentive is to please the payer, not the patient, so the physician’s response is to maintain their income by cutting the price to the payer and increasing the volume of patients by spending fewer minutes with each patient. There is no incentive to increase the value or quality of the health care they provide, only the quantity.
The “$4 Solution” demonstrates how a true market in health care can work, not by government edict, but by patients and health care providers working in each other’s best interest.
And Dave can now afford his medications.
I am referring to the widespread availability of very inexpensive and highly effective generic prescription medications. This is the most important advance in American medicine in the early 21st century. It will change the treatment of the most common fatal diseases of our time, and will improve the quality and duration of life for millions. It is not high tech, nor did it come as a result of government edict. How this came about sheds light on how the medical marketplace can work, if it is allowed to.
In 2006 Wal-Mart saw their pharmaceutical sales making up only 8% of total sales1. They also recognized that in 2004 45.5 million Americans were uninsured and thus had to pay for prescription drugs out-of-pocket, and that that number was rising2. By happy coincidence, many prescription medications had recently become available generically, and at very low wholesale cost. Furthermore, a large proportion of these drugs had been shown to be the most effective treatments for their respective diseases, much more effective than more expensive newer brand name drugs.
It was a perfect capitalistic storm. In September 2006 Wal-Mart began a program in the Tampa Bay, FL area offering nearly 300 generic prescription drugs for $4 for a one month prescription. This was important savings; for example, lisinopril, proven to lower blood pressure and prevent heart attacks and strokes, was $144 per year for the brand name, and $48 per year for the generic3.
Over the next year they expanded nationwide to include all Wal-Mart, Sam’s Club and Neighborhood Market pharmacies, and added additional drugs, including prescription birth control pills at $9 per month. By the end of the first year, pharmaceutical sales had increased to 9% of total sales1 and the program drugs accounted for 40% of the prescriptions filled by Wal-Mart, most of those for uninsured patients. Wal-Mart estimated that they saved their customers $613 million in that first year.4 Subsequently, Wal-Mart began offering the same generic drugs at $10 for a 3 month prescription.
Critics claimed these prescriptions were just loss leaders, to get customers into the store. COO Bill Simon denied that claim, saying, “Even at $4, we are making more money on the generic prescription drugs than we did last year. Each and every one of these products is very profitable for us.”5
The idea has caught on. Several other national drug store chains are offering similar $4 per month/$10 per 3 months generic drug programs, including Kroger/Smiths, Target, and, for a few dollars more, K-Mart, Rite Aid and Walgreens. In an effort to compete, each pharmacy has a different list of available generics. This diversity of offerings is good for consumers because with a little shopping most people are able to get most or all of their prescriptions filled cheaply.
What is going on here? Many health economists claim that health care is “different”, that a true market cannot exist in health care. The truth is that market conditions have not existed in health care for over 50 years. We currently have a medical “marketplace” where typically the end-user of health care (the insured patient) doesn’t pay the cost of purchasing their health care. That payment comes from third-party payers like insurance companies, Medicare and Medicaid.
This separation of the payer from the end-user is the fundamental distortion of the medical market. The patient wants high quality health care; the payer wants the cheapest health care. Since it is the payer, not the end-user, who controls the dollars, the result is, predominantly, near-monopolistic and coercive price controls, whereby the payer tells the physician “If you don’t accept what we are offering, we will take all of our patients somewhere else.” The incentive is to please the payer, not the patient, so the physician’s response is to maintain their income by cutting the price to the payer and increasing the volume of patients by spending fewer minutes with each patient. There is no incentive to increase the value or quality of the health care they provide, only the quantity.
The “$4 Solution” demonstrates how a true market in health care can work, not by government edict, but by patients and health care providers working in each other’s best interest.
And Dave can now afford his medications.