“It’s evidently possible to run an effective discount network without the associated bloat and misaligned incentives of a traditional PBM…..”
3 product categories that challenge the traditional PBM model
By Nikhil Kapse
In a recent article I wrote, I argued that employers overestimate the value that traditional pharmacy benefit managers (PBMs) provide—and that rather than containing systemic costs, they may be driving them up artificially.
I’m working on a series of posts with the goal of reasoning out new, innovative models for pharmacy benefits that enable meaningful cost reduction, but I thought it’d be prudent to begin by examining existing business models that are already subverting traditional PBMs.
Note: I’d highly recommend reading my last piece if you haven’t already to get the lay of the land with how money flows in pharmacy and particularly how PBMs make money in interesting ways.
Discount cards (GoodRx)
Prior to discount cards, the only option that uninsured patients had to buy drugs was to pay the full cash price for the drug at the pharmacy. This was obviously expensive for patients, but PBMs were also cut out of the transaction in this scenario and had no way of making money.
Companies like GoodRx realized this and proposed an opportunity for the PBMs: in exchange for giving GoodRx users access to drugs at the rate that PBMs had negotiated with their network of pharmacies, they would gain the ability to keep a cut of the amount that patients using GoodRx would pay to the pharmacy.
This is essentially what GoodRx coupons do: the member pays the full amount listed on the coupon, which is the negotiated rate between one of their partnered PBMs and the pharmacy that the member is at, which is usually much cheaper than the regular cash price for the drug without coupons or insurance.
Example
When a patient uses GoodRx to pay for what is listed as a $10 drug, what’s really happening is that the pharmacy is processing the payment as a regular claim to the PBM. So the PBM receives the $10, takes something like a $3 cut, and then pays the pharmacy $7. The cut that the PBM takes is called the “spread”, and it enables the PBM to capitalize on a new market of uninsured patients. GoodRx also receives a portion of this spread, which is their primary revenue model.
A fascinating consequence of discount cards like GoodRx is that they’ve created pricing competition between the PBMs. GoodRx works with multiple PBMs (since they all want in on the new market share) and gives the consumer whatever the lowest negotiated rate out of all of the PBM networks is. This means big PBMs like OptumRx and Caremark now compete to offer better coupon prices for consumers, and this is why people often see that GoodRx gets them a better price on a drug than going through their health insurance plan would have gotten them. In other words, this price competition has worked so well that GoodRx has seen meaningful adoption with insured patients as well and is now just a generally useful tool for the American healthcare consumer.
Solutions like GoodRx are interesting to me because if the discount you can get through coupon codes is so comparable to what a regular PBM network would get you through your regular health plan, why would a health plan even pay for the PBM’s network? Why not just cover whatever cost the patients will get via GoodRx and save yourself the per-script fee AND the monthly PBM fee? The main answer I can think of is that for the very expensive specialty drugs, the cash-pay discount is not strong enough to provide financial security for the health plan. But maybe the health plan could use a PBM exclusively for speciality pharmacy, and then use discount cards for the long tail of lower-cost drugs.
Online pharmacies
There’s been a general trend towards online pharmacies that are building direct relationships with manufacturers. The most well-known of these is probably Mark Cuban’s Cost-Plus Drugs, which directly negotiates rates with manufacturers and marks these prices up a transparent 15%. Cost-Plus has even started manufacturing certain generics themselves and seems to be trying to generally achieve more vertical integration on the manufacturing side of things.
It’s also worth mentioning that the concept of “cost-plus” is not unique to Cuban’s pharmacy —it’s a more general term used to refer to a fixed mark-up pricing model. In Cost-Plus Drugs’ case, they mark up drugs that they get directly from manufacturers exactly 15% and sell them at the marked up price directly to consumers. The whole idea is that by cutting out the whole supply chain of wholesalers and retailers and moreover circumventing traditional PBMs entirely, they save the system money and get drugs to consumers at a lower cost.
Amazon Pharmacy follows a more traditional supply chain by purchasing drugs from wholesalers the way retail pharmacies do and also accept health insurance, although there are always cash pay and discount coupon options for their drugs as well. Specifically, Amazon uses Inside Rx to administer the PrimeRx program, which gives Prime members discount cards on prescription drugs.
An interesting consequence of Amazon’s traditionality is that assuming all parties wanted to operate profitably, Amazon would probably be disadvantaged in how much they can discount drugs relative to GoodRx or Cost-Plus drugs. Amazon has neither the cost benefit of working directly with manufacturers nor the competitive pricing that GoodRx has cultivated.
In the cases of both Amazon and Cost Plus, it’s clear that there is a general trend towards consumer accessibility of prescription drugs at competitive rates in a way that is at least partially subverting the traditional PBM model. We’re moving towards a world where, if a patient can wait 24 hours to receive a prescription drug, especially a generic, chances are there’s an online pharmacy option via Cost-Plus Drugs, Amazon Pharmacy or one of the many others, that can offer a better price than a standard retailer could.
Transparent PBMs
Transparent PBMs are a newer class of PBM that commit to passing through 100% of rebates to the plan and abstaining from using spread pricing as a source of revenue. While traditional PBMs would keep a share of the rebates they receive from manufacturers for placing a particular drug on the plan formulary, transparent PBMs would return it all to the plan.
This transparency is supposed to align the PBM better with the health plan and motivate it to truly contain costs since it no longer has an incentive to promote expensive drugs. The business case for this model is that it should be more appealing for the health plan because the net cost is significantly lower (no % of savings costs or loss of rebates). The transparent PBM usually makes money exclusively off of per-employee-per-month (PEPM) fees and per-script fees and is incentivized to do a good job at finding members cheap drugs simply so that the employer is happier with it and will work with them again.
The traditional PBM pricing model is more complicated because it includes an additional opaque “percent of savings” component which just means that the PBM is keeping some amount of the money that they save the plan. This seems like a good thing at first glance because it incentivizes the PBM to save more for the plan but it really just creates perverse incentives for PBMs to find ways to maximize drug prices so that they can report a greater savings amount. This doesn’t necessarily financially hurt the plan much, but it means that the drugs that the plan covers are going to be more expensive on average, and lead to higher out-of-pocket cost for members.
So do we still need PBMs?
It’s clear to me that, for the foreseeable future, health plans will likely need a cost-containment mechanism for drugs, and networks that discount expensive drugs are a logical solution to this. That being said, it’s evidently possible to run an effective discount network without the associated bloat and misaligned incentives of a traditional PBM. So while we still probably need something that resembles a traditional PBM, there are a lot of improvements that can be made by piecing together the ideas we just explored.
We’re already starting to see partnerships between transparent PBMs and online pharmacies like Cost Plus Drugs as a result of improved value alignment. For example, a transparent PBM called SmithRx encourages its plan members to buy drugs from Cost Plus Drugs and tells them that the copay will be mostly or completely waived if they do so, because it ultimately saves the employer money to purchase these significantly cheaper drugs. So it’s a win-win for the employer and the member, and there are no spreads or retained rebates at any point in this flow of money.
As drugs become more shoppable for healthcare consumers and employers begin to realize the flaws with traditional PBMs, it’s clear that there is momentum for better pharmacy benefit design, and I’m working on a piece that explores what this new design could look like (don’t miss it).
Until next time!
