Wednesday, May 20, 2009

Reality Check on Mail Economics

I got a lot of comments and emails about last week's article on CVS Caremark (Debate Over CVS Caremark's Tactics Heats Up). Many people criticized me for not recognizing that mail pharmacy reimbursements are higher than retail pharmacy reimbursements.

Regular readers know my credo: "Everyone is entitled to his own opinion, but not his own facts." And as I show below, an independent data source shows that – on average – mail pharmacy reimbursements are actually lower than retail reimbursements.

Please take the time to read this article carefully before you accuse me of bias. I'm not defending or attacking anyone; I'm merely providing you with some independent data so you can make up your own mind. Let's keep the discussion going by leaving me your reactions and comments.


I never discuss confidential or non-public information on this blog.

Therefore, I will address the mail vs. retail reimbursement question using the Pharmacy Benefit Management Institute's most recent Prescription Drug Benefit Cost and Plan Design Report. The report is chock-full o' great data, including historical time series.

The 2008 report is based on completed surveys from 223 employers representing 15,137,168 members. As far as I know, this is the only publicly available data on detailed plan design components from a reasonable sample of employers. You can download the report for free and check my numbers.


Pharmacy reimbursement formulas are a key element of benefit plan design. These rates reflect the amounts paid to a pharmacy for filling the prescription of a beneficiary.

The two tables below are derived from the PBMI report, page 21. (Click to enlarge.) As you can see, the discount from Average Wholesale Price (AWP) is greater for scripts filled by a mail pharmacy than a store-based retail pharmacy. In other words, the reimbursement to a mail pharmacy is less than reimbursement to a store-based retail pharmacy for both brand and generic prescriptions.

There are some important comments on these numbers.

  • 80% of employers do not have mail dispensing fees. I included the AWP minus figures for both options, although by far the more common situation is to have no mail dispensing fees.

  • MAC pricing is more common for generics than AWP minus. No surprise here. Maximum Allowable Cost (MAC) sets a unit price limit on pharmacy reimbursement because AWP is often a poor proxy for a pharmacy's acquisition cost for a generic drug. The AWP data are reported by PBMI because some employers do not use MAC pricing.

  • MAC pricing is more common for retail than mail. MAC pricing is used by 86.6% of employers for retail generic prescriptions and 61.1% of employers for mail-service generic prescriptions. No explanation or detail is provided for this finding.

  • Half of the employers do not understand pharmacy economics. Here's an amazing stat: "A total of 49.1% of employers said they did not know their pharmacy reimbursement rates" (page 20). I presume that this finding reflects the fact that Pharmacy Benefit Managers (PBMs) act as intermediaries between employers and pharmacies. This level of ignorance suggests that Wal-Mart will have to spend time educating employers if they want to sign more Caterpillar-type deals.


If acquisition costs were equal between a mail and a retail pharmacy, then the PMBI data imply that a dispensing pharmacy's gross profit per script (Reimbursement minus Acquisition Cost) is higher at retail than mail for brands. The situation for generics is a little murkier because of the disparity in the use of MAC pricing, but I'd expect a similar relationship.

Before you pop the champagne for store-based pharmacy, keep in mind that the operating profit per script will depend on the relative cost of dispensing. If the cost of dispensing (COD) for a prescription is lower from a mail pharmacy than from a retail store, then the mail pharmacy can accept a lower reimbursement and still have higher operating profits per script. (Technically, higher EBITDA per script, but who want to get technical?)

Put aside any personal biases or beliefs about the relative merits of mail versus retail pharmacy. Just consider the financial economics for a moment. If you do so, you can see the implicit win-win of the PBM/mail order business model.

  • The employer will pay less for a drug dispensed by mail because the AWP discount is bigger.

  • The mail pharmacy can simultaneously be more profitable for the PBM because the mail COD is generally below the retail COD.

Last Friday, CVS Caremark appeared to claim something quite different about their model. As evidence of my balanced approach, a follow-up post will highlight a discrepancy between a reimbursement example cited by CVS Caremark's CFO during last Friday's analyst meeting and these external facts. Stay tuned.


  1. AnonymousMay 20, 2009

    Adam, you are assuming that Mail order is using the same AWP as retail.Is it possible that Mail order is using a "repacked" version of brand name drugs with its own NDC number and a much higher AWP?

  2. AnonymousMay 20, 2009


    AWPs at retail and mail may differ. PBMs typically assign AWP at mail based on package size of 100's whereas at retail it is based on actual package size. Do you believe that retail and mail pharmacies have the same purchasing power?

  3. I'm "and idiot"?

    I thank you for sharing this thoughtful and well-researched rebuttal. Well played, sir!



  4. AnonymousMay 20, 2009

    OK. Let's deal only in facts:
    1. Whose facts may be germane; PBMI is not exactly an impartial source. It's wholly supported by the PBM industry.
    I assume the surveyed employers are working off of reports provided to them by their PBMs. Even when we assume that the data is accurately reported to the employer and accurately noted on the survey and not cherry-picked or spun in presentation context to support the PBM model;
    2. The 25.5% difference in the use of MAC pricing by employers for "by mail" generics is HUGE (I'll leave it to you to calculate the billions with a "B" that accrue to the mail order model when "off AWP" is paid). I'd be surprised if there's an advertising blitz by PBMI to educate employers to change to the MAC model, or to verify payer contracted MAC pricing by comparison to that actually paid to pharmacies.
    3. Branded products may be marginally cheaper to the payer through mail order if the package-size NDC game is not in play. It would be instructive if you looked into the model utilizing all administrative fees, discounts and offsets (as so frequently noted by commenters). How about including a look at how PBMs have the opportunity to play the shell game with the illusion of transparency, while slicing and dicing categories of Manufacturer support and allocating each to internal business segments to protect much of it from discovery by or handoff to the payer? Add NDC games, and the MAC/AWP gaping disparity and you have substantial marketing opportunity for a retail-based direct-to-provider compensation model.

  5. AnonymousMay 20, 2009


    A PBM mail order pharmacy is classified as a closed door pharmacy making it a different class of pharmacy according to the manufacturers. They are able to purchase at a different price then a retail pharmacy( sometimes quite a bit lower). There is a difference in the cost of goods. You should know this!!! Also, I have seen remittances where the cost of goods is based on a "package size of 100" when in fact the larger mail order pharmacy can purchase and does purchase in 5000 or 1000 packages but bill for the 100 size.

  6. AnonymousMay 20, 2009

    Most PBM contracts contain extensive gag clauses that prevent pharmacies from disclosing the information to customers, even when specifically requested -- why would they then turn around and provide it ACCURATELY on a voluntary basis? answer: they don't. that's why employers don't know their reimbursement costs. and that's why spreads between what the plan pays and the pharmacy gets are absurd.

    and if you imagine that information is going to be out there in a publication financed by the PBM industry, you need to think again.

  7. AnonymousMay 20, 2009

    Above posted nailed it. Pbm's can make the figures look however they want.

    How can they fill scripts on brands at awp-23% and no dispensing fee? They get the rebates from the branded manufactures (as high as 20-40%). They also can bill and get paid before the prescription is even filled.

    Which MAC are you referring to? The MAC they use for the payer or the other MAC they use to pay the pharmacy?

    When the truth gets out about the unethical practices of the pbm's, I will be here to tell you "I told you so!"

  8. AnonymousMay 20, 2009


    I'm not sure where you are going with the CVS example but I can guess at a couple of different conclusions. My understanding is that a Maintenance Choice script filled at retail is reimbursed at the mail rate rather than the pharmacy rate. This makes the payor indifferent to where the script is filled - so essentially the $100 to retail or mail is the same as the mail rate (presumably if the script were filled at retail outside of Maintenance Choice the cost to the payor might be $110 - but since CVS is transferring the script from mail to retail, I think you can conclude they would be revenue neutral). On the cost side, CVS is buying for both the PBM and retail so the procurement costs should be the same. On the COD side, the leap of faith you have to make to believe the CVS argument is that the mail COD is highly variable and the retail COD is largely fixed. Intuitively it makes sense to me that retail pharmacy COD would be fixed as long as pharamcy utilization is well below 100% - I've talked to CVS and they've indicated that that there is at least 15% excess capacity at retail so there shouldn't be incremental costs. The other leap is that the PBM mail costs are largely variable. I have less of a sense for this but I would imagine in a high volume mail center it would be easier to reduce capacity by say 10% than it would be at 20 high volume mail distribution centers than it would be to do so at 7000 retail locations.

  9. AnonymousMay 20, 2009

    Dr. Fein,

    I should be able to put this issue to rest for you, I need to do some digging. My father-in-law is insured thru the NYC Board of Ed. He began on Metformin 500 and Glyburide 5mg for his diabetes. I was able to fill his rx's and I had proof of what my father-in-law paid via co-payment and what MY store was reimbursed. A few months later, my father-in-law was forced into mail order to "save money". Well, he did save a little via his lower copayment for his mail order. Where he wasn't saving money was via his Union as a whole. I would see the paper work my father-in-law was getting, for the SAME two meds (divided by 3 of course, because it was a 3 month supply), his union was paying out 129 dollars MORE per month for both rx's. I had saved all this stuff, and I will look thru some file cabinets tonight to see if I an find it. If I do, I will fax it to you. Forget about these so called "studies". Pretty hard to come up with ANY study on a PBM model when so much of their workings are secret because of the "proprietary " nature of their business.

    George R

  10. AnonymousMay 20, 2009

    "an independent data source"

    "PBMI report"

    Reminds me of the Wolf doing the census count on the sheep....

  11. AnonymousMay 20, 2009

    I'm wondering if the "and idiot" author might also prefer his music played at 11?

  12. A few quick points:
    1. 90 day supplies increase waste and cost by ~5%.
    2. Lower patient pay further reduces the employer savings (e.g., losing two brand co-payments).
    3. The mail AWP vs. retail MAC is a huge issue. In hundreds of audits I have never seen generic pricing at mail be lower than retail. It's also why I can buy a 90-day supply of a generic for $19 at Sam's Club but our mail-service pharmacy charges over $200. At least that's one way to use up all your deductible.

  13. 1. I think about any pharmacy would take AWP - 25% if they could use the same NDC's that the mail order pharmacies are using. Want proof? Go get a copy of the Red Book, and look at the AWPs of the PBMs' own repacked drugs.

    2. I too doubt the "unbiased" nature of PBMI.

    3. Not only do PBMs pay themselves more for generics that are filled at mail order, but they also make money off the spread whenever generic prescriptions are filled at retail. For example, a PBM will pay the pharmacy $9.00 for a metformin Rx, and then turn around and bill their client $23.00. I think these activities probably make it look like generics cost more at retail pharmacies than they actually do.

    4. The studies I've seen have actually shown that mail order vs. retail have about the same real cost.

  14. AnonymousMay 21, 2009

    mac values, mac values, mac values. pbm assign different mac values to the mail order pharmacy they own. employers always pay more for generics through mail. get some real "independent data"

  15. AnonymousMay 22, 2009

    Many PBMs do not like to offer MAC at mail, and MAC-at-mail pricing often differs from MAC-at-retail pricing. Some PBMs adjust their MAC-at-mail pricing with each proposal. Under traditional pricing, MAC-at-retail cost can differ from (and be lower than) related PBM charges to the client. Mail-dispensed generics represent a major source of PBM profit.

  16. James CammarataMay 24, 2009

    Upon reading above comments, they reinforce the reality of why it is so difficult for the pharmacy community to educate and inform our legislators and our industry experts with respect to the intricacies of the PBM model. PBM's have so many smoke and mirrors that even you, Dr. Fein, a well-respected industry expert, are not completely informed re: prescription economics despite your well intentioned efforts. One reality says it all: if PBM's are truly operating an efficient and non-abusive administrative function with an industry accepted profit margin, why do they continuously hide behind the "proprietary information" shield??? If we effectively regulate PBM's as we do insurance companies and retail pharmacies, the abuses will "come out in the wash". PBM Regulation is LONG OVERDUE!!!

  17. AnonymousJune 01, 2009

    they hide behind that shield because it is how they make money. it is simple economics - there is competition for the lowest cost alternative whether it is mail or retail. this will eventually lower the cost of mail-order as more beneficiaries begin to use it.
    mail-order pharmacies owned by PBMs also increase economic efficiency by not having the costs of negotiation and profit margins at both entities.
    don't the plan sponsors consult and negotiate with the PBMs when they set the reimbursement rates? if it cost them that much more, they wouldnt opt to use it. one off examples of Dad's meds don't make a case for or against the issue... and I don't see the case for PBMI having any incentive to work for the PBM industry. If they weren't independent, they wouldn't be publishing reports on how the industry works, how to negotiate with PBMs, different aspects of plans, etc. The five or six reports I have read from the PBMI seem completely independent in their anlaysis.

  18. AnonymousMay 26, 2011

    I can't really add much to the above comments, except to say ditto. What I can add for Dr. Fein, is that he can plan on writing many articles in the coming months about states enacting legislation that bans mandatory mail order. Why? All the above posts, plus, it has been documented, well documented, that mail-order does not save the plan sponsor any money whatsoever. The facts and public sentiment are on the side of retail pharmacy, specifically, Independent Retail Pharmacy. I'll look forward to the spin Dr. Fein puts on the New York Legislation that will probably be law by 2012.

  19. "it has been documented, well documented, that mail-order does not save the plan sponsor any money whatsoever."

    Links? Citations? Logic?

    Do you realize that your statement implies plan sponsors are completely foolish. Come to think of it, I guess companies like ExxonMobil and Microsoft don't really care about money so they can be easily tricked, right? ;)

    Anyway, retail pharmacies can be price-competitive with mail if pharmacies cut their prices. See Walgreens Joins the Attack on PBM Mail Profits.


  20. "it has been documented, well documented, that mail-order does not save the plan sponsor any money whatsoever."

    Links? Citations? Logic?

    Do you realize that your statement implies plan sponsors are completely foolish. Come to think of it, I guess companies like ExxonMobil and Microsoft don't really care about money so they can be easily tricked, right? ;)

    Anyway, retail pharmacies can be price-competitive with mail if pharmacies cut their prices. See Walgreens Joins the Attack on PBM Mail Profits.