Although community pharmacies have been the mainstay for drug distribution in the USA, plan members are encouraged to use mail-order pharmacies as a cost-containment strategy. Both channels differ with respect to reimbursement rates, utilization, and costs. We evaluated the differences in reimbursement rates and in ingredient costs between the two dispensing channels. We used pharmacy claims from a large Midwestern retirement system for the period 2000-2005. A representative sample of drug products was selected. We estimated the aggregated gross reimbursement, the ingredient cost, dispensing fee, pharmacy incentives for drug substitution, professional fee for other services, sales tax, and reimbursement per payer. The sample contained 1964 observations-four million claims. There were 58.5% observations for single source brands and 39.0% for generics. Observations with lower unit gross reimbursement rate in community pharmacy increased from 10.3% to 16.5%. Unit ingredient cost and dispensing fees were higher in community pharmacy than in mail-order pharmacy. Community pharmacy had a lower reimbursement rate per unit of medication (33.5-44.6% observations) compared with mail-order pharmacy. There were 87.3-98.1% observations with a higher patient co-financing per unit of medication in community pharmacy. Gross pharmaceutical reimbursement rates and unit ingredient costs were higher in community pharmacy than in mail-order pharmacy; but in more than 10% of the observations, the costs were higher in mail-order pharmacy than in community pharmacy.