Impact of Generic Drug Discount Programs on Managed Care Organizations

AJPB® Translating Evidence-Based Research Into Value-Based Decisions®January/February 2011
Volume 3
Issue 1

Generic drug discount programs, which differ across large chain pharmacies, may result in significant savings for managed care organizations.

A role that managed care organizations (MCOs) andpharmacy benefit managers (PBMs) have traditionallyplayed is to increase generic utilization rate byenhancing generic substitution practice. Pharmacy benefitmanagers use tiered systems, mail-order pharmacy, and steptherapy to accelerate the use of generics.1 Employer planstypically charged an average copay of $10 for generics, $25for preferred brand drugs, and $40 for nonpreferred branddrugs in a tiered formulary system during 2007.2 By usingtiered formulary systems, PBMs provide financial incentivesto encourage consumers to use the lower-copay medication(generally generics). Although these attempts by PBMs werecriticized as well as appreciated, they proved somewhat effectiveover the years in improving generic utilization in conjunctionwith efforts by other healthcare sector participantsto promote generics and with the fact that more medicationslost patent protection in recent years.3 The cost savings associatedwith increased utilization of generics continue togrow as generic drug discount programs (GDDPs) have furtherdriven down the generic drug prices.4 The aim of thisstudy is to review a subset of these programs and discusstheir potential impact on PBMs and MCOs.

Generic drug discount programs are generally launched by a chain pharmacy. In these programs selected generic drugs are available at a subsidized rate, typically $4 for 30 days of supply (DS) and $10 for 90 DS to both insured and uninsured patients. Because this amount is lower than the copay that is typically charged by a health plan, these programs benefi t consumers. If an insured consumer opts in to the GDDP, then the MCOs and PBMs do not reimburse for that particular prescription. Walmart was the fi rst to introduce a GDDP, on September 22, 2006, in a pilot program in Tampa, Florida; this program was expanded across Florida on October 6, 2006.5 This program offered 314 generic prescription drugs at $4 per prescription for up to 30 DS.6 Within a day of Walmart’s initial announcement, other retail stores such as Target, K-mart, and Kroger followed with their own GDDPs.7 Moreover, the GDDP offered by Walmart wasopen to both the insured and the uninsured.8 To achievesuch a competitive price, mass retailers reduce the stepsin supply chain management, eliminate middlemen, andpurchase in bulk with volume-based cost discounts. Further,generics are now priced in relation to their actualcost, as opposed to the traditional pricing in relation totheir brand-name equivalents.9

Generic drug discount programs have been criticized for a variety of reasons. They are considered to be a predatory practice to force smaller competitors like independent pharmacies to shut their businesses.10 Moreover, because prescriptions filled using a GDDP are not processed through PBMs, issues such as application of disease management programs and monitoring drug utilization data become questionable.8 It has been reported that the initial intent of the program was to increase the foot traffic in stores by extending attractive prices to cashpaying consumers.11 While there is no estimate of actual sales volume shifted to Walmart or other pharmacies, Bill Simon, Walmart’s executive vice-president of professional services, predicted that the long-term effect of the program would be a billion-dollar reduction per year in the nation’s healthcare cost.12 Walmart has since expanded the program further by broadening the supply period (90 DS) and consistently adding more generics, women’s health medicines, and over-the-counter drugs to the existing list.13 Other pharmacy chains followed in a similar manner, but varied in the amount and number of drugs covered. Since these GDDPs were launched, there have been no studies that compared them based on what they offer and their potential impact on MCOs.

As mentioned earlier, the take-up rates of these programs are not yet established. However, if the take-up rates of these programs are high, then GDDPs may have changed the delivery of medications by shifting a major proportion of the market share of generic drugs to GDDPs from PBMs and MCOs.12,14 There are mixed perceptions about the effect of these GDDPs on PBMs and MCOs. Some predicted that Walmart’s $4 generic program would force PBMs to shrink hefty profit margins on generics, whereas some believed that these programs do not seriously compete with PBMs; rather, they advocate PBMs’ aim to increase generic utilization.15 Because of their pivotal role in the US healthcare market, PBMs have helped to increase generic medication utilization. The generic utilization rate increased to 65% in 2006 compared with 47% in 2000.16 The launch of the first GDDP in 2006 and the awareness of such programs due to the advertising campaigns by pharmacy chains may have increased the generic utilization rate and may have increased profits for PBMs and MCOs.

The objective of this study was to evaluate differences in various GDDPs across large chain pharmacies operating in Houston, Texas, and compare them by reviewing the number of top 50 generic drugs (by retail dollar sales and total prescription volume) covered by each program. The secondary objective was to provide insight into the impact of such programs on potential cost savings associated with the delivery of medications for MCOs.


A cross-sectional field study was conducted by extracting data regarding the information about the GDDPs from local chain pharmacies. Large chain pharmacies operating in Houston, Texas, were selected for the convenience of collecting data locally (as a visit to the store might be necessary) and included CVS, Walgreens, Walmart, Kroger, Target, Randalls, and H-E-B. These pharmacies were among the top 20 pharmacies across the nation by pharmacy dollar volume.17 Walgreens ranked first by pharmacy dollar volume (2008) across the nation ($39.3 billion), followed by CVS (second rank, $33 billion) and Walmart (third rank, $19.63 billion). Kroger ranked fifth ($6.9 billion) and Randalls (Safeway) ranked seventh ($4.4 billion), followed by Target (eighth rank, $4.2 billion). Of all the pharmacies included in this study, H-E-B had the lowest rank at 19th ($1 billion).17 The 7 pharmacies’ total dollar sales summed to $108.43 billion, which is around 46% of national prescription drug spending ($234.1 billion) for the year 2008.17,18

A data collection instrument was developed that included questions on the type of GDDP offered by DS, cost per prescription, total number of generic drugs included, and whether a prior membership was required for eligibility. A list of drugs covered in these GDDPs was acquired from the pharmacy Web site and by asking the local store manager or contacting the national office. The list was validated by making sure that the data matched for the various methods used; for example, the list from the local store was checked with that provided online at the pharmacy’s Web site. The data collection period extended from February 2009 to May 2009. The data were then entered into a data abstraction form using MS Excel 2007. The extent of drug coverage of each GDDP was obtained by comparing the GDDP drug list of each pharmacy with the list of top 50 generic drugs consumed in the United States by US national retail dollar sales and by total prescription volume during 2008.19,20 Data were then coded and analyzed using SAS version 9.1 (SAS Institute Inc, Cary, NC). Differences in the GDDPs were evaluated based on descriptive statistics.

Potential savings that could result due to the introduction of GDDPs were estimated by first matching the number of drugs included in these GDDPs with those in the top 50 generics list by US national retail dollar sales for 2008. A conservative average of 40% was considered as the share of prescription drug expense paid by private health insurance.21,22 The percentage of retail dollar sales out of total prescription drug spending by these 7 pharmacies was also considered. The savings could vary based on how many of those 7 pharmacies provided a given generic drug via a GDDP. It was assumed that pharmacies would process through the GDDP all prescription drugs previously covered under a patient’s managed care plan but now in the GDDP list. The formula developed to calculate the potential savings was as follows:

Potential savings for a drug = national retail dollar spending for the drug in 2008 × A × B × percentage of pharmacies in this study offering the drug in their GDDP, where A represents the percentage of national retail dollars spent by PBMs (40%) and B represents the percentage of the retail dollar spent by the 7 pharmacies in this study (46%).


All 7 major chain pharmacies in Houston offered a GDDP and were evaluated.

Table 1

describes the type of GDDP by DS, cost per prescription, number of drugs covered, and whether an enrollment fee was required. Most pharmacies offered both a 30-DS and a 90-DS program,except for Randalls, which offered only a 30-DS program and CVS, which offered only a 90-DS program. A 30-DS program was typically offered at around $4 and a 90-DS program at around $10, except for Walgreens, which charged $9.99 for a 30-DS program and $12.99 for a 90-DS program. Although all pharmacies covered a minimum of 300 generic drugs, the exact number of generic drugs covered by these GDDPs differed across pharmacies. H-E-B covered more than 500 drugs in its GDDP, whereas Randalls covered only 307 drugs. It should be noted that a drug with different doses was counted as a separate drug by these pharmacies in their list of drugs. For example: amitriptyline 10 mg, 25 mg, 50 mg, 75 mg, and 100 mg was considered as 5 different entries/ drugs when counting the number of drugs offered via a GDDP. It was observed that the list of drugs covered in a particular GDDP did not differ between 30-DS and 90-DS programs within the same pharmacy. Out of 7 pharmacies, 3 GDDPs required membership to obtain benefits of their respective programs. H-E-B requires a membership only for the 90-DS program, which involves a one-time fee of $5. The CVS program requires an annual enrollment fee of $10 and Walgreens’ Prescription Savings Club Card costs $20 annually for an individual and $35 for a family. All major therapeutic classes were covered by these GDDPs, ranging from allergies to vitamins and supplements.

When GDDPs were compared with respect to coverage of the top 10, 25, and 50 generic drugs, more drugs were covered when the list by total prescription volume was considered compared with drugs by retail dollar sales (

Table 2

). On average, 16 (range 10-19) of the top 50 generics by retail dollar sales were covered in these programs. This number increased to 29 (range 22-33) when total prescription volume was considered. CVS (90-DS only) and Walgreens covered the highest number of top 50 generic drugs by retail dollar sales, whereas only Walgreens covered the highest number of top 50 generics when total prescription volume was considered. Despite being the first to launch the GDDP, Walmart covered fewer top 50 drugs than most other pharmacies except Randalls, which covered the least number of drugs by retail dollar sales and total prescription volume. When one considers the top 10 generics by retail dollar sales, only 1 drug was covered by CVS and Walgreens. H-E-B pharmacy covered only 2 drugs from the top 10 list by retail dollar sales, and the other pharmacies covered none. This number increased to 5 and 6 when drugs were considered by total prescription volume (Table 2).

When we reviewed the analyses by considering the percentage of drugs covered in the top 10, 25, or 50 lists, the results were not consistent for retail dollar sales and total prescription volume. An increase in the extent of

coverage was observed for generics by retail dollar sales,

where 10% to 20% of drugs from the top 10 generics were

covered, followed by 8% to 28% from the top 25 generics,

and 20% to 38% from the top 50 generics. However,

the coverage remained more or less constant when drugs

by total prescription volume were considered (50%-60% from the top 10 generics, 48%-60% from the top 25 generics,

and 44%-66% from the top 50 generics). Further, the

increase in the coverage observed by retail dollar sales

was mainly for drugs in the 25 to 50 rank compared with

the 1 to 25 rank.

Potential savings for MCOs was calculated by considering the total US national retail dollar sales data (2008) for 26 of the top 50 generic drugs covered in these GDDPs. A conservative value of 40% was considered as the annual share of prescription drug expense paid by MCOs. The resulting amount was multiplied by 0.46, which is the percentage of national prescription drug spending accounted for by the 7 pharmacies in our study. The amount thus obtained was then multiplied by the percentage of pharmacies (within the study) that offered the drug in their GDDP. For example,

Table 3

shows that US national retail dollar sales for simvastatin alone amounted to $1,453,155,000 ($1.4 billion) in 2008. Considering that 40% would have been paid by MCOs previously, the maximum amount saved by MCOs if complete conversion to GDDP was accomplished would be $581,262,000 ($0.5 billion). Of this amount, only 46% ($0.2 billion) was spent at the 7 pharmacies considered in our study. Because only 1 of the 7 pharmacies in our study offered this drug in its GDDP (14.3%), the potential annual savings for MCOs for simvastatin would be $38,235,000 (14.3% of $0.2 billion). Summing the savings for the 26 drugs in the top 50 list that were covered by GDDPs, the annual savings for MCOs could be around $1.28 billion (Table 3). Potential annual savings could further increase to $5.15 billion if the drugs listed in Table 3 were covered by all pharmacies nationally, or to $2.37 billion if only the 7 pharmacies in our study considered it on their GDDP. Thus, the savings could range anywhere from $1.28 billion to $5.15 billion, depending on how many pharmacies carry a particular drug in their GDDP. These amounts are considered as potential savings because MCOs do not reimburse for a drug purchased by a consumer using a GDDP.


Impact of Generic Drug Discount Programs on Consumers

As more large chain pharmacies have begun to offer GDDPs, they have become more prominent as a mainstream approach to increase the utilization of generic drugs. The GDDP launched by Walmart alone was reported to have saved consumers more than $2 billion by May 2009.23 Pharmacies that do not offer a GDDP might require alternate methods for providing a discount to their consumers, especially consumers who are informed about such programs and their potential savings. Because of the launch of GDDPs, their advertising campaigns, and advertising by pharmacies with information on GDDPs at pharmacy store counters, consumers enrolled in MCO plans may now be more aware of the lower copay associated with these generics and hence be more sensitive to the price of generics.8 They may either demand lower prices for drugs or change purchasing behavior when it comes to deciding health plan options.8 However, because of inherent differences in GDDPs asfound in our study, mainly in the list of generic drugsincluded, DS, enrollment requirements, and most importantlythe cost per prescription, consumers may findit difficult to make a wise decision when selecting oneparticular GDDP over another. Hence, there either needsto be consistency in these programs across various chainpharmacies or a source such as a Web site where the differencesbetween these GDDPs could be highlighted andpresented to consumers.

By extending these programs to uninsured consumers, GDDPs ensure that consumers receive affordable care when needed. Insured consumers must opt into the GDDP; otherwise, the drug is processed through their insurance plan. However, if insured patients have lower copays via their insurance plans, would they opt for a GDDP? Also, would patients opt for a GDDP with an enrollment fee if their copay was similar to the cost of a generic drug offered through that GDDP? The success of these programs really depends on how price elasticity factors into decisions of consumers to use GDDPs, and prescription drug utilization in general. For example, if a person’s generic copayment is $7, then $4 plus the need to go to another pharmacy may not be as attractive as it would be to a person with a higher starting copayment. Moreover, for individuals with low income, the enrollment fee can be discouraging. These individuals may lean toward filling a prescription where there is no enrollment fee for the GDDP.

The study results indicated that a significantly higher number of drugs were covered when one considered total prescription volume as opposed to total retail dollar sales. This may indicate that these GDDPs select drugs based on total prescription volume rather than total retail dollar sales (ie, high-volume, lower-cost drugs are more likely to be on the GDDP than high-volume, higher-cost drugs). Although the extent of coverage by retail dollar sales increased with progression from the top 10 to the top 25 to the top 50 generics, it should be noted that this increase was mainly due to the drugs with lower retail dollar spending. If GDDPs increase the coverage to top-ranking generic drugs by retail dollar sales, such drugs may become more affordable to consumers and increase savings for MCOs. No evidence or published guidelines address the question of why a certain drug is or is not included in a GDDP. More research is needed to understand these concepts and develop universal strategies of coverage. Furthermore, how patients with specific disease states may benefit by selecting drugs listed in GDDPs needs to be evaluated.

Impact of Generic Drug Discount Programs on PBMs and MCOs

The most important issue with GDDPs is their impact on PBMs. It has been argued that GDDPs would endanger PBMs’ position in the US healthcare market.24 This may be true for 3 reasons. First, the utilization data on prescription drugs in managed care databases may not be all-inclusive, as patients who use GDDPs are not required to use their insurance; thus, such data will not be captured by PBMs. The validity of utilization data obtained from the MCOs then will be questionable for generic drugs. Second, Walmart recently started offering a 90-day supply of generics for $10 including free mail delivery. This could have a direct impact on PBMs’ mail-order business, which is one of their revenue-generating strategies.25 Finally, Walmart has stepped into the PBM market by offering a $0 generic copay program for employees of Caterpillar. Plan enrollees will have no copay for genericdrugs bought from Walmart.24,26 Nonetheless, GDDPs cannotsubstitute for PBMs as they cannot match the diseasemanagement and case management services providedby PBMs.8 Also, PBMs involve larger contracts that covervarious services, whereas GDDPs function as 1 strategyand are limited to generic drugs.15

Pharmacy benefit managers do not view GDDPs as a threat; rather, they anticipate savings due to reduced processing and reduced generic drug payout.8 As consumers use GDDPs, MCOs and PBMs will accrue direct savings associated with the utilization of generics covered in these GDDPs. These savings would increase with increased coverage of the number of top-selling generics by retail dollars and/or total prescription volume. Savings could also dramatically increase with an increase in the number of chain pharmacies providing a GDDP, as well as the number of consumers demanding a GDDP drug.

The question that remains is whether these savings will be used to enhance patient care or to reduce the heavy premium burden on consumers, or just held as profits by these companies. Time and further studies will be required to understand whether GDDPs have an impact

on reducing prescription drug plan premiums for consumers.

Impact of Generic Drug Discount Programs on Uninsured, Low-Income Patients and Medicare Patients

It has been documented that high prescription costs pose a significant burden for the elderly; those with low-income, chronic conditions; and the uninsured.27 Frequently, uninsured low-income patients who do not qualify for Medicaid and have no resources to obtain prescription medication forgo essential medication, thus increasing their health risks.28 Additionally, some studies have found an association between medication underuse and the cost associated with medications.28-31 In a study by Piette et al, 19% of respondents reported a reduction in medication use in the prior year due to cost.31 In another study, the same group found that individuals with copayments of $30 or more had 4.5 times higher odds of underusing medication due to cost in the past year compared with individuals who had copayments less than $5.32 Similarly, in another study, 40% of adults with income less than $25,000 indicated that they had not filled a prescription in the past year due to cost.33 Underuse of prescription medication as a result of cost has been associated with increased use of emergency department visits and unnecessary hospitalizations.28,30,32,34 The GDDP is a pathway for resolving some of the burden created by medication underuse due to cost. It has been shown previously that programs that increase availability of low-cost prescription medications (similar to those offered by GDDPs) can assist in improving medication adherence, reduce emergency department visits, and prevent unnecessary hospitalizations.35-37

Another area in which the GDDP can be useful is reducing the gap in coverage for the Medicare Part D prescription benefit plan, popularly known as the “donut hole.” Fifteen percent of Medicare beneficiaries in 2007 who entered the donut hole stopped taking their medication.38 In a study by Cronk and coworkers, beneficiaries within the drug coverage gap reported adopting strategies for coping with increases in expense such as obtaining samples from physicians, taking fewer medications than prescribed, or choosing to stop taking their medication.39 Other studies have shown that many beneficiaries in HMO plans cut back on their medication use after they entered the coverage gap.40 Similarly, in other studies Medicare Part D beneficiaries were found to reduce medication use after they reached the donut hole.41,42 Generic discount drug plans will represent a way for seniors who fall in the donut hole to save money while still being able to obtain those medications that have a generic substitute on the GDDP. The GDDP has only partially catered to this population due to the limited list of medications offered, but the potential exists, and future studies of GDDPs as a cost-saving strategy for seniors to cope with the donut hole are needed.43


The results of this study should be considered in light of the fact that there were several limitations. The study only included pharmacies operating in Houston, Texas. Thus, the GDDPs offered by large chain pharmacies operating outside Houston were not considered and could inflate the savings. However, the result should be robust enough, as the majority of the pharmacies considered in this study have outlets across the nation and offer GDDPs on a national level. Moreover, the calculated potential savings included the percentage of national prescription drug spending by these pharmacies. The potential savings would vary based on what percentage of an MCO’s total prescription spending is accounted for by GDDPs and what percentage of pharmacies cover a particular drug among all the pharmacies that offer a GDDP. The estimated savings represent a higher estimate, as we assumed that all the prescriptions that qualified for a GDDP were filled via a GDDP. As more pharmacies are added, the estimated savings would increase. To our knowledge, data on the actual use rate of these programs were not available. Future studies should evaluate the impact of adding all top 50 generic drugs to GDDPs’ lists. Consumer awareness, intention to use these programs, and satisfaction with these programs could affect the results to a great extent. These issues need to be addressed.


The GDDPs offered by various large chain pharmacies varied with respect to the amount per prescription paid by consumers, DS, enrollment requirements, and number of drugs covered. Potential savings for MCOs associated with the introduction of GDDPs were estimated to besignificant.

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