March 2, 2010 
This is one of those questions that eludes many people so let me try to explain it here. It’s one of the major constraints for PBMs in terms of driving mail order volume. Most (all) PBMs select patients to target for retail to mail programs based on a win-win-win criteria.
- Does the patient save money?
- Does the plan sponsor save money?
- Does the PBM make money (net of costs of acquisition)?
In most cases, the patient will save money since the default plan designs incent mail use. Typically plans are set up to be roughly 2x the retail copay meaning that you get a 90-day supply for twice the cost of a 30-day retail supply. The only time that this sometimes doesn’t work is on generics where the mail order price could be more than the retail price. Which shouldn’t happen if you have a MAC (maximum allowable cost) list being used at both retail and mail.
BUT, the problem for clients is that over time as copays have gone up it’s possible that the copay savings they give to the patient as an incentive to choose mail could outweigh the savings they get from the PBM. For example:
- Let’s assume it’s a brand drug.
- Let’s assume that the average cost for a 30-day supply is $100 (and therefore $300 for a 90-day mail order supply).
- Let’s assume that the average discount at retail is 18% and the average mail order discount is 23%. (i.e., the client pays $82 for a 30-day supply at retail and $231 for a 90-day supply at mail)
- Let’s assume that the copays are $30 at retail for the brand drug and $60 at mail. (i.e., the client is passing on $30 of their savings to the patient)
- Therefore, in this case, the client is saving (pre-copay) $15 by moving a drug to mail order. (5% incremental discount times the $300 drug cost)
- The client saves $15, BUT they pass on a $30 copay savings to the consumer meaning that they pay an extra $15 for each of these brand scripts moved to mail. PROBLEM!
So, the question is what to do here. Well, first most PBMs or consultants should be recommending mail order copays that are 2.5x or more the retail copay. AND, they should be recommending differences in the copay multiplier based on the tier and the actual discounts received to make sure that the plan sponsor is not upside down.
At this point, you should be saying “well this seems so easy”, BUT it’s not. Plan sponsors don’t want to reduce the copay savings for consumers because it’s viewed as a takeaway or viewed as not being competitive. They are stuck with this 33% savings framework that worked when copays were $10-15. It’s a real issue which every account team within the PBMs should be focused on.
Now, on the final point…the PBM making money. I’ve already talked about this many times. The PBM makes money on generic medications at mail. This margin underwrites all the other business which is often a loss leader. [Or at least this was the model a few years ago as some people remind me.]
Enabling Healthy Decisions 
Mail-service vendors do receive preferential pricing due to being in a different trade class than retail pharmacies. They can purchase generics at better than 95% off AWP.
In many audits I’ve conducted I found that mail-service pharmacies have selected the highest possible AWP for a similar generic in order to maximize profit. It is possible to have similar acquisition costs for a generic from two different suppliers but far different AWPs. My favorite case was when a drug cost $19 at retail but $207 at mail for the same drug and quantity. I also have noted instances where they will repackage medications, both brand and generic, in order to assign their own AWP amounts. One quick check for your own program. Does the mail-service use the same MAC list and amounts as retail? If not, that is a red flag.
You can avoid these issues through a solid contract. But make sure you get a true PBM expert to help.
George, thanks for your reply. I don’t think i fully explained my original question.
Is it not true that at times mail order pharmacies can buy prescription medications at prices that retail pharmacies cannot access? If so would this not influence the calculation for AWP?
As I understand it, mail order pharmacies do receive this preferential pricing and as such and then work a percentage as the benefit rather than real dollars.
For example if the if the AWP for mail order is higher a bigger % discount won’t always = larger $$ savings if the AWP for retail pharmacies is lower.
I don’t know if how I typed this makes sense. Here are a couple of reference docs that I recently came upon that may give further insight into my question.
Click to access mrileyotestimonycppsi.pdf
Click to access mrileyotestimony.pdf
As an aside, i am not an advocate of local pharmacies. I am an HR professional looking for the best pricing for my employees. Thanks for your time.
Jesus does ANYONE but ME know the problem??!! Are you all scared or ignorant?
The 90-day option is prohibited by the PBMs at the retail level.
I know the truth is sometimes stranger than fiction.
Put THAT FACT into your little silly equations and stir.
Retail is getting so f’d by the very companies that provide it with its largest bi-monthly revenue imbursements. And we’re all worse than prostitutes. At least THEY bitch when they get FINANCIALLY screwed! We retailers simply lay there with our legs spread hoping to stay alive. Embarrassing.
BJackson – I’m not sure you’re looking at it the right way.
Insurance companies (and/or their PBMs) give a greater discount on brand drugs and mail. And, typically for generic drugs if the pricing (i.e., MAC list) is set up right.
The AWP on the drugs filled at mail isn’t higher although it may seem that way based on AWP averages. The math is deceiving since more acute drugs are generic than maintenance drugs. Therefore, the average AWP for retail drugs (even adjusted for days supply) will be lower.
George,
This is a really good thought experiment.
A few computation comments:
1. There is usually a dispensing fee at retail (x3) versus a low or no co-pay at mail.
2. Brand reimbursement averages AWP-16.4% at retail and AWP-23.7 % at mail (per latest PMBI survey of 417 employers).
Plug in those numbers and costs are lower for both consumer and payer.
But your point is valid — benefit design math does not automatically favor the payer.
Even with your math, a payer may be willing to “over pay” for moving maintenance scripts to mail in advance of generic launch b/c mail substitution rates are faster and higher.
Adam
Isn’t it true that many times the isurance companies are giving a bigger % discount for mail order, however the AWP is higher for those drugs they are selling? If the starting price is higher then the person is paying just as much if not more for mail order right? Am I not looking at this the right way?
Don’t forget that providing larger quantities increases the waste factor when patients discontinue the medication. I’ve estimated that factor at 4-5%. That makes it very hard to safe money using mail-service.