Why Pennsylvania's New Anti-Mail Law Will Hurt Pharmacy and PBM Profits

Last Thursday, Pennsylvania joined the anti-mail pharmacy movement when Governor Corbett signed into law SB 201, a bill requiring consumers to receive equivalent terms at retail vs. mail pharmacies. The law takes effect on March 1, 2013.

At first glance, the PA law may appear to be a big victory for retail pharmacies, because mail pharmacies can no longer have a copayment advantage with consumers. But pharmacy owners should curb their enthusiasm. The law has strong language requiring retail pharmacies to accept “the same pricing, terms, conditions or requirements” as a mail pharmacy. Congratulations, pharmacy owners! You won the legal right to reduce your margins in a frantic, race-to-the-bottom price war!

The law also provides another headwind for mail pharmacy, and therefore is likely to reduce pharmacy benefit manager (PBM) profits. Last night, Express Scripts gave a downbeat assessment of 2013. The anti-mail legislative movement may come up in this morning's 9:30 AM earnings call.

Read on and then post a comment with your opinion.

THE GOOD NEWS?

For your reading pleasure, see the official text and analysis:

• An Act amending the act of May 17, 1921 (P.L.682, No.284), known as The Insurance Company Law of 1921, in health and accident insurance, providing for coverage of prescriptions (full text of the bill)

• Fiscal note (from PA House Appropriations Committee)

Here is the bill’s key requirement:

“(A) A health insurance policy or government program providing benefits for prescriptions shall not impose on a covered individual utilizing a retail pharmacy a copayment, deductible, fee, limitation on benefits or other condition or requirement not otherwise imposed on the covered individual when using a mail order pharmacy.”

In other words, the bill outlaws many conventional pharmacy benefit designs with a mail pharmacy alternative. As I discuss in the 2011-12 Economic Report on Retail and Specialty Pharmacies (starting on page 55), the pharmacy reimbursement formula usually makes PBM mail-order dispensing less expensive for both the payer and the consumer.

Consider the chart below, showing the plan sponsor’s ingredient costs for a brand-name drug as a percentage of Average Wholesale Price (AWP) along with the consumer copayment. According to these data, a mail pharmacy is 670 basis points (84.0% minus 77.3%) cheaper for an employer than is a 30-day prescription dispensed by a community retail pharmacy. This means the plan sponsor pays less when the consumer uses a mail pharmacy than a store-based retail pharmacy.

Because of possible costs increases, private payers, such as the Pennsylvania Chamber of Business and Industry, originally opposed the bill. See this November 2011 letter.

THE BAD NEWS FOR PHARMACY

The Pennsylvania Pharmacists Association noted: “SB 201 represents a compromise from our original intentions, but one that was agreed upon between the pharmacy community, the insurance industry and the pharmacy benefit managers and allows consumers to have the freedom of choice to access their local community pharmacies if they so choose.”

And here’s the compromise—a very important additional requirement which retail pharmacy owners should definitely not like:

“Subsection (a) shall apply only if the retail pharmacy is willing to accept from the insurer the same pricing, terms, conditions or requirements related to the cost of the prescriptions and the cost and quality of dispensing prescriptions that the insurer has established for a mail order pharmacy and any of such pharmacy's affiliates, including any affiliated pharmacy benefit manager, pursuant to the health insurance policy.”

Take another look at the chart above. Will payers merely *increase* a mail pharmacy’s reimbursement to be equal to the retail pharmacy reimbursement rate? Doubtful. Instead, retail pharmacies will be forced to accept the lower mail rates.

The NCPA reluctantly acknowledged the unpleasant reality of price competition, noting:

“By supporting the bill that emerged out of Pennsylvania's State Senate and House, the Governor allows more than 1,000 local mom and pop pharmacies throughout Pennsylvania to match the reimbursement terms and conditions that large mail order pharmacies currently enjoy.” (source; emphasis added)

Well, I sure hope community retail pharmacies “enjoy” the margin pressure from mail pharmacy reimbursement rates. As I note in my summary of Pharmacy Economics 101, those incremental scripts can still be profitable at the margin, although average pharmacy margins will decline.

To read more about the likely market dynamics, see New York's Anti-Mail Bill and the Coming Generic Price War.

THE BAD NEW FOR PBMS

Mail growth is crucial to the big two PBM’s profits. In 2013, the two largest PBMs—CVS Caremark (NYSE: CVS) and Express Scripts (NASDAQ: ESRX)—will account for more than 80% of U.S. mail-order prescriptions. PBMs also operate the largest specialty pharmacies, most of which use a mail-order dispensing format. Dispensing drugs via a mail pharmacy accounts for a minority of a PBM’s equivalent prescriptions, but more than half of per-prescription profits.

Alas, there has been a multi-year slowdown in prescriptions dispensed by mail pharmacies. Retail chains—drugstores chains and mass merchants with pharmacies—continue to gain market share at the expense of all other dispensing formats. In 2012, mail growth picked up a little, but still remains behind chain growth.

In The Great Mail Pharmacy Slowdown, I summarize the four key factors behind the mail slowdown. With the passage of SB201, state legislation is quickly becoming a fifth important factor. Pretty, pretty, pretty good?