Friday, April 13, 2012

The Great Mail Pharmacy Slowdown

As a follow up to How the Pharmacy Industry Changed in 2011, here’s a deeper dive into the surprisingly weak mail pharmacy numbers.

The 2011 downturn in mail pharmacy prescriptions is part of a multi-year trend. As I show below, the slowdown is also reflected in the mail penetration rates at the big 3 (2?) Pharmacy Benefits Managers (PBMs).

Following the FTC’s approval for the Express Scripts/Medco merger, the Wall Street Journal wrote: Merger to Mean More Rx by Mail. I’m not so sure. And if I'm right, it will have big implications for pharmacy competition, PBM profits, and manufacturer trade strategies.

Hopefully, today's analysis will mollify your paraskevidekatriaphobia!


Here’s a look at IMS data on mail prescriptions since 2000. Since 2006, the growth of prescriptions dispensed via mail-order pharmacy has been slowing.

Meanwhile, retail is growing. From 2007 to 2011, total U.S. retail prescriptions (excluding mail pharmacies) grew by 162 million, a gain of 4.9%. During the same five-year period, total equivalent mail prescriptions grew by 9 million, a gain of only 1.2%. What’s more, the total number of prescriptions dispensed from mail pharmacies has declined in two of the past four years.

I see four key factors behind the mail slowdown:
  • Mail's economic advantage is diminishing. Six out of ten employers allow community pharmacies to fill 90-day prescriptions for maintenance medications. These programs are reducing the cost gap between mail and community pharmacy for both consumers and third-party payers. See Retail and Mail Pharmacy Economics Start Converging.
  • The generic price war is heating up. In an era of 0.3% script growth, retail community pharmacies are competing more aggressively with the discounts offered by mail pharmacies. Pharmacies have either pursued cash-pay consumers with discount generic programs, or reduced their reimbursement rates to providers to participate in more limited networks. See Humana-Walmart Preferred Network Plan Wins Big in Part D
  • Part D is about 20% of the market. Since 2006, the Medicare Part D benefit has favored retail prescription growth over mail growth. The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (Public Law 108-173) contains a “level playing field” requirement, which prohibits mandatory use of mail order pharmacies. If a Medicare Part D plan offers a 90-day supply at mail, then it must offer a 90-day supply option at retail. Additionally, the older Part D population is generally more resistant to mail-order prescriptions
  • Maintenance Choice is booming. CVS Caremark’s Maintenance Choice program removes the cost difference between mail and retail dispensing of 90-day maintenance prescriptions. This program has shifted business from Caremark mail facilities to CVS retail stores. As of January 2012, nearly 800 plans totaling 10 million covered lives had adopted it. I estimate that Maintenance Choice accounts for more than half of same-store sales growth in CVS retail pharmacy business.
Looking ahead, New York state recently passed the Anti-Mandatory Mail Order Pharmacy Bill (New York Assembly Bill 5502‐B). (See New York's Anti-Mail Bill and the Coming Generic Price War.) The law eliminates mandatory mail-order programs for certain commercial payers and prevents plans from using differential copayments for mail pharmacies. Similar legislation is pending in Pennsylvania and being considered in other states.

Some people have suggested that the mail slowdown is driven by the weak macroeconomy. In theory, consumers shy away from 90-day fills (via mail) to avoid paying 2 co-payments up front. I’m skeptical of this explanation.
  • 90-day retail scripts have grown during the past few years period. For example, Walgreens reported a 30% jump in 2011 90-day retail volume. (source
  • The time horizon doesn’t seem long enough to shift people from retail (3 co-payments spread over 3 months) to mail (2 co-payments upfront for a 3-month supply).

Even if you don’t trust the IMS data, the SEC filings of the largest PBMs—CVS Caremark, Express Scripts, and Medco Health Solutions—tell a similar story. (BTW, when do we start calling them the Big 2?)

The chart below shows equivalent mail prescriptions as a percentage of each PBM’s total scripts--retail network prescriptions + equivalent mail prescriptions. I added the IMS data, which is lower because it captures the whole market.

The biggest drop was at CVS Caremark (-63 basis points), presumably driven by Maintenance Choice's channel shifting. Express Scripts (down 32 basis points) has had substantial customer mix shift following the acquisition of NextRx. They also have to contend with the highly-politicized Tricare contract, where it’s hard to increase mail pharmacy usage given intense lobbying by pharmacy associations. Medco, which has the highest mail penetration, dropped by 35 basis points.

These declines matter a lot for PBM profitability. Dispensing from their own mail-order pharmacies generates more than half of a typical PBM’s EBIDTA per equivalent script. (See 49 of the 2011-12 Economic Report on Retail and Specialty Pharmacies.)


Independent pharmacy owners complain endlessly about the threat from mail order. But the facts tell a very different story. In reality, chains like CVS, Walgreens, and Walmart are the real competitive challenge.

Like it or not, US retailing continues to become more concentrated and increasingly dominated by chain stores, warehouse clubs, home centers, and big box superstores. Consumers are fueling this trend by consolidating their purchases and shopping at fewer, larger stores. Low prices and self-service ("How can you help you?") now dominate. Online retailing is also consolidating as consumer use mega-retailers for showrooming, something that's not relevant to prescription drugs.

Put another way, NCPA members have more to fear from NACDS members than PCMA members.

As generics come to dominate dispensing activity, PBMs will struggle to grow mail penetration. Generic drugs’ extremely low acquisition cost is triggering a price war among pharmacies. Pharmacies have either gone after cash-pay consumers or agreed to 90-day deals with close-to-mail (or lower) reimbursements. This was the premise of last year’s article Walgreens Joins the Attack on PBM Mail Profits.

Manufacturers, meanwhile, should pay close attention to these shifts. Mail is not taking over the world. Retail pharmacy is not going away. A brand-name manufacturer with a strong traditional drug portfolio (yes, they exist) should focus on retail influence, especially in advance of the post-2016 generic bust.


  1. Long term, how can a price war between mail order and 90-day at retail really result in lower mail volumes? With the exception of maintenance choice, you argued that in NY state at least that retailers couldn't afford to match mail pricing, or that to do so would be a loss leader for them. Isn't there a pretty significant cost advantage at mail order vs. retail that should enable the PBMs to sustain or even increase share over time? Other than client preference (which you've questioned in the past), don't the underlying economics favor mail?

  2. PUTT-Dave MarleyApril 13, 2012

    If I had to rank indy fears it would be (in order):

    1. Below cost MAC reimbursement from the PBMs. Since their volume has dropped, they are taking our profit as their own by simply increasing the spread between what the pharmacy is paid and what the employer is billed. (Non-level playing field)

    2. Mandatory mail (non-level playing field)

    3. NACDS members (LEVEL playing field). Given the ability to set price and compete on service, indy's win.

    As more and more employers become aware of spread pricing of generics, traditional PBMs (the big 2) in the era of 80% (soon to be 85%) generic dispensing rates are doomed to go the way of the VCR.

    Further, with the consolidation of ESI/Medco the target just got MUCH bigger when it comes to proving the PBMs actually raise, not lower employer drug costs.

  3. John CroninApril 13, 2012

    No mention here of the impact of payer experience in using mandatory mail order.  Perhaps the payers are seeing that the promised savings from mandatory mail weren't there or were not significant enough to counter the push back from their insured?  Any data on how many of the payers who contract with these PBMs switched away from mandatory mail?  

  4. You might add a 5th key factor in the mail order slow down:  Consumer choice.  Give the consumer a little bit of credit for choosing the channel that provides the best service at the best price, and frankly, is safest.
    Walgreens Study Shows Patients Prefer Community Pharmacy Channel over Mail Order for 90-Day Maintenance Medication Prescriptions

  5. Despite the hype, mandatory mail is not very common. According to PBMI surveys of employer plans, only about 1 out of 6 employers use mandatory mail.

  6. PUTT-Dave MarleyApril 13, 2012

    Jacob, here is how the mail game is perpetuated. The PBMs and their benefits consultant shills present mail as cheaper using an AWP minus formula as the bait. But that "discount" only applies to brands, which are now less than 20% of the business. Then the PBM rapes the employer with either an inflated MAC or similar AWP - formula for generics.

    Employers are realizing that generics are MUCH less expensive at retail than mail. With every retail outlet now offering discount generic programs, patients have discovered they get better pricing (and the employer doesn't get spread priced) when they just using the pharmacy discount rather than the PBM's copay.

    Any employer that is paying a PBM more than AWP-90% for generics needs to fire both the benefits consultant and the PBM.

  7. Actually, my belief is that retail pharmacies will cut generic prices to (1) compete with mail pricing on generics, and (2) compete with each other to grow store traffic in a flat/slow growth market. It's not clear that PBMs will be willing to cut margins/prices enough to grow mail vs. hungry/desperate retail pharmacies. 

    As usual, Dave Marley below overstates his case by assuming that every plan sponsor is a fool. However, he is correct that most retail pharmacies have a discount generic program, i.e., they are cutting prices to be more competitive.

  8. 1. So, pharmacies lose money on every prescription? Yet, pharmacist salaries continue to rise and very few pharmacies are going bankrupt? Hard to believe.
    2. Mandatory mail is rare. You overestimate its influence because the customer comes in to complain. Meanwhile, the customers who switch to a big chain never tell you; they just don't show up again.3. In most cases, co-pays are still the same at all retail pharmacies in the network (chain, independent, supermarket, mass merchant.) As I showed on Tuesday, big chains are winning vs. all other formats. Everyone is entitled to his own opinion, but not his own facts. ;)

  9. cbasseatmeatApril 13, 2012

    I think the majority of independents, like myself, consider mandatory mail and "monetary incentivized mail" as one.  I agree with Mr. Marley above, except I would place the mandatory mail order or monetary incentivized mail as the number one concern for independentsf.  It keeps me up at night reading blogs like yours.  I have a relatively large customer base where the plan sponsor switched to  Medco for 2012.  The plan is designed to cover 3 fills at retail, then the prescription needs to be filled at select retail locations (Walmart, CVS, or Kroger) or Medco Mail Order, or the member has to pay 100%.  I think most people, whether receiving consultant dollars from the PBMs like yourself, or myself competing with the unlevel playing field created by the PBM would claim that this is a "select procurement chain" or mandatory mail plan.

    Mandatory mail order may not be common, but if you consider monetary incentivized plans that exclude most independent pharmacies, these plans are growing creating insomnia in the independent world and probably increasing your readership.  I think most independents view yourself as the "enemy" aligned with the interests of the PBMs, and the only reason we read your posts is that we want to know what the PBMs are thinking as you are the barometer.

    I do enjoy reading your posts and if the PBM model does go the way of the VCR, I will still read your blog. 

  10. Perhaps. But the research literature on channel choice suffers from  "data physics": For every study, there is an equal and opposite study. 

    Example: Surprising Data on the Mail vs. Retail Choice.

  11. PUTT-Dave MarleyApril 14, 2012

    It's just that I have yet to find a single HR/CFO/CEO (over 300 and counting) that didn't know that a) benefits consultants have undisclosed deals with the PBMs and b) that "ingredient cost" is not what the pharmacy gets paid.

    Most PBM statements break out "ingredient cost" and "dispensing fee" to further give the impression that ingredient cost is the same as "pharmacy paid" which it is not.

    I wish I had enough room here to relate a recent conversation between a county manager, their consultant, the PBM rep and myself. It was only after I gave the PBM rep enough rope to hang himself that he admitted their contract was NOT transparent and pass-through after spending over an hour implying that it was......

    BTW it appears that a certain PBM CEO is too much of a coward to be interviewed for a spot on PBMs to be aired on national TV. I guess being pressed for answers on the extent of spread pricing is too hard to answer.

  12. PUTT-Dave MarleyApril 14, 2012

    1. We adjust our business model to deal with the reality as it is. My beef is that reduced reimbursement are not being passed on to the end payer, but rather being kept as profit for the PBM. Speaking of salaries rising, I see Mr. Paz is ranked #5 on Fortune 500.

    2. Rare or not, it is not a level playing field, and the proposed savings are a myth that disappear when placed under close scrutiny.

    3. Most indys now have tracking abilities (loyalty programs) that identify lost customers, as well as transfer reports. Co-pays only matter for brands, discount programs are often cheaper than most generic copays. With more and more people without insurance, or with high deductible FSA price does matter. FSA pricing  has also opened a crack into the what the PBM charges the employer (spread) compared to what the PBM pays the pharmacy. I have yet to have a single FSA price be equal to what my reimbursed price is.

    As for IMS data relating to indys, more and more indys are prohibiting their switch vendor from selling or sharing their data. In fact many vendors now use the "we don't share your data" as part of their sales pitch. If IMS can't see it, they can't report on it.

    I think a little field research would do you good. You have a standing invite to spend an afternoon in my pharmacy seeing what life out of the ivory tower is like these days :)

  13. PUTT-Dave MarleyApril 14, 2012

     At the end of the day, what most indys resent is that the PBM is making more dollars off the processing of the Rx, than the pharmacy does in the filling of the Rx. Let's not forget that Visa/Mastercard does essentially the same function, without all the cost raising games that the PBMs engage in.

  14. Wow.  Impressive data and analysis.  Market forces really are powerful things, aren’t they?   There was no way that WAG and CVS were going to just sit around year after year and watch their Rx business for maintenance meds go down the tubes.  Different approaches (so far), but powerful responses to stem the tide.  It’s interesting to see the historical entrenched powers like them try to use legislative and regulatory processes to slow down the market drive for mail order – been there, done that.  But such interests always try.   What do you think accounts for the big spikes in percent of total Rx’s going through mail in the years of 2004 and 2007 (from your first chart)?   Thanks.

  15. Meenal WebprApril 16, 2012

    This comment has been removed by a blog administrator.

  16. This comment has been removed by a blog administrator.

  17. Adam - All good points.  I've talked about these issues several times including these two posts:


    I think the one big point missing is the fact that as generic utilization goes up the amount of savings for the consumer goes down.  Additionally, as copays have gone up, employers have had to change the plan design to limit the savings to the consumer (from 2x to 2.5x multiple for 90-days at mail). 

    Since savings has been the traditional reason for conversion, this puts a lot of pressure on the model. 


  18. The other study to look at here is the CVS Caremark study which showed that choice was based on prior experience with the channel.

  19. That's the same study that I wrote about in the post linked above.

  20. Adam, haven't posted in quite some time but thought I'd chime in here.

    On the surface it clearly shows mail and indys as being flat to down, but in all reality those indys that remain are up. 

    What we've seen over the past 5 years is a large # of independents who have sold out to the chains. This may show a decrease in the # of overall Rx's filled by independents AND an increase in the # of overall Rx's filled by chains.

    Yet if you look at the average # of Rx's filled by those providers you will see a different picture.

    As with everything in life, we all gotta do more with less. 

    Chairs up.

  21. Welcome back!

    Good insight. Here's how I interpret your idea:- Chains continue to do file buys, while new independents keep popping up. - The start-ups take some time to reach the size of the acquired pharmacies.- As a result, the aggregate numbers show a decline, but the "new buds" and survivors are growing.
    Your interpretation puts a positive spin on the weak macro numbers, although I don't have any data to back it up.Thanks.