The Unexpected Losers from New York’s Anti-Mail Bill

New York’s legislature was pretty busy last week. They named corn as the state’s official vegetable and legalized gay marriage. Oh yeah, they also overwhelmingly passed an anti-mail order pharmacy bill.

The Anti-Mandatory Mail Order Pharmacy Bill (New York Assembly Bill 5502‐B) would eliminate mandatory mail-order programs and prevent plans from using differential co-payments for mail pharmacies. As of this morning, the bill has not yet been signed into law by Gov. Cuomo, although I expect it will be soon.

Is this a big win for retail pharmacies and the health care system? Nope, not really. Almost everyone will lose from this legislation:

• The average consumer will face higher out-of-pocket costs because mail-order discounts will vanish by legislative fiat.

• Pharmacy Benefit Managers (PBMs) will have another headwind for mail order growth.

• Benefit plan sponsors will be forced to subsidize an already-saturated retail pharmacy industry, will lose the right to choose how to spend their own benefit funds, and will lose the economic advantages and control of mail pharmacy.

• Manufacturers of specialty drugs will find their channel strategies undermined by a new any-willing-provider mandate.

• Retail pharmacies may gain some incremental foot traffic, but will ultimately face more margin pressure as they fight to meet mail pharmacy reimbursement rates. I predict that pharmacy owners’ joy will fade once they realize that they are sacrificing their own profitability to spite PBMs. Be careful what you lobby for!
  

Read on for my $0.02 and then feel free to post your own comments below.

CONSUMERS

Consumers always lose from anti-competitive, protectionist legislation. The New York bill is no exception. The average consumer will face higher out-of-pocket costs because everyone, regardless of need or preference, will be forced to forgo any economic advantages of mail-order benefit design.

Consumers with third-party insurance only see the out-of-pocket co-payment or coinsurance of their prescriptions, not the price that has been negotiated between the pharmacy and the PBM or the actual cost paid by a pharmacy. The basic reality is that consumers with employer-sponsored insurance save an average of 33% for each maintenance prescription when using a mail pharmacy. (Example: retail vs. mail)

But if you live in New York, you will pay more out of your own pocket, because your mail order discount will vanish.

Imagine that your local bookstore owner lobbied your state Senate to pass a law preventing you from buying a book less expensively via Amazon.com. You would immediately recognize that the bookstore was trying to protect its business at your expense. This is precisely what has happened for prescription drugs in New York.

The only winners are the small subset of consumers who don’t want to pay more for the privilege of picking up a prescription anywhere, regardless of costs. But it’s not like consumers have been clamoring for this choice. As I discuss in Surprising Data on the Mail vs. Retail Choice, more than two-thirds of consumers chose a mail pharmacy over a retail pharmacy when co-payments were equal.

PLAN SPONSORS

Proponents of anti-mail legislation claim that it’s all about “freedom of choice.” Ah, but whose choice should matter?

Today, consumers pay only about one-fifth of retail prescription drugs costs out of their own pocket. See Who Paid for Prescription Drugs in 2009?

The owner of the mail pharmacy (usually a PBM) charges less to an employer or health plan—the third-party payers who foot most of the bill for prescription drugs.

• In 2010, the discount from Average Wholesale Price (AWP) was 580 basis points lower for brand-name scripts dispensed by a mail pharmacy versus scripts dispensed by a store-based retail pharmacy. (source: PMBI survey of employer-based plans)
• The Federal Trade Commission (FTC) reached a similar conclusion in 2005, concluding "...prescription drug plan sponsors generally paid lower prices for drugs purchased through PBM-owned mail-order pharmacies than for drugs purchased through mail-order or retail pharmacies not owned by PBMs." (source)
• I am not aware of peer reviewed studies showing that prescriptions purchased through mail order pharmacies are more expensive for payers than those purchased at retail pharmacies, as some people claim.

If you ask someone else—such as your employer or the American taxpayer—to pay for your drugs, why shouldn't they want you to save them some money? And why can’t they encourage you to use the lower-cost channel for the payer by sharing a portion of these savings in the form of a lower co-payment?

PHARMACY BENEFIT MANAGERS

The New York bill adds another headwind for the mail-order pharmacy businesses of Express Scripts (NASDAQ:ESRX) and Medco Health Solutions (NYSE:MHS). It precludes any out-of-pocket cost difference for consumers between a mail-order vs. a store-based pharmacy with the following language:

"Any policy which provides coverage for prescription drugs shall not impose a co-payment fee or other condition on any insured who elects to purchase drugs from a network participating non-mail order retail pharmacy which is not also imposed on insureds electing to purchase drugs from a designated mail order pharmacy..."

Total mail volume is already growing more slowly than the overall market. See Chains in 2010: Winning. I don’t expect mail prescription volume to pick up speed anytime soon. For more on the factors behind the mail slowdown, see Walgreens Joins the Attack on PBM Mail Profits.

Maintenance Choice is successfully cannibalizing the Caremark mail business, so CVS Caremark (NYSE:CVS) doesn’t need any help from New York legislators.

PHARMACEUTICAL MANUFACTURERS

Manufacturers of specialty drugs will be hurt by the New York legislation because it creates an “any willing provider” requirement that would inadvertently broaden a specialty pharmacy network. Manufacturers that lack a well-designed channel strategy and use sloppy class-of-trade guidelines will discover that their specialty products can be dispensed from a much broader set of pharmacies than they expected. See Who Pays For Specialty Drugs? (And Why It Matters) for the full story.

On the other hand, manufacturers of traditional (non-specialty) brand-name drugs will see only a minimal impact, although there is one small silver lining. Co-pay offset programs (a.k.a., discount cards) are banned from mail-order pharmacies, but still widely accepted at retail pharmacies. If you use these cards as part of your marketing strategy, then the New York bill is not a bad thing. I suspect many plan sponsors will feel otherwise given the controversy over these programs. I’ll have more to say on this topic in a July post.

WILL RETAIL PHARMACIES ACTUALLY BENEFIT?

Before pharmacy owners pop the champagne, consider the fact that you will now have to compete on price with mail-order pharmacies. Let the race to the bottom begin!

The language in the bill gives plan sponsors and PBMs much more wiggle room than you might imagine. Check out the Level Playing Field Requirement of The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (PL-108-173; MMA), which created the Medicare Part D prescription drug benefit.

(D) Level playing field.--Such a sponsor shall permit enrollees to receive benefits (which may include a 90-day supply of drugs or biologicals) through a pharmacy (other than a mail order pharmacy), with any differential in charge paid by such enrollees.

Part D puts the cost burden onto the beneficiary because the consumer must pay any difference in cost between retail and mail order.

The New York bill flips the burden onto the plan sponsor. The consumer can’t be charged a lower co-payment for mail-order as long as the retail pharmacy “offers to accept a price that is comparable to that of the mail order pharmacy.”

"Comparable" is not defined in the bill. Now, ponder the fact that most mail-order drugs are maintenance prescriptions of generic or soon-to-be-generic drugs. Sounds a lot like battling with Walmart for a $4 cash price than a "level playing field." Retail pharmacies now have the freedom to lower their prices to consumers and payers.

Congratulations.

A FINAL THOUGHT

How did The Anti-Mandatory Mail Order Pharmacy Bill pass unanimously in the New York State Assembly? I will remind you of a quote that I cited last summer in A Victory for Pharmacy Profits in South Carolina.

"[T]here may be many advocacy groups that have strong incentives for lobbying the government to implement specific inefficient policies that would benefit them at the expense of the general public ... The costs of such inefficient policy are dispersed over all citizens, and therefore unnoticeable to each individual. On the other hand, the benefits are shared by a small special-interest group with a strong incentive to perpetuate the policy by further lobbying." (source)

Your move, Governor Cuomo.