Exclusionary Practices in the Mail Order Pharmacy Market

Abstract

Pharmacy benefit managers (PBMs) engage in exclusionary practices favoring their own captive mail order pharmacies. They justify this practice by pointing to mail order’s price superiority to retail pharmacy outlets. We will present evidence from two sources indicating that the second largest independent PBM, Medco Health Solutions, has been pricing brand drugs dispensed from its mail order pharmacy at, or near, acquisition costs. While these prices are significantly below retail levels, they cannot be said to be competitive until the possibility of recoupment elsewhere is investigated.The true value of captive mail order to PBMs is not as a source of dispensing and procurement efficiencies, but as source of cost containment achieved by through retrospective therapeutic interchange and enhanced power to extract rebates from brand name drug manufacturers. By recasting Medco’s margins by revenue “driver” rather than by revenue source, we demonstrate that mail order gross profit margins are in the competitive range of 7% ― neither too high nor too low. This means that Medco is within the “rule of reason” of antitrust law.