Chains ponder responses to mandatory mail order

April 18, 2005

As mandatory mail-order pharmacy continues to grow and encroach on the market share of traditional pharmacies, the National Association of Chain Drug Stores met in Philadelphia last month and discussed ways to respond to this competition. Potential solutions included: retail pharmacies' contracting with their own pharmacy benefit managers to service mail-order plans, mounting a public relations campaign to attack the accepted belief that mandatory mail plans save money, and offering alternative 90-day retail programs that provide mail-order savings but retain contact between patient and pharmacist.

As mandatory mail-order pharmacy continues to grow and encroach on the market share of traditional pharmacies, the National Association of Chain Drug Stores met in Philadelphia last month and discussed ways to respond to this competition. Potential solutions included: retail pharmacies' contracting with their own pharmacy benefit managers to service mail-order plans, mounting a public relations campaign to attack the accepted belief that mandatory mail plans save money, and offering alternative 90-day retail programs that provide mail-order savings but retain contact between patient and pharmacist.

"Retail pharmacies are at a crossroads," said Douglas M. Long, VP of industry relations at IMS Health, a pharmaceutical information company. "In the past few years, mandatory mail order has eroded our business." Retail prescription drug sales grew 8.3% in 2004, he said, which is respectable but down significantly from the 15% to 19% levels of growth the industry experienced five or six years ago. And as the retail market continues to soften, the mail-order business is expanding rapidly. By 2008, if mail order continues growing at its present rate, one-quarter of all prescriptions in the nation would be filled by mail, he predicted.

Another speaker, David R. Bellaire, of the consulting firm Bain & Co., pointed out that pharmacies will continue to lose not only prescription business, but also whatever front-store sales Rx-related foot traffic brings in. Under fairly conservative estimates, some pharmacies could be facing revenue losses of up to 40% over the next several years, he said. In 2001, 6% of employer drug benefit plans included some form of mandatory mail-order provisions. That figure rose to 24% in 2004.

PBMs, which own most mail-order facilities, are structured to buy drugs in bulk. By taking advantage of the economies of scale, PBMs can offer price rebates to health plans. Assuming PBMs pass at least 90% of these rebates on to the health plan payers, it is virtually impossible for retail pharmacies to compete on price with PBMs and turn a profit, according to Bellaire.

Retail pharmacy chains should adopt a long-term strategy of partnering with a PBM that has a mail-order facility, Bellaire suggested. In his model, prescriptions would be dropped off at the retail pharmacy and faxed to the partner mail-order facility, which would fill the Rx and label the bottle with the chain pharmacy's brand name. The pharmacy would charge a $12-$14 handling fee and also benefit from inventory cost reductions while retaining foot traffic. For its part, the PBM would benefit from increased business and association with a trusted brand name. Consumers could either receive prescriptions by mail or collect them at the pharmacy.

Bellaire's argument was based on PBMs' passing along at least 90% of their manufacturer rebates, but another speaker at the conference suggested health plan payers receive on average much less. Michael J. Rudolph, Pharm.D., of the University of Southern California School of Pharmacy, noted that one of the three largest PBMs admitted in its latest annual report that of about $3 billion in rebates garnered last year, it passed only $1.7 billion to health plan providers. "This is the story that is not being told, and I venture to say most of the plan sponsors do not understand this," he said.

Patients may see significant savings, but health plan sponsors usually do not. Retail pharmacies should make efforts to publicize this message to the healthcare community and the general public, Rudolph advised.

The general consensus at the meeting was that the industry should continue to offer and implement 90-day retail programs. George P. Flaherty, R.Ph., VP of managed care sales at Walgreens, pointed to his company's successful 90-day program, which offers savings similar to mandatory mail, while preserving patient choice and pharmacist consultation.