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Commentary

The Market's Medicine
Orange County Register, 11-26-06

This Register editorial illuminates how the pursuit of profit—in this case, Wal–Mart's program offering 30–day supplies of many generic drugs for just $4—can help improve lower health care costs and access to needed medicines.

Prescription drugs are expensive largely because of research and development costs and the needlessly expensive approval process imposed by the Food and Drug Administration. (The most expensive part of the process is proving efficacy; if the FDA confined itself to regulating safety, the cost of all prescription drugs would be significantly lower.)

Once a drug has gone generic, those initial sunk costs are in the past, and other companies can replicate the drug, so the cost per unit falls. So retailers with significant buying power, like nationwide discount chains, can often negotiate significant savings with the promise of large–scale purchases.

The drugs most likely to be amenable to such negotiations are precisely those that are most commonly used. So these programs stand to benefit many consumers. People without health insurance—the Kaiser Family Foundation estimates there are 33 million of them in the 38 states Wal–Mart presently serves—will be able to buy certain drugs for less than the co–payment under many insurance plans.

It is likely that the two discounters are not making money on all the drugs placed in the program. David Brennan, co–director of the Institute for Retailing Excellence at the University of St. Thomas, says Wal–Mart and Target are hoping that people who come to the stores for low–cost drugs will also buy other things. Thus some of these drugs are probably loss leaders.

This is canny marketing—canny marketing that ends up benefiting potentially millions of consumers.

The two chains didn't do it because of altruism or benevolence but to increase the number of their customers. Wal–Mart, the target of scurrilous but effective attacks funded by unions, was undoubtedly hoping to improve its image. Target was motivated in part by competitive impulses—giving people one more reason to come to their stores rather than to Wal–Mart.

The politicians have been talking about maybe passing legislation to allow government entities to negotiate lower prices. But now private companies have already done that, and nobody seriously thinks the government is likely to negotiate more effectively.

Nice development.



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