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PBMs: Is the edifice crumbling–not yet!

Conundrum—It was reported in their most recent 10K that what Medco got in rebates from manufacturers went down, and that really hit profit from that sector of their business in the most recent quarter. But their overall profits went up?  How did they manage it?

Well I know (and told a private client all about it in research report) and have given you some hints before about where they make their money. But now Barbara Martinez at the WSJ has figured it out—their margins on generics are huge. And of course they control that channel by pushing their clients into mail order where they can make the generic substitutions as soon as the rebates go away. So the more generics they sell, and the more mail order they sell, the higher their margins are —even if they keep less of the rebate on the branded product.

And, as the WSJ article says, luckily for them their clients are too dumb to figure it out. (Other than Horizon Blues of New Jersey which is suing Medco)

But wait there’s a little more. Remember last year? That’s when the trade association of the big PBMs (PCMA) put out a report explaining what great savings mail order provided for purchasers of drugs. But the entire report neglected to mention that mail-order pharmacies are significantly more profitable then regular pharmacies, and it further neglected that the owners of the major mail-order houses are, of course, the big PBMs.

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7 replies »

  1. Compound Pharmacy has gained much popularity in the field of medicine. The medications are equally effective and safe for sick patients who cannot take the actual medications due to their personal allergies.

  2. These comments miss a basic point about today’s drug channel: Profits on generic drugs now subsidize the retail and wholesale distribution of much more expensive branded products
    IMO, the WSJ article had a negative slant on the relative profitability of generics because it downplayed the cross-subsidies at work. Plus, it ignored the fact that a PBM’s customers (large corporations) presumably are sophisticated enough to understand the trade-offs in pricing a basket of goods.
    BTW, I have written in more detail about this topic in my own blog:
    http://drugchannels.blogspot.com/2006/05/will-unbundling-crush-pharmacy-profits.html

  3. Tom, in my own case, I technically do have a choice between mail and retail. However, for mail, we only pay a $20 co-pay for generics and $40 for a brand for a 90 day supply as compared to a 50% co-pay at retail. If I remember from when I asked about this last year, Plavix, for example, was something like $375-$400 at retail for 90 days worth of which my share was half or about 5 times the co-pay for mail order. Even in the case of the two generics I take, the co-pay comparison wasn’t close between retail and mail. If the co-pay requirements were the same at least very close, my own preference would be retail.
    As for transparency, it is fairly easy to find out the total price for a drug at retail before buying it. If one is already taking several drugs and is new to an area, the customer could go to or call all the different retail pharmacies in the area to learn the retail price. Of course, if the co-pay is a flat dollar amount as opposed to a (high) percentage of the cost like my company’s plan, he doesn’t care about transparency because it’s irrelevant to him. I never tried to find out what my employer pays the PBM for the drug. I suspect they wouldn’t tell me, but it’s irrelevant to me anyway because of the flat dollar co-pay for mail order.
    Regarding mail order forcing retail to provide better service and prices, I assume that’s true. It’s just another example of the benefits (to the customer) of competition which I, of course, applaud.

  4. > I take five scrips, all of which I get
    > via mail because that is my only choice
    > the way our co-pays are structured.
    The only choice or cheapest choice?
    I don’t know whether there is a price differential between PBM mail and Walgreens back to the ultimate payer. I know I don’t pay shipping on my mail Rx unless I’m in a big hurry.
    The way I see it, mail order has forced retail to provide better terms (lower price & mail service) than they would’ve otherwise. And remarkably, without price transparency at the consumer level.
    t

  5. Tom, that was a very interesting post. I’ve head all sides of this argument numerous times.
    The PBM’s tell the employer: we have the lowest costs, we have the systems to make sure the insured is switched from a brand to a much cheaper generic if one is available, and while we get rebates from Big Pharma on certain drugs, we will share some of the rebate with the payer. Bottom line: we can save you money.
    Walgreens, CVS, etc. say we are just as efficient as the PBM’s. Their costs are no lower when you include scrip shipping costs. They are being paid by Big Pharma to move market share of certain brands irrespective of whether or not it is better or cheaper for the patient and payer. Our pharmacists know their customers and are always available to consult with them. Your all in costs with us will be no higher and may be lower than with the PBM’s.
    As a patient, I take five scrips, all of which I get via mail because that is my only choice the way our co-pays are structured. I would prefer to go to my local pharmacist and pick up a fresh 90 day supply when the current one is about to run out. I like to be able to talk to the pharmacist in person when I need to. On the other hand, when I am older and, perhaps can no longer drive or get around easily, then mail order would be a godsend, so why not provide a choice?
    As for the Walgreens business model, I at least understand where they’re coming from. Their current store prototype is 15,000 square feet with a drive-thru, of which only 900 square feet is for the pharmacy. Front end merchandise accounts for 30%-35% of sales and 94% of the square feet, while the gross margin on the front end is 10-15 percentage points higher than on the scrip business. Over 80% of Walgreens 5200+ stores now have drive through pickup stations, and they have more 24 hour stores than the rest of the industry combined. Given their record of success and the fact that they are growing their square footage and store base by almost 8% per year, they must be doing something right.
    I don’t think any outside observer can determine definitively whether retail or PBM provides the payer with lower all in costs. As a customer, I certainly prefer more choice to less choice in filling renewals for chronic medications.

  6. > Walgreens has been fighting hard against mandatory
    > mail for chronic medications, and, indeed, some
    > plans do now offer the option of 90 day fills at
    > retail pharmacies within the same co-pay structure.
    Yes indeed, they have fought it, but why?
    A few years back I was involved in an e-prescribing project. Walgreen’s did not want to accept e-Rx (or even a fax!) at the time because (get this):
    it broke their business model
    They wanted people to physically present at least their first Rx at the store, and then to spend 30 minutes shopping while they waited for the thing to be filled. Drive-through for subsequent fills was an evil they tolerated. But even that got you on their parking lot — and you might think of something you “need”.
    Now they apparently offer the same terms at least to the patients as the mail-order houses do. The first-fill had to be handled somehow in the past, so unless the doc had samples(!) the patient had to go to a retail pharmacy at least once anyway.
    Walgreens has evidently admitted defeat, and will (un)happily convert an Rx over to its own mail service if the patient really wants it.
    t

  7. Matthew,
    Two points. First, Walgreens claims to have the lowest cost to fill in the retail drug industry. It also has a PBM though much smaller than the Big Three. It claims that the PBM’s do not have any cost advantage over the most efficient retailers when you add in the PBM’s cost of shipping the scrip to the customer. Walgreens has been fighting hard against mandatory mail for chronic medications, and, indeed, some plans do now offer the option of 90 day fills at retail pharmacies within the same co-pay structure.
    Second, I remember once in Canada years ago having to fill a scrip for my son while there on vacation. I was struck to see that the cash register receipt showed the price of the drug itself, the dispensing fee, and the total price paid. I don’t know why we can’t require that in the U.S. The most efficient retailers have a fully allocated cost to fill in the $5-6 range, I believe, while the less efficient (like supermarkets) could easily be above $10 since they fill many fewer scrips per day on average.
    For generics which the retailers and PBM’s are buying at very low cost per pill, showing the dispensing fee separately would suggest that the business might not be as hugely profitable as it first appears.

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