Thursday, October 27, 2011

Retail and Mail Pharmacy Economics Start Converging

Let’s dig into PBMI’s 2011-12 Prescription Drug Benefit Cost and Plan Design Survey again to look at the drug channel management in employer-sponsored plans.

Here’s what I found:
  • For employers and consumers, a 30-day brand-name prescription is still cheaper at a mail pharmacy than a retail community pharmacy.
  • However, mail's economic advantage is vanishing because six out of ten employers allow community pharmacies to fill 90-day prescriptions for maintenance medications. These programs reduce retail reimbursement and shrink the mail-retail gap.
  • For generic prescriptions, mail appears to have an ingredient cost advantage vs. retail, although employers are less likely to use Maximum Allowable Cost (MAC) limits for mail pharmacies.
The PBMI data demonstrate that plan sponsors are paying attention to drug channel margins. The embrace of channel-neutral benefit designs will pressure profits at both retail pharmacies and PBM-owned mail pharmacies. Retail pharmacies must accept lower reimbursements to compete with mail order, while mail pharmacies must compete more directly on service with retail community pharmacies.

Oh, by the way, manufacturers: who do you think is going to be asked to subsidize the system as profits get sucked out of the pharmacy distribution?


I described the strengths and weaknesses of the data in More Formulary Exclusions for Many Drug Therapies.

I want to highlight the fact that only 30% of the survey respondents—about 82 employers—provided pharmacy reimbursement data. It is not clear if this subset of employers differ in some significant way from the other respondents.


We all know the usual story. The pharmacy reimbursement formula makes mail-order dispensing less expensive for both the payers and the consumer, encouraging the substitution of mail pharmacies for retail network pharmacies. Here’s the twist: the PBMI data clearly show mail and retail reimbursement rates converging for maintenance prescriptions.

The chart below shows the plan sponsor’s ingredient costs for a brand-name drug as a percentage of Average Wholesale Price (AWP). As you can see, a mail pharmacy is 670 basis points cheaper for an employer than a 30-day prescription dispensed by a community retail pharmacy. Since the average brand-name drug AWP is about $200, the employer pays about $13 less on average for a drug dispensed by mail. The consumer’s co-payment drops by $7 per equivalent script.

PBMI, for the first time, asked employers about 90-day at retail programs. Sixty percent of respondents allow retail network pharmacies to dispense 90-day maintenance supplies of medications.

The average 90-day at retail reimbursement reduces the cost gap between mail and community pharmacy for both consumer and third-party payer. The difference is now only 330 basis points (about $6 per prescription) and the average copayment per prescription differs by only $2.


The generic story is similar but has an important caveat.

The chart below shows the data for generic prescriptions in a comparable format to the brand-name data above.

Oddly, the average 90-day retail reimbursement rate is greater than the 30-day rate. In an email, Brenda Motheral of PBMI told me that this quirk in average AWP discounts could reflect sample heterogeneity:
  • 25% of the employers reported 90-day discounts greater than 30-day discounts for generic prescriptions (consistent with the brand-name averages)
  • 25% reported 90-day discounts less than 30-day discounts (per the overall averages)
  • 50% reported the same AWP discounts for 30-day and 90-day generic prescriptions

The generic reimbursement data do not tell the full story. The PBMI survey also found that Maximum Allowable Cost (MAC) reimbursement limits are much less common for mail prescriptions than retail prescriptions. The gap is pretty striking.

What’s going on? Some possibilities:
  • Perhaps the respondents (from employers) don’t know about MAC lists. For instance, I would have guessed that more than 42% of employer-sponsored plans are using MAC limits for 30-day retail scripts.
  • The varying MAC tactics could reflect product mix differences. Non-maintenance medications, such as short-course antibiotics, are dispensed by community pharmacies, not mail pharmacies. (BTW, the generic dispensing rate is roughly equal for mail pharmacies vs. community pharmacies once you normalize for therapeutic class. See NCPA Twisting Reality Again.)
  • Employers are signing PBM contracts that allow mail pharmacies to earn higher ingredient cost spreads from dispensing generic drugs.
Other ideas?


The PBMI data demonstrate that plan sponsors are paying attention to drug channel margins, creating a strategic vulnerability for both pharmacies and PBMs.
  • Employers are getting on board with the channel-neutral model. CVS Caremark (NYSE:CVS), Walgreen (NYSE:WAG), and Walmart (NYSE:WMT) have been competing to provide these options for both cash-pay and insurance-paid consumers. Reread January’s Walgreens Joins the Attack on PBM Mail Profits for more on this trend.
  • 90-day programs reduce the pharmacy industry’s profits because retail pharmacies must compete on price at close-to-mail reimbursement levels. Remember, mail pharmacies have lower dispensing costs by buying in bulk to highly-automated, centralized locations. This cost disparity is why the flawed New York mail-order bill may end up hurting retail pharmacies more than they think. See The Unexpected Losers from New York’s Anti-Mail Bill. It’s also a good example of why we don’t need government mandates to take care of something that the market can handle just fine.
  • The growth of 90-day at retail is a major hurdle to mail-order growth and therefore a threat to PBM profits. In 2010, total mail volume increased by 1.1%, but this was a bit lower than overall market growth of 1.2%, so share of scripts declined slightly (per Chains in 2010: Winning). Dispensing generic drugs from mail pharmacies accounted for a minority of a PBM’s equivalent prescriptions but more than half of per-prescription profits. Hence, the urge to merge.
  • Given the third chart above, PBMs are at risk if payers start requiring MAC pricing for mail-order generic prescriptions. The chart above implies that this payer strategy would reduce PBM ingredient cost spreads in the mail pharmacy. The biggest PBMs—Express Scripts (NASDAQ:ESRX) and Medco Health Solutions (NYSE:MHS)—would be most affected by this shift.

Here come ol' flatprofits,
He come reimbursing up slowly,
He got joo-joo channel,
He one holy payer,
He got hair down to his AWP,
Got to be a joker,
He just do what he please.


  1. You are against government mandates
    interfering with the market and yet you are adamant that government antitrust
    laws apply to small pharmacies? Also, you have conveniently excluded the
    shipping expense and the high degree of waste from your analysis of mail
    efficiency. The “buy in bulk” theory is not accurate. Chain retail pharmacies
    and independent GPO purchases greatly exceed mail, but they receive a higher
    price? It is because mail receives “class of trade” pricing which arguably
    violates antitrust law. These pesky government laws/regulations cut both ways,
    unless you are PCMA or Drug Channels that argue that they are for it and
    against it?

  2. Sorry, your comments about class-of-trade are not accurate. Mail-order pharmacies would buy brand-name drugs directly if they had better class of trade pricing. In reality, the PBM-owned mail pharmacies purchase brand-name drugs from wholesalers (just like chains and independents). These sales persist because large self-warehousing customers can buy brand-name drugs at lower prices from the wholesaler than they can when buying directly from the manufacturer due to class-of-trade issues. I discuss this issue at length on pages 21-26 of in my new wholesaler report.

    My point about costs is true even when you factor in postage due to central-fill economics.
    ==> At a mail pharmacy, products are delivered in bulk to a few large warehouses in a low-rent part of town. The products are moved a few hundred feet into automated dispensing machines and then mailed out.
    ==>Community retail pharmacy requires bulk deliveries to a warehouse, products being put into inventory, picked in unit or case quantities, and then shipped by truck or common carrier to 60,000 prime retail locations.
    ==>Net store-level acquisition costs for a chain pharmacy will be higher than costs at a PBM mail-order pharmacy because the chain must act as its own wholesaler. Self-warehousing chains have internal capabilities for distributing drugs to individual stores from the retailer’s own warehouses. In contrast, smaller pharmacies rely on drug wholesalers for direct distribution to individual stores.

  3. It is my understanding that there would be no reason for mail-order pharmacies to buy direct from the manufacturer to realize the class-of-trade price as it is administered through a charge-back procedure. By the way, the blog is an excellent insight as it relates to pharmacy cost. Great work!

  4. MAC at mail is a big deal.  PBMs for years didn't want to do this (which created margin).  I think most PBMs have realized that it's important to do it to keep clients whole as they move from retail to mail with generic drugs.  When I was at Express Scripts, we launched an effort to move our clients to have MAC at mail.

    But, it's very important to monitor copays and discounts as you consumers move prescriptions from 30-day to 90-day (retail or mail).  If not done right, the payer won't save money (see older post -

  5. Adam , and what is the reason why these so called sophisticated consultants for large employers dont mandate MAC for mail order?? Dont u think its the PBMs who offer the menus up to them so they can choose. But given how opague these contracts are most employers probably dont realize they are getting bent over!!!
    If they are you MAC for retail then use MAC it for mail. Lets see what the real cost are behind the mail order profits.

  6. Adam , and what is the reason why these so called sophisticated consultants for large employers dont mandate MAC for mail order?? Dont u think its the PBMs who offer the menus up to them so they can choose. But given how opague these contracts are most employers probably dont realize they are getting bent over!!!
    If they are you MAC for retail then use MAC it for mail. Lets see what the real cost are behind the mail order profits.

  7. Again, not true. In my experience, brand-name manufacturers do not provide additional discounts to PBM-owned mail pharmacies. Remember, manufacturers pay formulary rebates to PBMs, so there are firewalls between the trade (mail) function and the managed markets function to avoid compliance issues.

  8. Steve MooreOctober 28, 2011

    Once again, this year's report does not differentiate the portion of the cost of a prescription that is allocated to the pharmacy and the portion allocated to the PBM.  It may be beyond the scope of what the report is intended to do, but the breakdown cannot be ignored.  

    In my experience, albeit limited to the self insured employers in and around my area of Upstate NY, employers believe that the entirety of the prescription charge on their bill is going to the pharmacy while the PBM is only retaining the contracted per prescription transaction fee.  They do not realize that while their PBM may be contracted with employers for AWP - 14, the same PBM is contracted with its pharmacy network for AWP - 16.  Or that retail pharmacies are paid based upon MACs but mail order pharmacies are paid based upon AWP for the same NDC.

    If a PBM wants to make their own mail order pharmacy look good, all they have to do is upcharge scripts filled at retail.  The employer would never know about the upcharge and just assume that mail is a better option.  I get "buyer beware" and the like but most small to mid size employers do not have the resources or the expertise needed. 

  9. Data on AWP Comparisons: retail vs.  Mail… collated and compiled by PCMI (See PCMI twisting reality again)Adam, I am not sure how many PBM contract audits you have done, but I am sure you are aware that 82 employers who do not even know what MAC pricing is are not able to supply information to discern a true AWP cost analysis and you are not so na├»ve as to think that PCMI is any better than any other advocacy group when it comes to number twisting.Again, how is it that a supposed fiduciary business like PBMs cans service accounts for the last 30 years and their clients do not even know what a MAC price is. Worse yet, they do not even know if they are using a MAC list. That would be akin to going to an accountant for 30 years and not knowing what an IRS 1040 form is but in the case of the PBM the employer is spending 100 times than they pay the accountant.These long time PBM accounts, for the most part, do not understand MAC or AWP; and PBM contract language has gotten to the point that even, I after 17 years of doing this, have to occasionally use an attorney for word interpretation, which is always in the PBMs favor. Recently I audited an account who thought he was getting AWP-22 on brand drugs. After taking out one source generics and other high cost generics out of his brand pricing he found out that he was only getting AWP -16.5. Additionally they were moving these same generics out of brands when calculating the generic fill rate to make the GFR look better, which is having you cake and eating to.Adam, I have offered many times to do an audit of any PBM account with a mail order piece; mandate or not, and I will do it at no charge.It easy to do your meta-analysis work but let us get down and do some real research.Jim Fields CFO ApproRx

  10. Jim,

    You need to read what I wrote more carefully. I never said that the 82 respondents didn't know about MAC pricing. I was just speculating about possible reasons for the low reported usage.

    You also need to get your facts straight. PBMI is not the same as PCMA. Check out PBMI's mission statement

    I was at the PBMI meeting last February. Almost all attendees were from self-funded small/mid-sized employers. Big  topic of conversation: how to get better deals from their PBMs. The other attendees were either regional/non-Big 3 PBMs or consultants to self-funded employers. 

    Instead of posting your usual litany of PBM gripes on Drug Channels, you should go to the 2012 PBMI Drug Benefit Conference and sell your company's services to self-funded employers. Sure, it won't win you any awards from other pharmacy owners, but it would help make ApproRx more successful. Just my $0.02.


  11. Adam, I think you are coming around.  After agreeing with NCPA in your "Digest" post and admitting that "spread" pricing exists in mail order business, I didn't think I'd ever say this, but, good job!  Keep up the good work.  It's amazing how much more clear things are when you open your mind and listen to people other than PCMA.  "I can see clearly now that the bias is gone"........ Or is it "rain"?  Anyway, for your next post I'd like for you to agree that competition is good and any mandates prohibiting it should be removed.  I can see the headline now " Adam Fein supports AMMO Legislation, Governor Cuomo signs Bill into law!"

  12. Steve MooreOctober 29, 2011

    State Boards of pharmacy mandate that prescriptions are filled
    generically.  Third party contracts are
    written in a way that ensures the pharmacy provides the patient with the lowest
    cost option.  New York State
    mandates that a sign stating “Price List is Available Upon Request” be
    displayed and even goes so far as to dictate the size of the letters.  As pharmacists we deal with laws, rules, and
    regulations that exist to protect the individual patient from being over


    I get the buyer beware concept. 
    That being said, if an employer group is harmed by a bad contract it is
    the individuals who ultimately pay the price through reduced benefits and
    higher out of pocket expenses.  If the
    employer is a city, town, school district or other governmental agency the tax
    payers ultimately foot the bill.   

    I think that there should be an acknowledgement of the fact that a
    significant portion of total cost of a prescription may not be associated with the dispensing

  13. Steve,

    As I have noted consistently on Drug Channels, there are many channel costs beyond the cost of the drug from the manufacturer. Some popular generic drugs are sold by manufacturers for less than 2 cents per pill, so a lot of costs obviously get added on the way to the patient. 

    Sure, some plan sponsors make bad economic decisions. I never claimed that we live in a Panglossian world where all people are making optimal, rational decisions in an economic equilibrium. However, I'd much prefer to let markets sort out the best option rather than impose a government solution. If you look at how state governments and employers are writing RFPs for PBM services, you'll understand this is already occurring.


  14. Since almost all employer offered insurance plans are not fully paid by the employer, but rather split into two parts, a portion (albeit usually smaller, but sometimes as much as half) of the bill is paid by the employees, why is it that the employees should have no say whatsoever in choosing whether to be forced into a mandatory Mail-Order or Preferred Network scenario? And then why is it that the independent pharmacy owners can't educate the consumers and can't lobby to keep the business??

  15. RxdisclosureOctober 30, 2011

    Jason, you have to remember independent pharmacy has been asleep at the wheel when it comes to contributing to the national dialogue on drug costs. PBMs (also not disinterested parties) have controlled the conversation for 15 years, and it has not been an honest conversation at that. We can't blame Adam for having some "confused" opinions about the issue. It is only natural that he form opinions based on the info that has been available. If the only info available for 15 years has been  PBM influenced "studies" and "articles", what can you expect? If the HRs and CFOs (whose jobs depend on these decisions) don't know how they are getting screwed, how can we expect an innocent bystanding blogger to know it as well?