Raking in profits revenue through mail order pharmacy
Yesterday's WSJ was simply chock full of pharmacy news. One of the front page stories was about mail order houses raking in huge profits because of patent expiry on brand-name drugs. Everyone loves generic drugs: they're cheaper for the patient, cheaper for the pharmacy, and cheaper for the insurance company. But what is interesting is who profits from the expiration of patents on brand-name medicines. The relationship is complex, and I'll not get into here, but essentially it all depends on who is filling the prescription, which is precisely why large PBMs like Caremark and Express Scripts offer incentives for their subscribers to fill by mail. Those of you with health insurance probably know that they often offer deals like a 3-month supply for one copayment.
Because generic drugs are so cheap to buy in bulk, a PBM can charge $1 per pill to an entity like the federal government, even though it might only cost them something like 16 cents. Naturally there is more to a prescription than the cost of the pills (there's the shipping, pharmacist salaries, administrative and overhead costs, etc.) but an 85 cent overcharge is huge. This is how PBMs make their money via mail order. In the case of a traditional retail pharmacy, it is the pharmacy itself that is taking home the profits because they're the ones buying the drugs in bulk. (With name-brand medications, the only people really making money are the pharmaceutical companies who produce the medication.)
Essentially, whoever buys in bulk takes home the pot of gold. Incidentally, this is also why you don't see many independent pharmacies anymore — they simply lack the economies of scale to compete on the basis of filling prescriptions; instead they make their money in medical supplies and other things.
The article goes on to talk about medication errors, and much of what they it says is largely incorrect.
PBMs could receive orders by phone or online and send pills directly to patients. It would be more convenient for patients and reduce the risk of errors.
While this is nice in theory, the reality is that electronic transmission really only cuts down on legibility errors. On the other hand, it (can) lead to prescriptions that don't make sense. Seeing electronic prescription that have different instructions in two different places is not uncommon. (For instance, the cleartext directions contradict or are different than the instructions in the SIG code.) Sometimes dosages are completely whacky. It is getting better, though. Many software packages now check for inconsistencies, bogus instructions, and contraindications with other meds, but we still have a long way to go.
Another problem is that it is much more likely for a community pharmacist to pick up the phone and call a doctor's office than it is for a mail order data entry person. Really the only potentially error prone steps that are skipped is the actual counting of the number of pills put into a bottle, because they're done by machine. Even then, many larger community pharmacies have automated pill counters for fast-moving drugs.
PBMs sold it in part by promising to switch employees as quickly as possible to cheaper generic copies whenever they were available. Even if the prescription was for a patent-protected drug, the PBMs would try to switch it to a similar generic. PBMs also offered lower prices on brand-name drugs if employees used mail order.
Unfortunately, this part of the article is misleading. All community pharmacies do this as well. For instance, Pravachol's patent protection ended on April 20, and we started switching people over on April 20. Again, this is for the simple reason that whoever fills the generic prescriptions makes the money. Community pharmacies do it as fast at the big mail order houses.
The whole point of Ms. Martinez's article can be summed by the second paragraph:
Today, Caremark Rx Inc., another middleman, charges the federal government and employees $96.88 for 90 pills of generic Prozac, according to a Caremark Web site. The same pills can be bought wholesale for less than $5.
Buried in the article text, though, is the following, and it's rather illuminating:
Medco says that after overhead its profit margin on mail-order generic drugs for the retired Ohio teachers was only 23% and its total margin, after losses on brand-name drugs, was 1%.
(Emphasis mine). It's always fun to castigate big businesses, and some truly deserve it. And its certainly no fun following up the second paragraph with the fine print above, but it should be noted that businesses have to make their money somewhere. For PBMs, it's in filling mail order generics. Gone are the days when insurance companies (and the medical profession at large) generated fat profits — nowadays, the emphasis is on "trimming the fat" — profit margins are razor thin* and the slice of pie that everyone fights over is much smaller.
*Big Pharma seems immune to this so far, which is both good and bad.
[tags]PBMs, generic drugs[/tags]
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So Medco says its profit margin "after overhead" is 23%. Does anyone know what they include in "overhead?" Does anyone know what the PBM's profit margin is BEFORE they subtract "overhead?"
In other words, what is the gross margin on mail order pharmacy?
Comment by Sylvia Aruffo — September 19, 2006 @ 11:15 am
Why would 90 sub-cutaneous injection syringes (120 mg) of Lovenox by mail order cost $2,937.92 in 2006 and projected cost for current purchase when I run out will be $3,955.00.
I guess V.P. Cheney who will be on blood thinners now, will not worry about cost like that if HE becomes resistant to Coumadin.
I know this has nothing to do with your above articles, but who else do you complain to. By the way, that is the out of pocket cost with insurance.
Comment by Robert cetenich — March 7, 2007 @ 12:12 am
I have no idea. I do know that (as a percentage) Ambien was the drug whose price increase the most during 2005. Looks like Lovenox is charging hard for 2006.
Have you looked at regular Heparin as an alternative?
Comment by RJS — March 7, 2007 @ 12:20 am
Lovenox is basically low molecular weight heparin. The only downside is that heparin is usually given twice a day. But it's WAY less money.
Ask your doctor about it.
Comment by RJS — March 8, 2007 @ 12:16 am