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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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Compounding PharmacistAdam J. FeinTom LeithBarry Carol Recent comment authors
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Compounding Pharmacist
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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.

Adam J. Fein
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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

Barry Carol
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Barry Carol

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… Read more »

Tom Leith
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Tom Leith

> 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

Barry Carol
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Barry Carol

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.… Read more »

Tom Leith
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Tom Leith

> 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… Read more »

Barry Carol
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Barry Carol

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… Read more »