Mail-order rates, capabilities foster increased competitiveness among PBMs

Drug Cost Management Report, Sept 12, 2003

PBMs have made significant investments in their mail-order capabilities over the past year, and are now making strong efforts to promote mail order to members. There are three primary reasons for this:

* Mail order has significantly better profit margins than does retail fulfillment, plus PBMs receive a "prompt payment discount" of approximately 2% of average wholesale price (AWP) that is typically not shared with clients.

* Mail order helps PBMs to efficiently enforce formulary goals and implement generic substitutions. PBMs have been known to gain as much as 80% generic substitution in their mail-order populations during the first week a new generic is available. Retail-based efforts take much longer, and typically don't achieve the same level of generic penetration.

* Mail-order capability is a foundation for expansion into the emerging specialty pharmacy market for distribution of biotech and injectable drugs.

For these reasons, a new competitiveness has emerged among PBMs regarding their mail-order penetration rates.

According to AIS's data, a total industry average of 11% of claims are processed by mail-order pharmacies on an adjusted basis (adjusted where one mail claim (90 days) = three retail claims (30 days)), as of the second quarter of 2003.

Among a core sample of 23 PBMs that consistently reported mail rates for the past three years, 35% of adjusted claims are filled via mail. For this group, adjusted mail-order volume has increased by 260% since 2001, while adjusted overall prescription volume increased by 56%. Figure 1 shows that most of this business is at the expense of chain drug stores, which actually filled fewer scripts in 2003 for this subset of PBMs, as compared with 2002, as well as a lower percentage of total scripts.

PBMs are currently processing more than 350 million mail-order claims (adjusted) on an annual basis. Medco leads the pack with 82 million mail scripts, followed by Express Scripts, Caremark and AdvancePCS. Medco says it has the capacity to handle an additional 600,000 mail scripts per year, and is urging its clients to pursue increased mail penetration as a means of controlling their prescription drug costs.

Figure 3 shows that several smaller PBMs have high mail penetration--possibly because of their less-close ties to retail pharmacies--which helps drive up the industry average. Smaller PBMs with demonstrated ability to move members into mail order may be considered attractive acquisition targets. Caremark Rx is increasing its mail penetration faster than any other company, and AdvancePCS cited Caremark's strengths in mail order as one of the most attractive features of the recently announced acquisition deal (see article, p. 1).

Both National Pharmaceutical Services and Northwest Pharmacy Services have high mail penetration and a significant increase in that rate over the past three years. PBMs have been acquiring and consolidating mail-order operations since the beginning of 2002, and the average PBM now has 5.1 mail-order facilities in its network, including both owned and contracted entities.

Figure 1. Adjusted Claims Processed by
Sales Channel, 2001-2003, for 23 PBMs

                2001         2002          2003
              2 billion   2.1 billion   2.5 billion
               scripts      scripts       scripts

Mail            16.24%       20.39%        34.98%
Chain           70.78%       65.83%        51.53%
Independent     12.99%       13.77%        13.49%

Source: AIS

Note: Table made from bar graph.

Figure 2. Top 10 PBMs by Mail-Order
Volume, 2Q 2003

                                                    Mail-Order
Company Name                                           Scripts

Medco Health Solutions, Inc.                        82,000,000
Express Scripts, Inc.                               81,481,383
Caremark Rx, Inc.                                   60,600,000
AdvancePCS                                          46,200,000
ACS State Healthcare (formerly Consultec)            8,000,000
CIGNA Pharmacy Management                            5,000,000
Aetna Pharmacy Management (APM)                      4,638,300
Prescription Solutions                               4,000,000
WellPoint Pharmacy Management                        3,344,613
National Prescription Administrators, Inc. (NPA)     3,000,000

Figure 3. Top 10 PBMs by Mail-Order
Penetration Rate, 2Q 2003

                                                    Mail-Order
PBM                                                Penetration

Pequot Pharmaceutical Network                           54.00%
Caremark Rx, Inc.                                       39.84%
Innoviant Prescription Benefits Administrator           37.77%
National Pharmaceutical Services                        27.14%
Northwest Pharmacy Services (NWPS)                      20.82%
Pharmacy Services Group                                 20.00%
Express Scripts, Inc.                                   18.54%
Medco Health Solutions, Inc.                            14.67%
CBCA Rx                                                 13.92%
EBRx, Inc.                                              11.11%