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Some good news for seniors on Medicare and Wal-Mart (NYSE: WMT ) investors is bad news for Wal-Mart's competitors: The retail giant has partnered with health-care benefits provider Humana (NYSE: HUM ) to provide an extremely low cost Medicare Part D prescription drug plan.
The plan, called the Humana Wal-Mart-Preferred Rx Plan (PDP), will provide coverage at a monthly premium of less than $15. The stand-alone plan is offered at one price throughout the country, and according to the joint press release, could help typical Medicare Part D recipients save an estimated $450 per year, starting in 2011. Copayments for prescription generic drugs could be as low as $2 if customers use a preferred retail location, and generic prescriptions delivered using Humana's home delivery program may require no copayment at all.
Big-box competitors Target (NYSE: TGT ) and Costco (Nasdaq: COST ) will also need to create programs similar to Wal-Mart's at this low cost in order to keep their own prescription drug customers. When Wal-Mart introduced its $4 prescription drug pricing for generic drugs just a few years ago, the other retailers had to be quick to match. Look for a similar scenario to occur with Medicare Part D this time around.
Wal-Mart wins again
As Wal-Mart's health and wellness division president Dr. John Agwunobi said, "We know every dollar counts, especially when you live on a fixed income. We believe no one should have to choose between buying their groceries or their medications. Financial health is a fundamental part of a person's well-being. "
Clearly, Wal-Mart is striking the right chord with the plan. It definitely benefits the company as well as the 18 million Americans who rely on Medicare Part D, especially if it draws new customers into Wal-Mart locations around the country. And even if margins will be small for Wal-Mart, the company is used to dealing with a low-margin environment, and is better equipped than its competitors to succeed in it. Wal-Mart can offer such competitive prices because of the sheer volume of business they are capable of doing at low costs. While other smaller pharmacies can attempt to match this deal, the margin squeeze will definitely be much greater on these companies bottom line.
Humana also doesn't see the deal as a loss leader for their company. Humana Pharmacy Services vice president William Fleming said that the company expects margins for the program of around 5%, which equals the average for all of the company's Part D plans, and sees it as a good way to increase its Part D membership ranks.
What the future will bring
It will be interesting to watch as competitors begin to respond to this new prescription drug plan. The details of how the new health-care reform bill is affecting businesses are still developing. As usual, Wal-Mart has struck early with a low-cost option, even if it isn't particularly innovative.
How do you think Wal-Mart and Humana's competitors will respond the new Medicare plan? Let us know in the comment box below.
Editor's note: A prior version of this article incorrectly included BJ's Wholesale among retailers that sell prescription drugs. The Fool regrets the error.