Wednesday, December 14, 2011

New York's Anti-Mail Bill and the Coming Generic Price War

Yesterday, Governor Andrew Cuomo signed New York’s controversial Anti-Mandatory Mail Order Pharmacy Bill (New York Assembly Bill 5502‐B). See New Law Bans Mail-Order Drug Mandates from The New York Times.

This law may appear to be a big victory for pharmacies, but they shouldn't pop the champagne yet. Governor Cuomo stipulated that “a retail pharmacy must agree in advance to accept the same reimbursement rate and applicable terms and conditions established for mail order pharmacies.”

Put another way, Cuomo called the pharmacy lobby’s bluff by requiring retail pharmacies to compete directly with mail, even though a retail pharmacy's costs and service model is different.

This bill is one more step towards an inevitable race-to-the bottom generic price war. If other states pass similar bills, expect to see profits drop even faster at pharmacies, PBMs, and wholesalers. The generic wave may turn out to be less profitable than everyone is expecting.


For background on the bill, see The Unexpected Losers from New York’s Anti-Mail Bill and FTC Slams NY Anti-Mail Bill.

The Governor’s new stipulation—“the same reimbursement rate and applicable terms and conditions established for mail order pharmacies”—is crucial. It will force retail pharmacies to meet the prices and terms of a mail pharmacy. Community retail pharmacies may gain some incremental foot traffic, but will ultimately face more margin pressure as they struggle to meet mail pharmacy reimbursement rates.

Consider the financial advantages of a mail pharmacy:

  • Drug acquisition costs are lower. Two-thirds of generic products sell for less than 25 cents per unit (pill, tablet, capsule, etc.). See Generic Drug Prices are Rising, according to latest AMP data. Note that the AMP data exclude mail pharmacies, which buy generic drugs in bulk at even lower prices.
  • Dispensing costs are lower. Mail-order pharmacies operate very efficiently by using automated dispensing machines. The newest high-tech mail-order pharmacies dispense more than 100,000 prescriptions per day—equal to the daily activity of 600 retail pharmacies. 
  • Logistics costs are lower. Drugs are shipped to a handful of central-fill locations instead of being trucked in small quantities to thousands of retail locations. Wholesaling costs—whether performed by a chain warehouse or a drug wholesaler—translate into higher net store-level acquisition costs for a retail pharmacy vs. a mail pharmacy. 
  • Mail scripts are 90-day fills. Pharmacy owners will find that foot traffic may not increase enough to offset the lower margins because the consumer only has to visit every three months, not every 30 days. The bill will accelerate 90-day prescriptions at retail, a trend that was already growing. See Retail and Mail Pharmacy Economics Start Converging.
Bottom line: retail dispensing is more expensive than mail dispensing. Walgreen effectively admitted that it sacrifices profitability by accepting mail reimbursement rates in a February conference call. See the “90-Day Prescriptions at Retail” section of Walgreen Talks PBM Conflicts, 90-Day Rx Profits, and AMP.

Congratulations, pharmacy owners! You can now agree in advance to reduce your profit margins! You'll learn first hand why Best Buy Pays Price to Rival Amazon.

This situation will have a negative derivative effect on wholesalers such as AmerisourceBergen (NYSE:ABC, Cardinal Health (NYSE:CAH), and McKesson (NYSE:MCK). Drug wholesalers will face margin pressure on generic drug sales, because pharmacies will require bigger discounts to remain competitive. A wholesaler’s smaller customers will require more aggressive pricing from wholesalers to remain competitive with the larger chains that buy directly from manufacturers.


Mail-order growth and PBM profits will suffer if New York consumers shift from mail to 90-day at retail. Dispensing generic drugs via a mail pharmacy accounts for a minority of a PBM’s equivalent prescriptions, but more than half of per-prescription profits. I describe this dynamic in Walgreens Joins the Attack on PBM Mail Profits.

Large retail chains have led the way with the retail generic price war. Pharmacies have either gone after cash-pay consumers or agreed to 90-day deals with close-to-mail reimbursements. This is one reason that mail prescription growth has lagged the overall market (per Chains in 2010: Winning).


I’ll leave you to ponder one big unknown: Will this "choice" even matter to consumers?

Look back at Surprising Data on the Mail vs. Retail Choice, which summarizes a fascinating study of CVS Caremark’s (NYSE:CVS) Maintenance Choice program. For both consumers and plan sponsors, Maintenance Choice removes the cost difference between mail and retail dispensing of 90-day maintenance prescriptions. By cutting retail pharmacy margins on generics, a plan sponsor’s gross pharmacy spend reportedly drops by up to 4%.

The surprising result of that study? More than two-thirds of consumers chose a mail pharmacy over a retail pharmacy. Put another way, consumers seem happy with mail based on their actual (voluntary) behavior. For new maintenance prescriptions, more consumers chose mail than chose a retail community pharmacy. The decision to use mail, however, was heavily influenced by a consumer’s prior use of a retail vs. mail pharmacy for maintenance prescriptions.

Ironically, New York is about to run a giant "maintenance choice" experiment with its insured population. Time will tell if people will actually switch from mail to retail.


  1. Adam, great analysis as always. One thing I noticed in the bill that hasn't been talked about (and may not matter in practice, but could in theory), is that it adds language that states that plan participants have the option to fill "at any mail order pharmacy or network participating non mail-order pharmacy." The first phrase "at any mail order pharmacy" is interesting. Typically, Medco, ESI, etc. only allow their mail-order pharmacy into their network (for obvious reasons). The language in this bill seems to state that PBMs / insurers would have to allow their participants to fill at other mail-order pharmacies as well if they so desired. Am I reading this correctly, or am I missing something? Whether this will change anything in reality, I don't know, but that in principle, that is potentially a very fundamental change. Thoughts?

  2. That’s how ALL any willing provider laws are across the country.  There are 26 states that have the AWP law; all of which has to be the same as mail order.  No new news!

  3. While this new LAW only slightly lifts the veil on the lack of PBM transparency in the mail order world, it will provide a glimpse of just how bad the current mail contracts (with absent MAC language, AWP minus scams for generics etc.) are at present.

    It is also a MAJOR loss to the PBMs who spent an incredible amount of money to defeat it, regardless of their lobby's hapless attempts to save face.

    Further, you overstate the impact of language change request by the Gov. The original "comparable" was written in Bill Drafting by lawyers trying to mimic the language in Medicaid. the pharmacy community supports "identical" because now the the pharmacies will get the identical MAC-less generic reimbursment. PUTT will then take those numbers (we already have some) to the press and expose the mail fraud once and for all!

    Finally the idea that the Law will raise cost is total malarkey. PBMs have been retaining volume discounts for year. The only thing will suffer is the PBM bottom line.

  4. I could be wrong, but I believe that in most of those states (half or more), the AWP laws apply to retail pharmacies, but do not preclude PBMs or insurers from having an exclusive mail provider. And I don't know that any state as large as NY has enacted such a law (again, could be wrong, I'm far from a law expert).

  5. Hmm.  I've heard recently that Caremark is terminating mail order pharmacies from its network.  Not sure how widespread it is, but thought it interesting...

  6. Re-reading, looks like I was wrong here. The law doesn't require PBMs to grant other mail order houses access to competitor pharmacy networks, which is what I thought it was saying first. It's just worded a bit confusingly.

  7. Great note, Adam.  I'd like to take this opportunity to thank you for another year of very educational blog posts!

    Happy Holidays to you and your family.


  8. I think you are spot on with your assessment of the bill. 

  9. Dave - 

    The original wording would have raised costs. The revised wording will lower costs in the same way that Maintenance Choice lowers costs--by reducing retail pharmacy margins. 

    You are betting that PBM mail reimbursements are consistently above retail reimbursements. I'm skeptical. We'll all find out soon enough.


    P.S. The unions got to opt out. Why?

  10. Yes, time will tell. Unions gets a cut of the spread from the PBM (verified), unions could care less if the employer is getting soaked.

  11. This law may have a more limited impact than some would think.  Collective Bargaining Agreements are excluded, as are self-funded benefit plans (ERISA preempts state insurance law.

  12. Good point. Dave from PUTT has an explanation for the omission above.

  13.  That comment was on unions. ERISA was a tactical decision. Since the totality of non-transparent games occur with the self funded plans, it was decided that it was more important to start small, and just deal with fully funded plans at this point. You saw what non-sense that the PBMs threw at this little law. It would have been thremal nuclear war to go straight for steps, it's race not a sprint.

  14. PUTT-Dave MarleyDecember 15, 2011

    Here is a link to PUTT's press release on AMMO being signed in to law.

  15. So wholesalers will have to reduce their margins to pharmacies from 150% to 100% on high-volume, low cost generics.  It's about time.  And, yeah, that ain't no joke.  Derek Smalls ... he wrote that.  This won't affect independent pharmacies as much as wholesalers.  And, when they say the "State" of New York, they mean New York City - where walking to a pharmacy on the corner and waiting for a fill takes 20min. 20mins to an NYC'er is 20k.  Time is money loaned out by the gov at a 0.01% rate with the requirement of purchasing a new-third-world bond there.
    Mail order won't be an issue in 48 other states. Get an effective transit system, NYC. Or bring the "Quicksilver" delivery method to burrough pharmacies and beat mail-order at their own game. Six Degrees of K.B., first time to play- and lose.

  16. One more thought New Yorkers ... those aren't pharm techs filling those mail order scrips. They're Jersey's finest.

  17. You state that Maintenace Choice saves money,not in the one case we were able to audit.
    Our Schools consortium assured us that they have the best pricing available under the direction CVS/Caremark and the Maintenance Choice Program. At this time prices were posted by the school consortium and CVS/Caremark… so we could easily compare prices both for patient and the tax payer, in most all cases the tax payer paid more and many cases the patient paid more. When we informed our schools of Maintenance Choice over charges the only action taken was to take down the website that showed pricing for area teachers. Transparency??

    Jim Fields ApproRx