Generic Prescription Drugs by Mail can be a Bad Deal

In an attempt to rein in its employees’ fast-rising prescription drug costs, some employers require its workers to fill prescriptions for maintenance medications (typically chronic conditions like type 2 diabetes) through mail-order pharmacies.

Some simple comparison shopping shows that despite formidable bargaining clout, many employers are paying far higher prices for some drugs than ordinary individuals can get walking into retail pharmacies.  Consider the price for Ranitidine 75 mg, the generic form of the popular anti-ulcer medication Zantac.

One of my clients paid Express Scripts $36.22 for 90 pills mailed to a worker, who pays an additional $5 co-pay, bringing the total cost to $41.22, according to a re-pricing we completed.  If this same employee had simply walked into their local pharmacy and bought the same Ranitidine prescription it would’ve cost as little as $10.00 for the same 90 pills.  This is a 400% difference in cost!

That this employer pays ESI higher prices for many generic drugs than regular pharmacies charge customers without insurance illustrates the complexities, and potential pitfalls, of prescription drug coverage. It’s also a rare glimpse into how such plans work.

Traditional pharmacy benefit managers, such as ESI and CVS/Caremark, administer the drug benefits of large employers, acting as the middlemen between the employers and the pharmacies. Such PBMs create large networks of participating pharmacies and use their size to drive down prescription drug prices.


Some, including ESI and CVS/Caremark, also own their own mail-order pharmacies, and guilt employers to move more of their workers’ prescriptions into the mail business.  Traditional PBMs promise to realize savings for their corporate customers by keeping the overall cost of prescription medications down.  But, they also preserve large profit margins for themselves, as the above prices clearly indicate.

Some companies say they are satisfied with the overall savings Medco is providing. But others simply aren’t aware of the vast price discrepancies on generic drugs.  How can a company say it is satisfied with the overall savings when they don’t even know the actual costs?

Too many companies are spending tens of thousands of dollars on products for which they were never given a price list!  These assumed savings are based upon colorful PowerPoint presentations, delivered by PBM account managers, designed to tell you exactly what you want to hear.

Because generic drugs are so cheap to begin with, PBMs and retail pharmacies alike typically make big margins on generic drugs, which account for about half of prescriptions filled in the U.S.  That’s why pharmacies have a big incentive to switch prescriptions for branded drugs to their generic versions.  Aggressively switching of branded prescriptions to generics does help reduce employers’ drug costs.

Employers also believe they are getting better prices on branded drugs through PBMs, which is why they are willing to pay bigger markups on generic medications. Mail-order pharmacies generally fill a three-month’s supply of medication at once.

Traditional PBMs, like ESI and CVS/Caremark, benefit greatly from its mail-order pricing system.  When a patient fills a prescription through the mail pharmacy, the full profit belongs to the PBM, rather than having to split it or get very little when the transaction happens at the retail store.

Some traditional PBMs derive more than half of its corporate profits just from selling generic drugs from its own mail order unit.  For example, Ranitidine 75 mg x 30 pills usually cost pharmacies about $2.  At retail, customers can pay $10.  I’ve seen mail-order prices as high as $181.00!  ESI can show its customers a great savings because the list price, called the average wholesale price, quotes Ranitidine at about $214 for 90 pills.

The complex system of drug pricing makes it difficult for employers to know whether they are getting the best prices.  Generic drug prices in mail programs are based on average wholesale price, or AWP.  AWP is considered an inflated price among those in the drug industry.  For example, the average wholesale price for Fluoxetine 20 mg x 100, the generic drug for Prozac, is $240.12 but pharmacies can pay less than $2.00!

Not all mail-order pharmacies are deceptive.  A truly transparent mail-order pharmacy, one willing to contractually accept the role of fiduciary, will deliver a significant savings for employers compared to retail.  Don’t hire a PBM because of its long history, big offices, or colorful presentations.  Hire a PBM because of the value it is contractually willing to deliver its clients.  It is really quite simple; if the PBM isn’t willing to sign on as a fiduciary then walk away.

Healthcare Reform: “A Peek at the Cost”

Effective January 1, 2014, the community rating provision of Healthcare Reform goes into effect for small employers. Experience tells us that costs will increase. Lets take a look at what it may mean to you in dollars and cents.

Most have heard that the new Healthcare Reform bill was projected to cost $850 billion. Many of us have heard the revised estimate of $1.2 trillion. Not many of us can explain $1.2 trillion in layman’s terms. The government hasn’t shared specifics about the cost in any meaningful way. So for many, the “cost of healthcare reform” becomes a point of conversation without much reality connected to it.

We know the reform will level the playing field in terms of cost. Generally, rating will be based on broad geographical areas with little ability to modify the rates to account for differences in risk. This rating strategy is called “community rating”. Let’s compare community rating to the way groups are currently rated in Ohio (our primary warehouse location).

There is general scuttlebutt that the Blue Cross plans will fare the best and gain the most in the healthcare reform implementations. It may or may not be a coincidence that Blue Cross of Michigan also “community rates” their coverage. In Ohio, many groups fall under a formula of rating that takes employee and dependent health into the formula to calculate rates for insurance coverage. In Ohio there are 36 rating tiers. Tier 1 is reserved for the healthiest risk. Tier 36 is the maximum rate applied to the worst risk.

Let’s compare the same company as if it were located in Toledo, Ohio, on Alexis Road (1/2 mile south of the Ohio/Michigan border) and then re-rate the same group, except assume the company is located in Lambertville, Michigan, on Smith Road (1/2 mile north of the Ohio/Michigan border). In Ohio they could have a range of rates, from Tier 1 to Tier 36, depending on the health risks present. In Michigan … just one mile north, all companies would pay the same rate because of the community rating system.

Here is a rate comparison for a $3000 deductible HSA plan:

                                                             Ohio Tiered Rate                               Michigan
                                               Best Risk                      Worst Risk           Community Rating
Employee Only:

Calculate the total premiums of your group to see the cost comparison between tiered and community rating. Most find that community rating is about 50% more expensive than the Tier 1 (best risk) rate and almost 7% higher than the Tier 36 (worst risk) rates in Ohio. Of course, the employer’s dependent status will vary by employer. It is difficult to understand how costs will be less under the new healthcare reform program. This comparison is a casual look at what employers may expect in term of costs.

Poor procedures cost thousands…

The price of health insurance is important during this era of tight labor and customer demands to reduce cost. Companies spend many hours and much effort competitively bidding their health insurance each year in order to have the best cost available to them.

After all the effort to reduce cost, some companies give back much of the savings because of poor administration and accounting procedures. Poor internal practices for handling employee terminations from benefit plans are the main culprit.

For example, without good communication between the “plant” and “accounts payable” with regard to employees quitting or being removed from the benefit plans, extra premiums can be paid and never recovered. With just one late or “non-communicated employee termination” per month, a company could easily pay $8,000 to $10,000 more per year for medical insurance than they need to pay. Most insurers will only give credit for 30 to 60 days of back premiums, making recovery of funds almost impossible.

Another area that is difficult for some employers to monitor is the “accounts payable” function. Most insurers require that their invoice be paid in full each month. This means that you’ll pay for all employees listed on the invoice even if they are terminated from employment. The insurer will then give credit in future months for terminated employees. Without good procedures to track the credits that are owed to your company, it is easy to forget or overlook them.

TransparentRx recommends that employers develop written procedures and checklists for termination of employees. The procedure should outline all steps to be taken from the moment an employee is terminated to the time credit is received from your insurance company. A little extra supervision of your employees that are new to the positions responsible for employee terminations and insurance bills is also a really good idea.

It’s News to me!

As a valued reader of the Payors Guide to Pharmacy Benefit Managers, we are happy to provide you with this week’s newsletter – It’s News to me!  We are focused on your success and thankful for the partnership to provide helpful cost-saving solutions and information.  Have a great day!

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