The Great Mail Pharmacy Slowdown

As a follow up to How the Pharmacy Industry Changed in 2011, here’s a deeper dive into the surprisingly weak mail pharmacy numbers.

The 2011 downturn in mail pharmacy prescriptions is part of a multi-year trend. As I show below, the slowdown is also reflected in the mail penetration rates at the big 3 (2?) Pharmacy Benefits Managers (PBMs).

Following the FTC’s approval for the Express Scripts/Medco merger, the Wall Street Journal wrote: Merger to Mean More Rx by Mail. I’m not so sure. And if I'm right, it will have big implications for pharmacy competition, PBM profits, and manufacturer trade strategies.

Hopefully, today's analysis will mollify your paraskevidekatriaphobia!

MAIL AWAY

Here’s a look at IMS data on mail prescriptions since 2000. Since 2006, the growth of prescriptions dispensed via mail-order pharmacy has been slowing.

Meanwhile, retail is growing. From 2007 to 2011, total U.S. retail prescriptions (excluding mail pharmacies) grew by 162 million, a gain of 4.9%. During the same five-year period, total equivalent mail prescriptions grew by 9 million, a gain of only 1.2%. What’s more, the total number of prescriptions dispensed from mail pharmacies has declined in two of the past four years.

I see four key factors behind the mail slowdown:

• Mail's economic advantage is diminishing. Six out of ten employers allow community pharmacies to fill 90-day prescriptions for maintenance medications. These programs are reducing the cost gap between mail and community pharmacy for both consumers and third-party payers. See Retail and Mail Pharmacy Economics Start Converging.

• The generic price war is heating up. In an era of 0.3% script growth, retail community pharmacies are competing more aggressively with the discounts offered by mail pharmacies. Pharmacies have either pursued cash-pay consumers with discount generic programs, or reduced their reimbursement rates to providers to participate in more limited networks. See Humana-Walmart Preferred Network Plan Wins Big in Part D. 

• Part D is about 20% of the market. Since 2006, the Medicare Part D benefit has favored retail prescription growth over mail growth. The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (Public Law 108-173) contains a “level playing field” requirement, which prohibits mandatory use of mail order pharmacies. If a Medicare Part D plan offers a 90-day supply at mail, then it must offer a 90-day supply option at retail. Additionally, the older Part D population is generally more resistant to mail-order prescriptions

• Maintenance Choice is booming. CVS Caremark’s Maintenance Choice program removes the cost difference between mail and retail dispensing of 90-day maintenance prescriptions. This program has shifted business from Caremark mail facilities to CVS retail stores. As of January 2012, nearly 800 plans totaling 10 million covered lives had adopted it. I estimate that Maintenance Choice accounts for more than half of same-store sales growth in CVS retail pharmacy business.

Looking ahead, New York state recently passed the Anti-Mandatory Mail Order Pharmacy Bill (New York Assembly Bill 5502‐B). (See New York's Anti-Mail Bill and the Coming Generic Price War.) The law eliminates mandatory mail-order programs for certain commercial payers and prevents plans from using differential copayments for mail pharmacies. Similar legislation is pending in Pennsylvania and being considered in other states.

Some people have suggested that the mail slowdown is driven by the weak macroeconomy. In theory, consumers shy away from 90-day fills (via mail) to avoid paying 2 co-payments up front. I’m skeptical of this explanation.

• 90-day retail scripts have grown during the past few years period. For example, Walgreens reported a 30% jump in 2011 90-day retail volume. (source) 
• The time horizon doesn’t seem long enough to shift people from retail (3 co-payments spread over 3 months) to mail (2 co-payments upfront for a 3-month supply).

SHRINKAGE AT THE BIG PBMS

Even if you don’t trust the IMS data, the SEC filings of the largest PBMs—CVS Caremark, Express Scripts, and Medco Health Solutions—tell a similar story. (BTW, when do we start calling them the Big 2?)

The chart below shows equivalent mail prescriptions as a percentage of each PBM’s total scripts--retail network prescriptions + equivalent mail prescriptions. I added the IMS data, which is lower because it captures the whole market.

The biggest drop was at CVS Caremark (-63 basis points), presumably driven by Maintenance Choice's channel shifting. Express Scripts (down 32 basis points) has had substantial customer mix shift following the acquisition of NextRx. They also have to contend with the highly-politicized Tricare contract, where it’s hard to increase mail pharmacy usage given intense lobbying by pharmacy associations. Medco, which has the highest mail penetration, dropped by 35 basis points.

These declines matter a lot for PBM profitability. Dispensing from their own mail-order pharmacies generates more than half of a typical PBM’s EBIDTA per equivalent script. (See 49 of the 2011-12 Economic Report on Retail and Specialty Pharmacies.)

THOUGHT FOR FOOD

Independent pharmacy owners complain endlessly about the threat from mail order. But the facts tell a very different story. In reality, chains like CVS, Walgreens, and Walmart are the real competitive challenge.

Like it or not, US retailing continues to become more concentrated and increasingly dominated by chain stores, warehouse clubs, home centers, and big box superstores. Consumers are fueling this trend by consolidating their purchases and shopping at fewer, larger stores. Low prices and self-service ("How can you help you?") now dominate. Online retailing is also consolidating as consumer use mega-retailers for showrooming, something that's not relevant to prescription drugs.

Put another way, NCPA members have more to fear from NACDS members than PCMA members.

As generics come to dominate dispensing activity, PBMs will struggle to grow mail penetration. Generic drugs’ extremely low acquisition cost is triggering a price war among pharmacies. Pharmacies have either gone after cash-pay consumers or agreed to 90-day deals with close-to-mail (or lower) reimbursements. This was the premise of last year’s article Walgreens Joins the Attack on PBM Mail Profits.

Manufacturers, meanwhile, should pay close attention to these shifts. Mail is not taking over the world. Retail pharmacy is not going away. A brand-name manufacturer with a strong traditional drug portfolio (yes, they exist) should focus on retail influence, especially in advance of the post-2016 generic bust.