Mail Order Pharmacy — Savings or Added Cost?

Mail order programs can provide savings, but HMOs need to ensure that they are actually receiving sufficient value.

Thomas Kaye RPh, MBA

Pharmacy Director
Blue Cross and Blue Shield of Oklahoma

Consultants and pharmacy benefit managers often recommend designing and implementing a mail prescription service. There are a number of factors that need to be addressed to ensure an efficient and cost-effective program.

Examining an existing mail prescription design also can be a fruitful undertaking, because unless the service is carefully structured, what initially was implemented to reduce costs can backfire, engendering greater expenditures.

Members often welcome mail order services, as they usually receive a greater discount and value when using mail prescription benefits. Greater convenience for the member is also a factor.

Here then are a few points to consider in an effective mail order design:

  • Only drugs used for maintenance indications are provided by mail fulfillment. Short-term medications are not appropriate for mail order.
  • Generic filling should be mandatory.
  • Full payment should be required. Members who are unable to pay for 90 days should be limited to 30 days.
  • The retail drug benefit formulary should be the blueprint for the mail prescription service.
  • The quantity of dose units should be limited to 300; larger quantities dilute the member-paid vs. plan-paid ratio.
  • Identify an appropriate average wholesale price (AWP) discount rate to provide parity with retail as desired. The graph below demonstrates the need for much higher discounts on mail order AWP to provide the savings if fewer copayments are used. The arrow shown in the graph represents the base retail level if the plan used AWP –15%, a $2 dispensing fee, and three copayments.


Some of the following factors may not directly relate to the ingredient cost, but relate to sociological issues and to the potential for increased utilization:

  • The termination rate of the employer group;
  • The mail utilization factor vs. retail;
  • The community vs. the mail discount on AWP for brand drugs;
  • The community vs. the mail discount on generic medications;
  • The dispensing cost per mail vs. retail prescription;
  • The terms of the mail contract with the vendor; and
  • Time required to “turn off” mail benefits eligibility to prevent member oversupply and waste.

Termination rate

If an employer group has an elevated employee termination rate, more drug can be dispensed without the accompanying member contribution of premium or copayment to offset the employer’s benefit cost. Members generally have a payroll deduction or monthly contribution that covers benefits for the future 30 days. If the member elects to leave, goes to the pharmacy, and obtains a three-month supply, then the employee has only contributed a one-month premium for a three-month supply; the plan or employer group pays for the extra two months without benefit of the employee premium to offset the expense. The amounts can be substantial.

To calculate the employer group’s termination rate, take the number of terminated employees and divide by the number of full-time employees. Trend factors are then needed to adjust for the current and future periods. The trend factor can be the local, regional, or national unemployment rate.

Take, for example, an employer with a group termination rate of 10 percent. Converting to a decimal (0.1) and dividing by 1 minus the decimal equivalent of the unemployment factor, then the equation is (0.1)/(0.94) = 0.10638. To get the percentage, multiply by 100 to get roughly 10.6 percent.

The example is representative of additional influences from other employment factors. The unemployment percent must be added to the employer’s own calculated termination rate to compensate for potential increases in the chance of slightly higher termination rates. As the employment rate increases, the labor pool becomes a better buy for the employer. As unemployment is reflective of the economic situation, this serves as a corrective factor in the calculations. Both the termination rate and the employment rate are stand-alone factors.

As another example, if the termination rate is 3 percent and the employment rate is 4 percent, then the corrective number would be (0.03)/(0.96) x 100 = 3.125 percent.

Mail vs. retail utilization rate

This rate can be calculated by taking the number of retail prescriptions divided by the number of mail prescriptions. If the ratio is favorable to mail prescriptions, the plan or group has greater leverage when negotiating with the mail vendor.

AWP discount rate difference

Simply stated, this is the retail AWP discount minus the mail AWP discount. This is where the major savings occur. A greater mail order AWP discount is very desirable.

Dispensing fee difference

This is the retail dispensing fee minus the mail dispensing fee. This contributes only minor savings, especially when the dispensing fees are $1 to $3 per month’s supply.

Generic drug pricing in mail order

Often mail providers suggest that the generic price be a high fixed discount off AWP, typically 50 percent. The 50 percent is significant, as the usual AWP discount is only between 12 and 15 percent. However, if the payer is familiar with the nuances of working with the maximum allowable cost (MAC), the payer understands that MAC provides a better discount overall than the 50 percent discount from AWP. MAC numbers are generated from multiple sellers of generic pharmaceuticals. These numbers are then averaged or weighted to generate a number for which the retail pharmacist should be able to purchase these generics at this price. In this way, the payer, plan, or employer group will not pay more than the MAC price for reimbursement. The better the retail pharmacy buys, the bigger the spread, and more profits for the store. As AWP does not reflect the high competition with generics, MAC takes advantage of the cost savings of a competitive environment, as the MAC price may change on a monthly basis due to market conditions.

What’s needed for savings

For mail prescription costs tobe comparable to retail benefit programs, an AWP of –22 percent or greater is required with a dispensing fee of $2 and two copayments. For mail prescription to achieve savings comparable to a retail benefit design of AWP –15 percent, a $2 dispensing fee and three copayments would be suggested.

Comparing cost of a retail benefit design vs. a mail benefit design results in a 9-percent higher cost to the plan/payer (assuming the same AWP of –15 percent, a dispensing fee of $2, and mail having two copayments while retail has three copayments).

As the AWP discount for retail and mail approach each other, the less the savings opportunity of using copayment tiers. Appropriate modeling should also include the termination rate, which should be added to the base calculations above. Nine percent base rate plus the 10.6 percent termination rate provides a difference of almost 20 percent. This indicates that for a plan to break even, a 20-percent savings over that of present retail design is required.

The importance of the termination rate cannot be overemphasized. If an employee leaves his employer and receives a 90-day supply, the employer is unknowingly providing 60 days of medication without contribution. With the average brand name product cost being $80 per month, the loss of $160 requires additional savings to offset this situation.

Calculating the expense using net cost (which includes cost reduction by rebates) can be performed in a similar manner. The results change very little.

Generic pricing can add several additional percentage points if an aggressive MAC is used instead of a flat 50-percent discount from AWP.

Mail order’s other sources of revenue

Often the mail order prescription designs are seen to benefit the mail provider/PBM when the nondisclosed fees are understood. The mail order provider has the opportunity to apply parameters such as therapeutic interchange and/or substitution; to undertake interventions for promoting the vendor’s preferred products; and to maintain a record of members’ utilization.

Maximum generic utilization using mail is generally lower than what can be achieved by retail; however, this is driven by plan design. Generic drugs are usually not promoted and may not have the opportunity for 90 days’ filling. Very often, branded drugs are filled more often than generics.

Generics are also much less expensive in the retail pharmacy; thus, the incentive for using mail-order generics is lower. Benefit design may also be a key to driving optimized generic utilization; either by requiring a mandatory generic or having the member pay the difference between the brand and generic.

Administrative fees are generally paid to the mail order vendor by the pharmaceutical manufacturer for promoting the use of its product. The managed care organization may not be aware of — or entitled to — these administrative fees, however. These fees add to the revenue stream of the mail order company, but are not shared with the payer — plan or group. Mail vendors may also exclude the transference of rebates to the health plan, as the terms of the contract may state that the rebates are offsetting the service fees usually incurred by the group or payer for mail prescription services.

Mail vendors may provide targeted mailings as a service to the pharmaceutical companies to achieve greater market share; and in return, service administrative fees may flow back from the pharmaceutical company to the mail vendor.

Other sources of revenue for mail order vendors include fees collected for selective offers from generic manufacturers for growth in market share, additional discounts, and rebates. This results in highly discounted prices for generic drugs used to fill mail prescriptions. Often the PBM will contract with the plan or group for a 50-percent discount off AWP for generics and not utilize MAC pricing. This results in a greater cost to the group or plan when compared to the use of an aggressive MAC price. The mail vendor or PBM has a larger margin, when compared to non-mail, which is not passed to the plan or group as savings.

MAC pricing

Mail order prescription programs can provide savings, but must be coupled with aggressive AWP discounts, generally -22 percent or greater. Dispensing fees should be as low as possible to maximize the savings. Reducing the dispensing fee provides incremental savings and unless the fee is greater than $4, relatively small savings will be seen in the overall cost.

MAC pricing provides the best performance in cost savings for generics, compared to AWP –50 percent.

Employer groups and payers must understand that mail service providers collect “unseen” administrative fee income from pharmaceutical manufacturers. These fees represent a significant income source that is not available to comparable retail pharmacy operations.

Providers of mail services are able to send business to particular manufacturers of generics. They also have the ability to ask prescribers for a preferred drug or to substitute for the presented brand name drug, often circumventing the member. Often, if the member does not request a generic medication, the prescription is filled with a brand, further enhancing the opportunity for rebates, but at a higher ingredient cost to the payer/MCO.

Captured data from participants may be used for special data mining to help pharmaceutical manufacturers promote brand loyalty, persistence, and therapeutic interchange. Mail-service companies earn administrative fees from manufacturers, enhancing the bottom line. These fees may or may not be disclosed or shared based on contract contents.

MANAGED CARE June 2003. ©MediMedia USA