OBJECTIVES Reimbursement for the same drug may differ with respect to channel of distribution. The objective of this study was to assess differences in reimbursement per unit of product dispensed and to compare pharmaceutical expenditures between mail-order and community pharmacy. METHODS Pharmacy claims from a retirement system for the period 2000-2005 were used in the analysis. Differences in reimbursement per unit of product dispensed and expenditures were estimated using a basket of drug items (i.e. unique combinations of drug products, formulations, strength, and generic status) dispensed in both channels. Rebates were not included in the analysis. Differences were assessed using bootstrapped 90% percentile and hybrid confidence intervals. RESULTS The comparison basket contained 1,964 items and 4,001,243 claims. In 2005, 52.07% of the items had higher reimbursement per unit in community pharmacy, 35.80% had higher reimbursement in mail-order pharmacy and 13.31% had equal reimbursement. In 2005, estimated pharmaceutical expenditures of the comparison basket were $558.93 million using mail-order pharmacy prices and $623.66 million using community pharmacy prices. This difference was attributed to higher reimbursement of ingredient cost, administrative fees and dispensing fees in community pharmacy. The difference in estimated pharmaceutical expenditures of the comparison basket between community and mail-order pharmacy decreased from 12.8% in 2000 to 10.4% in 2005. Estimated pharmaceutical expenditures in both channels increased from 2000-2005. The difference in total expenditures, ingredient cost, dispensing, administration and other fees between channels decreased during the study period. CONCLUSIONS Nearly one-half of all comparable items had higher reimbursement per unit in community pharmacy than mail-order pharmacy. Overall expenditures were significantly lower in mail-order pharmacy. Differences in pharmaceutical expenditures between community and mail-order pharmacy were explained by differences in acquisition costs and fees. Decision makers should carefully evaluate pharmaceutical reimbursement including discounts, fees and rebates when deciding the most efficient dispensing channel.