<Disproportionate Savings>

The PBM Mail Order Dilemma: Should I Spend $80 to Save $100?

Is There a Better Way?

PBM profits from mail order are disproportionate to the savings, with the lion's share going to PBM profit instead of the plan client who pays the bills.

Refusal to agree to a mandatory mail order program, limitations on mail order access, or changing to a 90-day retail option are often met with the same response from PBMs. They always claim that the costs to the plan will go up without aggressive mail order features in place.

This is simply not true. Plans have a range of options, to include 90 days at retail, to manage costs. Mail order, on the other hand, can actually increase costs if not managed properly. Moreover, they provide a disproportionate financial incentive to the PBM to not optimize cost savings for the plan.

Here are two points for consideration:

First, the PBM claim of increased costs assumes that the plan actually knows what the costs of their mail order programs are. They rarely do, because PBMs have historically refused to share any costs or margin data with their plan clients.

However, we do have some revealing industry reporting that sheds light on PBM mail order margins. Merrill Lynch reported in late 2005 that the average gross margin on a 90-day fill is around $26.00 (or $8.50 per script when adjusted to the typical three month fill).

These high margins quickly shed light on mail order and explain how it has become the number one profit center for PBMs, with over 50% of their margins coming from mail order.

It also clearly explains why PBMs vigorously fight to protect and expand these margins.

The point, though, is that any pushback from the PBMs about costs going up should begin with an accounting of what their costs and margins actually are. If they are willing to produce this data, then an honest dialogue is possible. If not, then their arguments lack credibility.

It should be noted, recently, two of the big three PBMs agreed to the PBM credentialing standards of the Human Resources Policy Association (HRPA), headquartered in Washington, D.C. One of the credentialing standards requires that the PBM disclose actual acquisition costs at mail to their clients.

This is a step in the right direction, but, unfortunately, is only limited to HRPA clients, which are mostly Fortune 100 size clients.

Second, PBMs already have in place aggressive discounts with manufacturers and wholesalers based on enormous volume generated from their entire book of business. These discounts are in place before individual plans come on line.

The point is, contrary to PBM claims, tweaking a single plan's mail order benefit (even a large plan) will have little to no impact on the discounts available to the PBM from the manufacturers and wholesalers. What they really mean is that their profits will be impacted, and particularly the profits they derive on the respective plan.

Given that the margins are already quite high, though, I would advise most plans to make it crystal clear to the PBM that they have been hired to control costs.

The crux of the problem is that most PBMs, who are hired to control costs, make more money when drug costs go up, and nowhere is this more evident than mail order. The PBM should be incentivized for controlling drug trend, not exploiting it.

It is a common argument for PBMs to tout the brand to generic conversion and increasing generic utilization rates, particularly at mail order as evidence of cost savings.

It is generally true that generics save money, and PBMs exploit this general truth to their advantage. However, is it a good deal to spend $80 to save $100? Or, is that too much of a premium to pay the middleman?

While that is a hypothetical example, the corollary is very close. As illustrated by the $26.00 in gross profit margin on generics at mail. The profits are disproportionate to the savings, with the lion's share going to the PBM instead of the plan client who pays the bills.

There is a better way. Certainly the PBM should be remunerated for their services, but fairly remunerated.

Certainly, an accounting of mail order margins – full transparency – is the first step, with robust auditing rights to guarantee compliance. Ensuring mail order margins are not disproportionate is crucial to long term cost savings, with performance and savings guarantees built in. Consideration of a 90-day retail option is important, providing convenience, savings, while not disrupting the local health care decision continuum.