POST SCRIPTS

Robert McCarthy

Mention "mail order" to supermarket pharmacy directors and the response, almost uniformly, is gritted teeth and daggered looks. It's not just that mail-order pharmacy is competition. It's the particular kind of competition that mail-order offers: insidious, in the case of the "vanishing patient" syndrome; and unfair, courtesy of "differential pricing," most supermarket pharmacies would say.

"Mail-order can be very difficult to defend against because you can't see it operating," says Russell Fair, vice president of pharmacy operations at Giant Food, Landover, Md. "It's not like a competitor opening a store down the street. Mail-order patients vanish. Sometimes the only way you know they're gone is when, months later, they come back to the store because their mail-order deliveries are late and they need a two-days' supply of the medicine to tide them over."

While it's safe to say that most supermarket pharmacy directors share Fair's sentiments, many also are getting into the mail-order pharmacy business, mainly to meet the demands of managed-care organizations.

In a soon-to-be-published Supermarket Pharmacy survey, 27% of responding supermarket chains say they already are providing through-the-mail delivery of prescriptions, and 50% of respondents say they'll be in mail-order pharmacy within two to three years.

Listen to Bob Storch, vice president of professional services at Dominick's Finer Foods, Northlake, Ill., waxing enthusiastic over mail-order at the recent Food Marketing Institute Supermarket Pharmacy conference.

"Does mail order have a place in a 60-store supermarket pharmacy chain like Dominick's?" Storch asked. "It sure does . . . . We can say now, anywhere in Chicago, anywhere in the United States, anywhere in the world, really, 'We can fill your prescription and overnight-mail it right to you.' We can do it."

Other supermarket operators, while admittedly in mail order, have not embraced it quite so ardently.

Although Dillon Stores Co., Hutchinson, Kan., has had a mail-order operation since 1990, it is still very low-key. "Basically," says Jane Siebert, Dillon's director of pharmacy operations, "we reacted our way into mail order. It was a necessary response to a competitive change in our marketplace."

What happened was the state employees of Kansas decided they wanted a mail-order pharmacy option and were about to sign a contract with an out-of-state vendor.

"To keep that business in Kansas," says Siebert, "we said we would offer mail order. It worked. We got the exclusive mail-order contract, plus we're part of the state employees retail pharmacy network."

Dillon designated one of the chain's low-volume retail stores to be the mail-order fulfillment house. Prescriptions are mailed to the store and filled during retail "downtime."

"Since then, we've gotten a few other local and regional mail-order contracts," Siebert says. "But it's a small part of our prescription business, and we're not even really marketing it as part of Dillon's package of services. It's more like an option that we have if somebody wants it."

That less-than-ringing endorsement for mail-order stems from two inescapable conditions. The first is that setting up a mail-order operation tends to increase overhead costs. "Our policy is to counsel every new prescription," says Siebert. "So when we started mail-order, we hired a part-time counseling pharmacist to come in during the evening and make those calls."

The second condition is that most mail-order operations set up by retail companies still buy pharmaceuticals at the top-tier prices that pharmaceutical manufacturers charge their retailer customers.

"Even though we now have a mail-order operation," says Siebert, "we still can't get manufacturer discounts comparable to those offered to Medco or Caremark, and so we can't really compete against the big mail-order pharmacy houses" on price.

To qualify for mail-order class-of-trade discounts, a pharmacy operation must operate a facility exclusively devoted to mail-order pharmacy. In addition, a retailer would need to maintain dual inventories: one side retail and one side exclusively mail-order. But even if Dillon were to maintain dual inventories, it still might not get the kind of discounts drug manufacturers routinely make available to the Medcos and Express Scripts of the world, says Delbert Konnor, executive director of the American Managed Care Pharmacy Association, or AMCPA, representing mail-order pharmacies.

That's because drug manufacturer discounts are a function of the volume of purchases as well as class of trade.

"Let's compare a large mail-service pharmacy and a large retail pharmacy chain," says Konnor. "Both may purchase exactly the same amount of a drug from the same source, but they may not get the same level of discounts. That's because the Federal Trade Commission has recognized mail service as a separate class of trade, and because levels of discount can be made specific to classes of trade."

In other words, Walgreens, Deerfield, Ill., which operates both retail and mail-order pharmacies -- and thus inhabits, simultaneously, two classes of trade -- may receive different levels of discounts for the same drug purchases, depending on whether these purchases are allocated to the mail-order or retail side of the business.

"But," adds Konnor, "small-scale mail service providers [such as Dillon, if it had a dual inventory, would presumably be] would probably not get the same level of discounts as a large retail pharmacy provider offering mail service. Volume still plays a role."

(By the way, Konnor also noted that some of the largest supermarket operators have been in contact with his association. Although no supermarket chain has yet become a member of AMCPA, "the big five," as Konnor put it, were interested "in being educated" about mail-order pharmacy.)

James Cordes, director of professional services at Schnuck Markets, St. Louis, can attest to the fact that volume still plays a role in obtaining discounts. Although mail order is a growing portion of the Schnuck prescription business, volumes are in the hundreds of scripts per day, not the tens of thousands Medco fills every day.

Consequently, Schnuck cannot get access to what Cordes describes as "the very preferential pricing available to the Medcos and Express Scripts." Nevertheless, he's convinced that mail-order is an essential component of Schnuck's pharmacy operation in competing for managed-care contracts.

"To be successful in retail pharmacy, you have to attract third-party, managed-care business," Cordes says. "A number of our third-party plan contract renewals came back with a new requirement -- mail-order. The ability to offer it has become a competitive necessity in our marketplace."

Schnuck's mail-order operation makes use of five pharmacies that were already operating 24 hours a day. There is sufficient downtime during the early morning hours for the pharmacists to fill the mail scripts.

"Each store may do 50 mail-order scripts per night, which in the morning are all bundled together and sent to the post office," explains Cordes. "The mail-order side has worked to keep business in-house that might otherwise have gone elsewhere. I'm not just talking about the mail-order portion of a plan going elsewhere. It would have been the entire plan that would have gone -- in search of a vendor able to provide both retail and mail service."

While supermarket pharmacies understandably try to accommodate their new customers -- the managed-care organizations -- there's something incongruous about a retail operation that sports a mail-order sidecar. After all, every customer successfully served by the mail-order side is a customer who's not shopping the store.

A Southwestern supermarket pharmacy executive explains: "Look, mail-order is especially

crazy for supermarket pharmacies, since not only are you pulling the customer out of the pharmacy, you're pulling her out of the grocery store as well.

"It undermines the whole reason for having a pharmacy in the supermarket, which is to serve as an attractor. The hope is that once you get the customer into the pharmacy, she will stay and shop the supermarket. Well, that's not going to happen with mail order. There's no way yet anyone can shop for groceries via the mail."

"There's definitely an argument to be made that offering a mail-order option goes against the whole reason for having a pharmacy," agrees Cordes.

"But if you're bidding on a 5,000-member plan, and if the only way to get that chunk of third-party business for your pharmacies is to offer a mail-order option, then that is what you have to do. And if some small percentage of those 5,000 lives uses the mail, and never come into the stores, that must be traded off against the thousands who will use the pharmacies and perhaps the supermarket as well."

"Among health plan benefit managers, mail-order pharmacy has become what I would call a 'buzz concept,' " says Terry Cater, director of pharmacy at Save Mart Supermarkets, Modesto, Calif. "Mail-order is something they think they must have -- although some of them, I'm convinced, don't understand it, and have no idea if it will be cost-effective for their plans.

"My procedure is to dialogue with these benefit managers by stressing Save Mart's performance-based network of pharmacies. We will produce savings by driving generic substitution, as well as therapeutic substitution, formulary compliance, drug utilization review and pharmacist interventions. And we'll make sure the beneficiaries are satisfied, which is very important. "Sometimes that works," Cater continues. "With other benefit managers there is nothing you can do. They want their mail order. Happily, I think mail order growth may be peaking."

To some extent, the numbers back up Cater's intuition about mail order's slowdown. According to health care research firm Frost & Sullivan, mail order, while filling 97.5 million scripts in 1992 (a 6% share of the $1.6 billion prescription retail market), showed slower growth: 22% in 1992, down from 31% in 1991.

Find/SVP, another market researcher, adds that "in 1993, mail-service growth slowed to 25.6%, down from rates of 30% to 40% that it enjoyed in the 1980s."

Some supermarket pharmacy operators -- even those forced by the marketplace to dabble in mail order -- are hoping that the promised end to discriminatory pharmaceutical pricing will cause mail-order pharmacy to whither away.

"Mail-order pharmacy has only had the success it has had today because of discriminatory pricing," says Jerry Callahan, pharmacy group manager at National Supermarkets, Hazelwood, Mo., and president of Super Net, the pharmacy network formed by supermarket operators.

"In my view, mail order is second-class health care, which has leveraged itself on the discount pricing it has gotten from manufacturers. And that's what I tell benefits managers. Look, if they want mail, we'll get it for them, but it's second-class care."

Grant MacLean, pharmacy buyer/merchandiser at Rosauers Supermarkets, Spokane, Wash., also says mail-order could soon lose its competitive edge.

"If we ever see an end to discriminatory pricing, which now, given the national health care reform [movement], seems at least a possibility, you will begin to see mail-order dissipating as a competitive force. What other advantage does it have other than those class of trade price breaks?"

Robert McCarthy publishes a newsletter on third-party programs and writes frequently on pharmacy issues.