When the Medicare-endorsed drug discount cards go into effect on June 1, card sponsors and government officials are projecting significant savings.

But some of the generic drugs most commonly used by seniors will still provide pharmacies a healthy margin. That's because pharmacies buy their generic drugs at very low wholesale prices -- often pennies a pill -- but mark many of them up by as much 2,000%, even for purchases made with a discount card.

According to major wholesaler invoices made available to The Wall Street Journal, the generic version of Prozac, or fluoxetine, can cost pharmacies about four cents a capsule, or less than $4 for a 90-day supply. But according to the Medicare.gov Web site, seniors could pay as much as $84.15 for three 30-day generic fluoxetine supplies using Walgreen Co.'s Medicare card at some pharmacies. (Walgreen, of Deerfield, Il., will charge $24.66 at its own retail or mail-order pharmacies). Filling three 30-day prescriptions using Aetna Inc.'s Medicare card will cost seniors a bit less, but still a steep $65.25.

Mail-order pharmacies, whose prices are generally lower than stores' and are available nationwide, also preserve a sizable margin on some generic drugs. Seniors using Medco Health Solutions Inc.'s Preferred Prescription Discount Card and buying through its mail-order pharmacy will pay $41.38 for 90 days of fluoxetine. Caremark Rx Inc.'s RxSavings card will sell fluoxetine for $25.72 through the mail. The mail-order operation of AARP, a senior advocacy group, sells it for $34.32 under its Medicare card.

"Our prices are extremely competitive, particularly when compared to retail pharmacies, where seniors had consistently been charged some of the highest prices for their medicines," said Soraya Rodriguez-Balzac, a spokeswoman for Medco, of Franklin Lakes, N.J.

The Medicare-card prices for generic drugs are generally lower than without the card -- Walgreens.com charges $95.97 for three 30-day supplies of fluoxetine ordered without the Medicare card. But the still-large margins indicate there's room for even bigger discounts and savings for the elderly.

The Bush administration hopes that competition among card sponsors will push down prices further. "We are going to keep making information available on prices to keep encouraging seniors to find the best prices. If a lot of people are doing that, the profit margins that exist would be a lot smaller," says Medicare's administrator, Mark McClellan. He said the cards will yield savings 30% to 60% on generics, based on the prices already posted on the Medicare Web site.

COMPARING THE COSTS

Seniors with discount cards can pay less for generics like fluoxetine (Prozac), but margins are still high for pharmacies. 

Cost of 90 pills of Fluoxetine 
Wholesale $3.60 
Walgreens card $24.66-84.15* 
AARP card (mail order) 34.32 
Medco (mail order) 41.38 
Drugstore.com (no discount card) 84.99 


*$24.66 at Walgreens stores; $84.15 at other pharmacies. 

Sources: Medicare.gov; card sponsors; WSJ research

At least one major retailer shows that prices can go much lower. 

Warehouse-discounter Costco's Web site quotes 100 capsules of fluoxetine at $14.94 without a discount card, and 100 pills of the popular blood-pressure medicine, lisinopril, for $16.19, compared with Walgreen's mail-order pharmacy, which charges $37.90 for 90 lisinopril pills under its Medicare card. 

In fact, Costco, which says its pharmacy operation is profitable, asserts that 85% to 90% of the time its regular prices would be lower than those listed for Medicare cards used at other retailers.

Since roughly half of all prescriptions are filled by generic drugs, they can generate a huge share of profit for pharmacies. Medco, which runs one of the biggest programs managing employer drug benefits, also has a mail-order pharmacy. More than half of Medco's profit is from sales of generic drugs through its mail-order business.

Despite the fat markups on some generic drugs, both pharmacies and PBMs say they have very slim margins overall. A spokesman for Walgreens, Michael Polzin, points to the company's 2% profit margin in the pharmacy business as evidence that consumers aren't being gouged. He says the reason some drugs might appear to yield a bigger profit margin is because many other drugs, particularly the big brand-name drugs, are sold at cost or less.

"Our pricing philosophy is to look at a market basket of medications and aim to make a reasonable profit on that total mix," says Mr. Polzin. "There are some where we're making money and some where we aren't."

Looking at only a handful of drugs and drawing a conclusion about the size of profit margins is "flawed, misdirected and misleading," says Robert Mead, a spokesman for Caremark, of Nashville, Tenn., which provides various Medicare discount cards under the name RxSavings and is one of the largest PBMs. Mr. Mead says that the wholesale costs seen on invoices by a Journal reporter are "inaccurate." But he won't say what prices Caremark pays because they are "proprietary."

Further, he says the wholesale price doesn't reflect "shipping, storage, customer service, marketing and other expenses and costs that are built into the product costs." Mr. Mead says Caremark loses money "on a lot of products we dispense" and that the company expects to "break even at best on our drug-discount program."

Pharmacies have estimated that their dispensing costs -- expenses other than the cost of buying the drugs, such as labor -- are about $10 per prescription. But managed-care companies routinely allow pharmacies dispensing fees of $3 or less per prescription to cover those other costs.

Some of the Medicare drug-discount prices seem to add much more than $10 to the price they pay for a drug. Pharmacies can buy supplies of blood-pressure drug lisinopril for about 11 cents a pill, or less than $10 for a 90-day supply. Medco's mail-order pharmacy plans to charge seniors $44.78 for a 90-day supply of lisinopril. The AARP Medicare drug discount-card mail program, charges $30. Lisinopril is the fifth-largest selling generic drug in the U.S., according to market research firm IMS Health.

Prices listed for the AARP Medicare drug discount card also reflect big margins for generics, though AARP says it doesn't get any of it. The program is run by UnitedHealth Group Inc., which outsources the mail-order work to Express Scripts Inc. A spokesman for UnitedHealth Group, Mark Lindsay, says the Minnetonka, Minn., health insurer makes only the annual initiation fee of $19.99 and a "tiny" transaction fee from each prescription.

That would leave Express Scripts, of Maryland Heights, Mo., picking up most of the profit margins on generic drugs in the mail for AARP Medicare-card holders. A spokesman for Express Scripts referred questions to AARP and UnitedHealth. Mr. Lindsay said the prices for the AARP card on the Medicare Web site don't show the discounts that eventually will be offered. "This is a work in progress," he said. "We don't have all of our discounts loaded."