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Wal-Mart Stores Inc.'s effort to provide low-cost generic drugs is facing legal complications in several states, and some observers say that the resulting debate could ultimately help employers by spurring greater transparency of prescription drug pricing.
Bentonville, Ark.-based Wal-Mart last September announced that in Florida it would begin offering hundreds of generic drugs for $4, and it soon expanded the effort to all states in which it has pharmacies. The move prompted other retailers, including Target Corp., to introduce similar programs.
However, complications have arisen in several states that have commerce laws designed to ensure fairness and competition, such as some state laws that require retailers and other entities to price goods at above cost and others, such as a California statute, that bar "practices by which fair and honest competition is destroyed or prevented."
It is uncertain at this point precisely how many states have such laws, but when Wal-Mart decided to expand its program, it raised the price to $9 for 56 of the drugs on its 331 generic drug list in nine of states: California, Colorado, Hawaii, Minnesota, Montana, Pennsylvania, Tennessee, Wisconsin and Wyoming.
In response, lawmakers in two of those statesColorado and Pennsylvaniaannounced publicly that they would be introducing legislation this session to create an exception for prescription drugs in state laws governing the sale of goods and services.
But as many as 12 other states also have statutes that would bar Wal-Mart's pricing strategy, according to the National Community Pharmacists Assn., an Alexandria, Va.-based organization that represents the nation's independent pharmacists.
Those states are Arkansas, Idaho, Kentucky, Louisiana, Maine, Maryland, Massachusetts, North Dakota, Oklahoma, Rhode Island, Utah and West Virginia.
South Dakota's law barring Wal-Mart's pricing strategy has no effect on the retailer, as it has no pharmacies in the state. South Dakota law bans pharmacies that are not at least 51% owned by a pharmacist.
Unless Wal-Mart raises prices in those states, the NCPA says it will ask those states' attorneys general to investigate whether the retailer is violating state laws.
"If they are allowed to eliminate the competition, then they will be free to jack up prices," said John Rector, senior vp and general counsel for the NCPA. "It's not about free competition, it's fair and free competition."
The executive director of the Oklahoma Board of Pharmacy in Oklahoma City said he also is confronting Wal-Mart in response to complaints from pharmacists in his state that the retailer is violating Oklahoma law.
Bryan Potter, the executive director of the board, said the state's Unfair Sales Act, enacted in 1949, is similar to Pennsylvania's Unfair Sales Act, which Wal-Mart is honoring.
"We've not filed any charges," he said. But because "there were three to five items that were being sold at least $11 below (the) cost to local pharmacies, we're discussing this with Wal-Mart."
As the battle lines are being drawn between small businesses and the nation's largest retailer, employee benefit experts are hopeful that the debate will lead to greater transparency in all prescription drug pricing.
"The bigger picture is, Wal-Mart's venture into this area is likely to speed the movement toward greater price transparency that employers have been pushing for a number of years," as more information about retailers' drug costs becomes available, said Peter Lee, president and chief executive officer of the Pacific Business Group on Health in a San Francisco.
Mr. Lee also noted that the community pharmacists' objection to Wal-Mart's $4 generic prescription drug program is reminiscent of their previous complaints about competition from pharmacy benefit managers. That clash aided employers by revealing that many PBMs were receiving rebates from drug makers in exchange for giving their products preferential treatment on prescription drug formularies.
If the true costs of prescription drugs are revealed as a result of Wal-Mart's efforts, it would be helpful to employers in their future negotiations with PBMs, said Helen Darling, president of the National Business Group on Health.
"Part of the problem is even knowing what the costs are, real costs, the actual cost of producing the drug," she said.
For example, the NCPA's Mr. Rector insists that the cost of dispensing a drug also should be included when determining its base price, and that Wal-Mart is failing to take these costs into account.
"Even if the raw materials are free, there's still somewhere around $8, $9, $10 or $11 in costs to dispense," that should be factored in to the basic cost of each drug being sold, he said.
Wal-Mart, however, claims that it is not selling any prescription drugs below cost.
"Even at $4, we still sell these drugs at a profit," a spokesman said, adding that Wal-Mart pays less than $4 for all of the 331 drugs on the generic drug program list.
After its legal department did an analysis of various states' laws, Wal-Mart decided to sell 56 of those drugs at $9 in nine of those states, the spokesman said. Meanwhile, the company believes it is complying with statutes in all other states.
"Our $4 price complies fully with Oklahoma statutes," the Wal-Mart spokesman said.
"From an employer perspective, you obviously want to drive competition, you want to try and drive prices down. But benefit managers need to be careful to look at whether it's real or PR," said Randy Vogenberg, senior vp of Aon Consulting's health and welfare practice in Providence, R.I.
"Since most employers have health insurance, and are working through a PBM or a health plan, they've already got negotiated discounts," Mr. Vogenberg said. "This really helps the smaller employers and those who are uninsured."
Minneapolis-based Target did not respond to calls seeking comment.