Costco's new PBM: It's all about differentiation

Costco announced in its January 2013 magazine that it would begin offering pharmacy benefit management services, targeting small businesses and highlighting a 200-employee company based in Washington state.

It remains to be seen whether the club retailer's efforts to compete with the existing PBM businesses of companies like CVS Caremark, Walgreens and Walmart will be successful, and analysts like Citi's Deborah Weinswig appear skeptical that they will. But whatever the outcome, it's clear that Costco is looking to compete in a bigger way.

Pharmaceutical industry consultant and author of the blog Drug Channels, Adam Fein, described the current prescription-growth environment as slow. Indeed, the generic wave is resulting in a major commoditization of the drug market, to the point where mass-merchandiser Meijer is even giving away the generic version of Pfizer's cholesterol drug Lipitor (atorvastatin) for free. Fein also noted that in a PBM industry that is consolidating, winning requires scale or differentiation, and that Costco Health Solutions could build its business with generics.

In such an environment, what will matter for pharmacy retailers is how they differentiate themselves to drive customers to their stores. For many, such as the three biggest drug store chains, this means things like loyalty cards, particularly Rite Aid's Wellness+ card, which rewards customers for using the pharmacy. But for Costco, as Fein wrote, the new PBM targets self-insured employers that are close to Costco stores; even though the PBM's network will includes tens of thousands of independent pharmacies, it'll also make picking up drugs at the local Costco all the more convenient, especially when one considers the club retailer's existing specialty pharmacy business. In other words, Costco's PBM may lack the scale of giants like Express Scripts, CVS/Caremark or Catamaran, but it does have the chance to differentiate itself. And Costco has long specialized in catering to small businesses anyway.

Even if some analysts' skepticism about Costco's latest move is correct, and it doesn't gain enough traction or manage to compete with the bigger and more established PBMs, the whole point of being in the retailing business is to drive foot traffic, and if CHS manages to do that, then the club retailer's foray into the PBM business might just work.