I got a lot of comments and emails about last week's article on CVS Caremark (Debate Over CVS Caremark's Tactics Heats Up). Many people criticized me for not recognizing that mail pharmacy reimbursements are higher than retail pharmacy reimbursements.
Regular readers know my credo: "Everyone is entitled to his own opinion, but not his own facts." And as I show below, an independent data source shows that – on average – mail pharmacy reimbursements are actually lower than retail reimbursements.
Please take the time to read this article carefully before you accuse me of bias. I'm not defending or attacking anyone; I'm merely providing you with some independent data so you can make up your own mind. Let's keep the discussion going by leaving me your reactions and comments.
PLAN BENEFIT DATA
I never discuss confidential or non-public information on this blog.
Therefore, I will address the mail vs. retail reimbursement question using the Pharmacy Benefit Management Institute's most recent Prescription Drug Benefit Cost and Plan Design Report. The report is chock-full o' great data, including historical time series.
The 2008 report is based on completed surveys from 223 employers representing 15,137,168 members. As far as I know, this is the only publicly available data on detailed plan design components from a reasonable sample of employers. You can download the report for free and check my numbers.
PHARMACY REIMBURSEMENT TRENDS
Pharmacy reimbursement formulas are a key element of benefit plan design. These rates reflect the amounts paid to a pharmacy for filling the prescription of a beneficiary.
The two tables below are derived from the PBMI report, page 21. (Click to enlarge.) As you can see, the discount from Average Wholesale Price (AWP) is greater for scripts filled by a mail pharmacy than a store-based retail pharmacy. In other words, the reimbursement to a mail pharmacy is less than reimbursement to a store-based retail pharmacy for both brand and generic prescriptions.
There are some important comments on these numbers.
80% of employers do not have mail dispensing fees. I included the AWP minus figures for both options, although by far the more common situation is to have no mail dispensing fees.
MAC pricing is more common for generics than AWP minus. No surprise here. Maximum Allowable Cost (MAC) sets a unit price limit on pharmacy reimbursement because AWP is often a poor proxy for a pharmacy's acquisition cost for a generic drug. The AWP data are reported by PBMI because some employers do not use MAC pricing.
MAC pricing is more common for retail than mail. MAC pricing is used by 86.6% of employers for retail generic prescriptions and 61.1% of employers for mail-service generic prescriptions. No explanation or detail is provided for this finding.
Half of the employers do not understand pharmacy economics. Here's an amazing stat: "A total of 49.1% of employers said they did not know their pharmacy reimbursement rates" (page 20). I presume that this finding reflects the fact that Pharmacy Benefit Managers (PBMs) act as intermediaries between employers and pharmacies. This level of ignorance suggests that Wal-Mart will have to spend time educating employers if they want to sign more Caterpillar-type deals.
THE OPERATING PROFIT QUESTION
If acquisition costs were equal between a mail and a retail pharmacy, then the PMBI data imply that a dispensing pharmacy's gross profit per script (Reimbursement minus Acquisition Cost) is higher at retail than mail for brands. The situation for generics is a little murkier because of the disparity in the use of MAC pricing, but I'd expect a similar relationship.
Before you pop the champagne for store-based pharmacy, keep in mind that the operating profit per script will depend on the relative cost of dispensing. If the cost of dispensing (COD) for a prescription is lower from a mail pharmacy than from a retail store, then the mail pharmacy can accept a lower reimbursement and still have higher operating profits per script. (Technically, higher EBITDA per script, but who want to get technical?)
Put aside any personal biases or beliefs about the relative merits of mail versus retail pharmacy. Just consider the financial economics for a moment. If you do so, you can see the implicit win-win of the PBM/mail order business model.
The employer will pay less for a drug dispensed by mail because the AWP discount is bigger.
The mail pharmacy can simultaneously be more profitable for the PBM because the mail COD is generally below the retail COD.
Last Friday, CVS Caremark appeared to claim something quite different about their model. As evidence of my balanced approach, a follow-up post will highlight a discrepancy between a reimbursement example cited by CVS Caremark's CFO during last Friday's analyst meeting and these external facts. Stay tuned.
