Tuesday, November 06, 2012

Why Pennsylvania's New Anti-Mail Law Will Hurt Pharmacy and PBM Profits

Last Thursday, Pennsylvania joined the anti-mail pharmacy movement when Governor Corbett signed into law SB 201, a bill requiring consumers to receive equivalent terms at retail vs. mail pharmacies. The law takes effect on March 1, 2013.

At first glance, the PA law may appear to be a big victory for retail pharmacies, because mail pharmacies can no longer have a copayment advantage with consumers. But pharmacy owners should curb their enthusiasm. The law has strong language requiring retail pharmacies to accept “the same pricing, terms, conditions or requirements” as a mail pharmacy. Congratulations, pharmacy owners! You won the legal right to reduce your margins in a frantic, race-to-the-bottom price war!

The law also provides another headwind for mail pharmacy, and therefore is likely to reduce pharmacy benefit manager (PBM) profits. Last night, Express Scripts gave a downbeat assessment of 2013. The anti-mail legislative movement may come up in this morning's 9:30 AM earnings call.

Read on and then post a comment with your opinion.


For your reading pleasure, see the official text and analysis:
Here is the bill’s key requirement:
(A) A health insurance policy or government program providing benefits for prescriptions shall not impose on a covered individual utilizing a retail pharmacy a copayment, deductible, fee, limitation on benefits or other condition or requirement not otherwise imposed on the covered individual when using a mail order pharmacy.
In other words, the bill outlaws many conventional pharmacy benefit designs with a mail pharmacy alternative. As I discuss in the 2011-12 Economic Report on Retail and Specialty Pharmacies (starting on page 55), the pharmacy reimbursement formula usually makes PBM mail-order dispensing less expensive for both the payer and the consumer.

Consider the chart below, showing the plan sponsor’s ingredient costs for a brand-name drug as a percentage of Average Wholesale Price (AWP) along with the consumer copayment. According to these data, a mail pharmacy is 670 basis points (84.0% minus 77.3%) cheaper for an employer than is a 30-day prescription dispensed by a community retail pharmacy. This means the plan sponsor pays less when the consumer uses a mail pharmacy than a store-based retail pharmacy.

Because of possible costs increases, private payers, such as the Pennsylvania Chamber of Business and Industry, originally opposed the bill. See this November 2011 letter.


The Pennsylvania Pharmacists Association noted: “SB 201 represents a compromise from our original intentions, but one that was agreed upon between the pharmacy community, the insurance industry and the pharmacy benefit managers and allows consumers to have the freedom of choice to access their local community pharmacies if they so choose.”

And here’s the compromise—a very important additional requirement which retail pharmacy owners should definitely not like:
Subsection (a) shall apply only if the retail pharmacy is willing to accept from the insurer the same pricing, terms, conditions or requirements related to the cost of the prescriptions and the cost and quality of dispensing prescriptions that the insurer has established for a mail order pharmacy and any of such pharmacy's affiliates, including any affiliated pharmacy benefit manager, pursuant to the health insurance policy.
Take another look at the chart above. Will payers merely *increase* a mail pharmacy’s reimbursement to be equal to the retail pharmacy reimbursement rate? Doubtful. Instead, retail pharmacies will be forced to accept the lower mail rates.

The NCPA reluctantly acknowledged the unpleasant reality of price competition, noting:
By supporting the bill that emerged out of Pennsylvania's State Senate and House, the Governor allows more than 1,000 local mom and pop pharmacies throughout Pennsylvania to match the reimbursement terms and conditions that large mail order pharmacies currently enjoy.” (source; emphasis added)
Well, I sure hope community retail pharmacies “enjoy” the margin pressure from mail pharmacy reimbursement rates. As I note in my summary of Pharmacy Economics 101, those incremental scripts can still be profitable at the margin, although average pharmacy margins will decline.

To read more about the likely market dynamics, see New York's Anti-Mail Bill and the Coming Generic Price War.


Mail growth is crucial to the big two PBM’s profits. In 2013, the two largest PBMs—CVS Caremark (NYSE: CVS) and Express Scripts (NASDAQ: ESRX)—will account for more than 80% of U.S. mail-order prescriptions. PBMs also operate the largest specialty pharmacies, most of which use a mail-order dispensing format. Dispensing drugs via a mail pharmacy accounts for a minority of a PBM’s equivalent prescriptions, but more than half of per-prescription profits.

Alas, there has been a multi-year slowdown in prescriptions dispensed by mail pharmacies. Retail chains—drugstores chains and mass merchants with pharmacies—continue to gain market share at the expense of all other dispensing formats. In 2012, mail growth picked up a little, but still remains behind chain growth.

In The Great Mail Pharmacy Slowdown, I summarize the four key factors behind the mail slowdown. With the passage of SB201, state legislation is quickly becoming a fifth important factor. Pretty, pretty, pretty good?


  1. You are dead wrong on this!  Remember that mail order is a major profit center for the large PBMs, and their  margins are more than adequate.  Note that they bill based on the smallest package sizes, while dispensing from the largest,  which adds about 3% to their profit. Add to that the games they play with 'multi-source brand', and on and on.
    So if the retail pharmacy actually gets the same reimbursement as the PBM's Mail Order Pharmacy, the store will get an adequate margin.My firm did  study of Medco's mail order rates to GM some years ago, and we proved that GM's cost per dose for mail was higher than if the Rx were filled at retail for a 30 day supply!

    Mike Winkelman, R.Ph.
    Winkelman Management Consulting,  Inc

  2. Adam, pharmacy owners have seen enough examples to know that mail order generic MAC is MUCH more generous to the pharmacy than retail MAC. With GDR approaching 85%, retail pharmacy is willing to take a small hit on brands when that loss is more than made up by the generic amount. 

    Now, for the math to work, the pharmacy must be diligent and make sure they are getting the EXACT terms as stated in the law, not a "Retail 90" schedule which is much different.

    The end goal is to show that mail order is now, and has always been a shell game of the PBM to inflate their profits at the employer's expense. On more than one occasion, a pharmacy with a new "mail order" rate has had to go back to the employer and tell them "you are paying too much, your consultant and PBM have been screwing you with this program."

    This explains why PCMA is so strongly opposed to it.  Not only will this law hurt heir profits by further eroding their mail order market share, it also puts actual mail order pricing data in the hands of those pharmacy owners who are willing to do the right thing and share it.

    Finally, I find it interesting that anyone would think pharmacy owners would advocate (successfully in, NY and PA, and many more coming) for a law that would actually hurt them. Remember, we work in the trenches daily, and probably know better than anyone how the games are being played.

  3. My quick read of the PA Statute indicates it is an insurance statute and may apply only to prescription drug plans that are part of an insured benefit rather than a self funded pharmacy plan sponsored by a single employer, trust, etc.

  4. I am confused as well.  The great majority of the time, we see unit cost at mail in excess of retail. 

  5. If "Phil Mypockets" is any indication, then independent pharmacies know less than they think about third-party payers and the PBM industry. 

  6. Everyone independent and most chain pharmacy managers know the game with mail-order pharmacy.  Besides it being bad for the customer in most cases, it is also bad for the insurance plan which ultimately will pay more to the PBM run mail-order pharmacy, even though they are happy to incentivize customers to use that service by charging the patient less and the insurance plan more.  Also, on your cute little chart, you didn't say whether the retail and mail order pharmacies were using the exact same AWP.  I doubt that they are, Mr. Fein, and I think you know that.  PBM's have been driving up prescription prices and putting honest pharmacies out of business, all while convincing consumer groups through expensive lobbying that they are holding prices down.  Maybe you should give me your Ph.D, because I just schooled you boy.

  7. These people don't get your point about what happens over time. Why do you bother trying to educate them about their own industry?? Funny how the independents can always find some reason to blame PBMs (and you)  for everything! The real test will be what happens in a few years.

  8. How elucidating Mr. Fein, perhaps you might respond to some of the specific points from Mr. Marley?  Differing MAC lists, do they frequently happen in your experience?  Do Mail-order or PBM's retail outlets play by different rules than other pharmacies?  

  9. Afraid so. As usual, Dave Marley et al confuses my point about the market's likely evolution with their boilerplate criticisms of PBMs and misinformed views of payers. Only time will tell whether "equal to mail" is financially better (as PUTT believes) or worse (as I suspect) for pharmacies.

  10. Adam... Shame on you. Comparing retail 30 day to mail 90 day when retail 90 is right there beside it... If you're going to lie with statistics at least make it difficult to spot.

  11. I suggest you skim the 6+ years of Drug Channels archives before accusing me. Start with this article: Retail and Mail Pharmacy Economics Start Converging.

    Perhaps you are merely trying to live up (or down?) to your screen name.

  12. I see you didn't respond to my previous post.  Not surprised.  Anyway, do you have a similar chart that compares mail order generic versus retail.  Mr. Fein, I know you are smart enough to know how these PBMs are raping the industry.  Also, I'll ask the question again, are the mail order pharmacies using the same NDC numbers to base AWP off of?  Like I said, you spent a lot of money to go to Wharton and I feel like I know more than you.  Prove me wrong

  13. No offense, my friend, but I doubt anyone with a business degree needs to be educating pharmacists on their own industry.  Any idiot can go to business school and Adam is proving that point.

  14. It's really quite simple to understand, and yet not. Real world vs. Ivory Tower arguments have existed for years. I actually run a very successful pharmacy, Adam likes to talk about running one. Adam struggles to believe that our  data trumps his belief system. I don't hate him for it, I actually respect him, we just disagree....a lot.

  15. Please don't use Larry David to forward your agenda, or if you do, please be more clever.

  16. In this post, I am not writing about how to run an independent pharmacy. I leave that stuff to Todd Eury, Dan Benamoz, et al.

    Instead, I'm writing about how the market environment for pharmacies and PBMs is likely to evolve. My training, knowledge, and research are more than sufficient to opine on that subject. 

    But given your comment, I presume you wouldn't want a doctor to treat you for cancer unless he himself has also had cancer, right? 

    P.S. The ivory tower comment is a cheap ad hominem shot. Stay classy, Dave.

  17. Something else you are missing --- Mail order is using inflated AWP's on their repackaged merchandise to offer their 23-25% off AWP - they probably net out at AWP - 10 or even less.  We know about it & will show this to their clients and hopefully we will be able to move them away from mail order that really does not save the payer any money - it costs them. 

  18. Accusing you?  How about if I quote you?
    "According to these data, a mail pharmacy is 670 basis points (84.0% minus 77.3%) cheaper for an employer than is a 30-day prescription dispensed by a community retail pharmacy." 

    In that statement you compared a 30 day fill at retail to a 90 day fill at mail order, but you implied that it was a comparison of two 30 day fills.  The classic misleading statistic is to compare apples to oranges.  

    All you had to do was compare the two 90 day fills (80.6% - 77.3% or 330 basis points) and you would have been fine, but 670 looks a lot more impressive than 330, doesn't it?

  19. I have to chime in here having been thoroughly entertained.

    “It is widely known, poorly understood, that the MAC list applied to PBM owned mail order pharmacies has higher unit prices than that applied to retails. This provides the mail order very large margins. Just try demanding the retail MAC at mail in a PBM contract and see what happens.
    It is apparent that the MAC list applied to retail pharmacies (which generates spread to the adjudicating PBM) is high to not only increase spread margin, but also to minimize the cost excess of the mail pricing.
    This is fact, not controversial. The base problem is that the plan paying the bills and the members (particularly in HSA’s where member pays the whole cost of Rx) are not aware of this and/or understand it.
    However, the following is a fact: Mail order pricing for generics is very frequently higher than that of retail. Perhaps this new law will commence the open discussion of spread pricing.
    More important, when plan sponsors (and the consultant/broke they hire) focus on unit cost, not AWP-discount, spread pricing will become rare and the plan and members will save $”

  20. And THAT is exactly what the problems is Adam. Independent pharmacies, the plan sponsors, the consumer, the government, the lawmakers, the politicians, the public, virtually everyone knows less than they think about third-party payers and the PBM industry.  It's time for them to come clean and inform all of us with the truth and transparency!  Thanks for pointing that out.

  21. That's not what I said. I was pointing out that independent pharmacy owners are very naive about how payers look at drug benefit management.

    You seem to assume that magical "transparency" pixie dust will somehow be more effective than marketplace competition between PBMs. Just spend 5 minutes thinking about what you are really implying. That somehow, a few companies have managed to bamboozle every employer, health plan, the Federal government, the Defense department, and all other payers, along with the armies of consultants and lawyers working for those payers? And that these payers are just too dim-witted and foolish to realize what's going on, so they need to be saved by the owners of independent pharmacies, the lone voices of truth in the healthcare wilderness? 

    Sure, some third-party payers get a better deal than others. It's called being a smart shopper and a good negotiator. In a free market economy, the operative lesson is Caveat Emptor. (Translation: Let the buyer beware). 

    FYI, I pondered this question in Why do pharmacy owners care about PBM transparency? (from 2010).

  22. There is no assuming about it.  There is no question that transparency would be more effective than market place competition between PBM's because it would be IN ADDITION to marketplace competition.  Just because you have transparency doesn't mean the marketplace competition is eliminated.

  23. Transparency generally, implies openness, communication, and accountability. Transparency is operating in such a way that it is easy for others to see what actions are performed.  Unfortunately, within the PBM industry, the term Transparency does not always meet the spirit of this definition and many Plan Sponsors find the cost of their prescriptions drugs are inflated well beyond the cost actually being paid to pharmacies.  It doesn't matter if your health plan is self-insured or fully-insured through a carrier, PBM pricing spread exists in most all situations and the level of prices being charged many times is creating financial barriers to patients who are dependent on their prescriptions to maintain a positive health status.

    The variations between mail and retail are just part of the game of illusion wtihin the scope this business.