New York's Anti-Mail Bill and the Coming Generic Price War

Yesterday, Governor Andrew Cuomo signed New York’s controversial Anti-Mandatory Mail Order Pharmacy Bill (New York Assembly Bill 5502‐B). See New Law Bans Mail-Order Drug Mandates from The New York Times.

This law may appear to be a big victory for pharmacies, but they shouldn't pop the champagne yet. Governor Cuomo stipulated that “a retail pharmacy must agree in advance to accept the same reimbursement rate and applicable terms and conditions established for mail order pharmacies.”

Put another way, Cuomo called the pharmacy lobby’s bluff by requiring retail pharmacies to compete directly with mail, even though a retail pharmacy's costs and service model is different.

This bill is one more step towards an inevitable race-to-the bottom generic price war. If other states pass similar bills, expect to see profits drop even faster at pharmacies, PBMs, and wholesalers. The generic wave may turn out to be less profitable than everyone is expecting.

RACING TO THE BOTTOM

For background on the bill, see The Unexpected Losers from New York’s Anti-Mail Bill and FTC Slams NY Anti-Mail Bill.

The Governor’s new stipulation—“the same reimbursement rate and applicable terms and conditions established for mail order pharmacies”—is crucial. It will force retail pharmacies to meet the prices and terms of a mail pharmacy. Community retail pharmacies may gain some incremental foot traffic, but will ultimately face more margin pressure as they struggle to meet mail pharmacy reimbursement rates.

Consider the financial advantages of a mail pharmacy:

• Drug acquisition costs are lower. Two-thirds of generic products sell for less than 25 cents per unit (pill, tablet, capsule, etc.). See Generic Drug Prices are Rising, according to latest AMP data. Note that the AMP data exclude mail pharmacies, which buy generic drugs in bulk at even lower prices.

• Dispensing costs are lower. Mail-order pharmacies operate very efficiently by using automated dispensing machines. The newest high-tech mail-order pharmacies dispense more than 100,000 prescriptions per day—equal to the daily activity of 600 retail pharmacies. 

• Logistics costs are lower. Drugs are shipped to a handful of central-fill locations instead of being trucked in small quantities to thousands of retail locations. Wholesaling costs—whether performed by a chain warehouse or a drug wholesaler—translate into higher net store-level acquisition costs for a retail pharmacy vs. a mail pharmacy. 

• Mail scripts are 90-day fills. Pharmacy owners will find that foot traffic may not increase enough to offset the lower margins because the consumer only has to visit every three months, not every 30 days. The bill will accelerate 90-day prescriptions at retail, a trend that was already growing. See Retail and Mail Pharmacy Economics Start Converging.

Bottom line: retail dispensing is more expensive than mail dispensing. Walgreen effectively admitted that it sacrifices profitability by accepting mail reimbursement rates in a February conference call. See the “90-Day Prescriptions at Retail” section of Walgreen Talks PBM Conflicts, 90-Day Rx Profits, and AMP.

Congratulations, pharmacy owners! You can now agree in advance to reduce your profit margins! You'll learn first hand why Best Buy Pays Price to Rival Amazon.

This situation will have a negative derivative effect on wholesalers such as AmerisourceBergen (NYSE:ABC, Cardinal Health (NYSE:CAH), and McKesson (NYSE:MCK). Drug wholesalers will face margin pressure on generic drug sales, because pharmacies will require bigger discounts to remain competitive. A wholesaler’s smaller customers will require more aggressive pricing from wholesalers to remain competitive with the larger chains that buy directly from manufacturers.

CHANNEL NEUTRAL: BAD NEWS FOR PBM PROFITS

Mail-order growth and PBM profits will suffer if New York consumers shift from mail to 90-day at retail. Dispensing generic drugs via a mail pharmacy accounts for a minority of a PBM’s equivalent prescriptions, but more than half of per-prescription profits. I describe this dynamic in Walgreens Joins the Attack on PBM Mail Profits.

Large retail chains have led the way with the retail generic price war. Pharmacies have either gone after cash-pay consumers or agreed to 90-day deals with close-to-mail reimbursements. This is one reason that mail prescription growth has lagged the overall market (per Chains in 2010: Winning). 

WILL THIS EVEN MATTER?

I’ll leave you to ponder one big unknown: Will this "choice" even matter to consumers?

Look back at Surprising Data on the Mail vs. Retail Choice, which summarizes a fascinating study of CVS Caremark’s (NYSE:CVS) Maintenance Choice program. For both consumers and plan sponsors, Maintenance Choice removes the cost difference between mail and retail dispensing of 90-day maintenance prescriptions. By cutting retail pharmacy margins on generics, a plan sponsor’s gross pharmacy spend reportedly drops by up to 4%.

The surprising result of that study? More than two-thirds of consumers chose a mail pharmacy over a retail pharmacy. Put another way, consumers seem happy with mail based on their actual (voluntary) behavior. For new maintenance prescriptions, more consumers chose mail than chose a retail community pharmacy. The decision to use mail, however, was heavily influenced by a consumer’s prior use of a retail vs. mail pharmacy for maintenance prescriptions.

Ironically, New York is about to run a giant "maintenance choice" experiment with its insured population. Time will tell if people will actually switch from mail to retail.