Wal-Mart, Humana offer low-cost drug plan, challenging Walgreens

Wal-Mart Stores Inc., the world's largest retailer, said it will team with health insurer Humana Inc. to offer the cheapest prescription drug plan in the U.S., as the companies seek to take sales of medications from rivals.

The companies will begin marketing the plan today to Americans in Medicare, the U.S. government health program for the elderly and disabled, William Fleming, a Humana vice- president, said in a conference call yesterday. The policies, which take effect Jan. 1, will cost $14.80 a month, less than half the average premium this year, and will boost sales for both companies, Fleming said.

Humana is the second-biggest provider of Medicare benefits in the U.S., after UnitedHealth Group Inc., the top plan by sales, and provides prescription plans to 1.7 million people. The insurer is betting Wal-Mart's marketing and purchasing muscle will help keep its drug plans profitable, even as it cuts monthly premiums by more than half, said Ana Gupte, a Sanford C. Bernstein & Co. analyst in New York, in an e-mail.

"The drop in premiums has to be compensated by an increase in enrollment," Gupte said. That's "likely achievable" thanks to Wal-Mart's network of low-cost pharmacies "which we expect will garner significant share gains in light of the simple low pricing of $14.80 nationwide."

Humana rose 10 cents to $50.24 at the 4 p.m. close yesterday in New York Stock Exchange composite trading. Shares of the Louisville, Kentucky-based company rose 15 percent this year before today. Shares of Wal-Mart, based in Bentonville, Arkansas, climbed 17 cents to $53.52 yesterday and were unchanged for the year.

The marketing agreement may boost Humana's Medicare drug membership by 250,000 people next year, a 15 percent jump to 1.97 million next year, Gupte estimated in a Sept. 29 note to clients. The company expects sales from stand-alone drug plans of as much as $2.4 billion for 2010, out of $34.5 billion in total revenue, the insurer said in an Aug. 2 statement.

Humana's Fleming and John Agwunobi, president of Wal-Mart's health and wellness division, declined to say how many customers the companies expected to add, what profit margin the plans would offer or how the margin would be divided.

"Humana does expect to gain membership from this plan," Fleming said on the conference call. "Wal-Mart does expect to gain customers."

Wal-Mart has used its heft to offer lower-cost drugs and step up competition with pharmacies at CVS Caremark Corp. of Woonsocket, Rhode Island, and Walgreen Co. of Deerfield. Wal-Mart started filling generic drug prescriptions for $4 an order in September 2006 and has more than 4,000 pharmacies in the U.S. Health and wellness products made up 10 percent of sales at U.S. stores in the year ending January 2010, according to company data.

"This will fit nicely with their $4 generic drug program, which has been a success thus far and has been copied by others," Brian Sozzi, an analyst at Wall Street Strategies Inc. in New York, said in an e-mail. "They are trying get their name out there that they offer affordable drugs for seniors, and get them coming to the store instead of going to Walgreens or CVS."

Customers can enroll in the plans beginning Nov. 15. Through the lower premiums and reduced co-payments, the companies expect the average enrollee to save $450 in drug costs next year, Agwunobi said.

"We believe we truly are standing as advocates with our customers at a time when they could not need us more," he said.