Retail and Mail Pharmacy Economics Start Converging

Let’s dig into PBMI’s 2011-12 Prescription Drug Benefit Cost and Plan Design Survey again to look at the drug channel management in employer-sponsored plans.

Here’s what I found:

• For employers and consumers, a 30-day brand-name prescription is still cheaper at a mail pharmacy than a retail community pharmacy.

• However, mail's economic advantage is vanishing because six out of ten employers allow community pharmacies to fill 90-day prescriptions for maintenance medications. These programs reduce retail reimbursement and shrink the mail-retail gap.

• For generic prescriptions, mail appears to have an ingredient cost advantage vs. retail, although employers are less likely to use Maximum Allowable Cost (MAC) limits for mail pharmacies.

The PBMI data demonstrate that plan sponsors are paying attention to drug channel margins. The embrace of channel-neutral benefit designs will pressure profits at both retail pharmacies and PBM-owned mail pharmacies. Retail pharmacies must accept lower reimbursements to compete with mail order, while mail pharmacies must compete more directly on service with retail community pharmacies.

Oh, by the way, manufacturers: who do you think is going to be asked to subsidize the system as profits get sucked out of the pharmacy distribution?

THE DATA

I described the strengths and weaknesses of the data in More Formulary Exclusions for Many Drug Therapies.

I want to highlight the fact that only 30% of the survey respondents—about 82 employers—provided pharmacy reimbursement data. It is not clear if this subset of employers differ in some significant way from the other respondents.

BRAND REIMBURSEMENT BY DISPENSING CHANNEL

We all know the usual story. The pharmacy reimbursement formula makes mail-order dispensing less expensive for both the payers and the consumer, encouraging the substitution of mail pharmacies for retail network pharmacies. Here’s the twist: the PBMI data clearly show mail and retail reimbursement rates converging for maintenance prescriptions.

The chart below shows the plan sponsor’s ingredient costs for a brand-name drug as a percentage of Average Wholesale Price (AWP). As you can see, a mail pharmacy is 670 basis points cheaper for an employer than a 30-day prescription dispensed by a community retail pharmacy. Since the average brand-name drug AWP is about $200, the employer pays about $13 less on average for a drug dispensed by mail. The consumer’s co-payment drops by $7 per equivalent script.

PBMI, for the first time, asked employers about 90-day at retail programs. Sixty percent of respondents allow retail network pharmacies to dispense 90-day maintenance supplies of medications.

The average 90-day at retail reimbursement reduces the cost gap between mail and community pharmacy for both consumer and third-party payer. The difference is now only 330 basis points (about $6 per prescription) and the average copayment per prescription differs by only $2.

GENERIC REIMBURSEMENT BY DISPENSING CHANNEL

The generic story is similar but has an important caveat.

The chart below shows the data for generic prescriptions in a comparable format to the brand-name data above.

Oddly, the average 90-day retail reimbursement rate is greater than the 30-day rate. In an email, Brenda Motheral of PBMI told me that this quirk in average AWP discounts could reflect sample heterogeneity:

• 25% of the employers reported 90-day discounts greater than 30-day discounts for generic prescriptions (consistent with the brand-name averages)
• 25% reported 90-day discounts less than 30-day discounts (per the overall averages)
• 50% reported the same AWP discounts for 30-day and 90-day generic prescriptions

WHAT THE MAC?

The generic reimbursement data do not tell the full story. The PBMI survey also found that Maximum Allowable Cost (MAC) reimbursement limits are much less common for mail prescriptions than retail prescriptions. The gap is pretty striking.

What’s going on? Some possibilities:

• Perhaps the respondents (from employers) don’t know about MAC lists. For instance, I would have guessed that more than 42% of employer-sponsored plans are using MAC limits for 30-day retail scripts.
• The varying MAC tactics could reflect product mix differences. Non-maintenance medications, such as short-course antibiotics, are dispensed by community pharmacies, not mail pharmacies. (BTW, the generic dispensing rate is roughly equal for mail pharmacies vs. community pharmacies once you normalize for therapeutic class. See NCPA Twisting Reality Again.)
• Employers are signing PBM contracts that allow mail pharmacies to earn higher ingredient cost spreads from dispensing generic drugs.

Other ideas?

SOME IMPLICATIONS

The PBMI data demonstrate that plan sponsors are paying attention to drug channel margins, creating a strategic vulnerability for both pharmacies and PBMs.

• Employers are getting on board with the channel-neutral model. CVS Caremark (NYSE:CVS), Walgreen (NYSE:WAG), and Walmart (NYSE:WMT) have been competing to provide these options for both cash-pay and insurance-paid consumers. Reread January’s Walgreens Joins the Attack on PBM Mail Profits for more on this trend.

• 90-day programs reduce the pharmacy industry’s profits because retail pharmacies must compete on price at close-to-mail reimbursement levels. Remember, mail pharmacies have lower dispensing costs by buying in bulk to highly-automated, centralized locations. This cost disparity is why the flawed New York mail-order bill may end up hurting retail pharmacies more than they think. See The Unexpected Losers from New York’s Anti-Mail Bill. It’s also a good example of why we don’t need government mandates to take care of something that the market can handle just fine.

• The growth of 90-day at retail is a major hurdle to mail-order growth and therefore a threat to PBM profits. In 2010, total mail volume increased by 1.1%, but this was a bit lower than overall market growth of 1.2%, so share of scripts declined slightly (per Chains in 2010: Winning). Dispensing generic drugs from mail pharmacies accounted for a minority of a PBM’s equivalent prescriptions but more than half of per-prescription profits. Hence, the urge to merge.

• Given the third chart above, PBMs are at risk if payers start requiring MAC pricing for mail-order generic prescriptions. The chart above implies that this payer strategy would reduce PBM ingredient cost spreads in the mail pharmacy. The biggest PBMs—Express Scripts (NASDAQ:ESRX) and Medco Health Solutions (NYSE:MHS)—would be most affected by this shift.

THE BOTTOM LINE

Here come ol' flatprofits,
He come reimbursing up slowly,
He got joo-joo channel,
He one holy payer,
He got hair down to his AWP,
Got to be a joker,
He just do what he please.