Can Cost-Plus Pricing Lower the Cost of Generic Drugs for Patients?

With the ever-rising costs of medications, new business models and patient care initiatives are becoming increasingly common methods to disrupt the industry to instill lasting change. But how do these recent ventures, like Mark Cuban’s new digital pharmacy model, affect the rest of the health care industry and how do other stakeholders follow suit?

On January 19, 2022, the Mark Cuban Cost Plus Drug Co (MCCPDC), announced the launch of its online pharmacy. The company’s website promises transparent pricing: a 15% markup on drug prices above the manufacturer’s price, and a $3 fee per drug order for processing through their pharmacy “to keep the lights on.” Over 100 medications—that includes generics of brand name medications—are currently available as of February 2022.

MCCPDC is a public-benefit corporation, or a corporate entity with a stated mission of improving public health while also making money. In a press release announcing MCCPDC’s online pharmacy, CEO Alex Oshmyansky, MD, PhD, said the company would do “whatever it takes to get affordable pharmaceuticals to patients.”

It is easy to see why the average American would cheer on Dr Oshmyansky and Mr Cuban’s initiative. Congress has struggled for decades with both Republicans and Democrats in charge to pass meaningful legislation that would lower the price of prescription drugs for patients.

A deadlocked Congress in 2022 seems unlikely to pass President Biden’s Build Back Better Act as written, which includes a section on reducing prescription drug prices—although some Democrats are proposing the prescription drug component be used to reshape Build Back Better into a slimmer bill.

With no clear solution in sight, patients and their providers have been left to figure out a messy configuration of private sector options for themselves. What they find when they navigate the landscape of prescription drug coverage can vary widely. A 2021 report put out by the RAND Corporation found drug prices in the United States were 252% higher than in 32 other comparison countries combined. GoodRx, a health care company that tracks the prices of prescription drugs, noted in January 2022 that the average price increase of a drug was 5% out of more than 800 drugs they track, up from 4.6% the previous year. Prescription drug prices between pharmacies can also vary widely, as evidenced by GoodRx’s price comparison tool.

“Out-of-pocket expenses continue to rise, and 2022 is no different. This means cost will continue to be a major barrier to health care for many patients,” said Srulik Dvorsky, cofounder and CEO of TailorMed, a financial navigation technology company.

Rising out-of-pocket costs for prescription drugs affect not only patients, but also providers and pharmacies. “With patients unable to afford their medications, providers and pharmacies struggle to provide necessary care and are challenged with being financially whole,” said Mr Dvorsky “Compounding the issue is the rate of prescription abandonment increases as the cost for drugs increases.” For prescriptions that cost $500 or more, 60% are never picked up, according to a report from IQVIA.

MCCPDC’s online pharmacy launch reinvigorated the conversation around efforts to disrupt the pharmaceutical industry, specifically around generic medications. But is what MCCPDC  offering truly new, or a remix on existing market options? What are the current available options for patients looking to save on prescription drug costs? How do these options help patients, and where do they fall short?

PBMs are among the most recognizable entities in managing pharmacy benefits. The top 3 PBMs in the United States process approximately 77% of prescription claims as of 2020, and the top 6 PBMs handled about 95% of prescriped claims, according to a report prepared by the Drug Channels Institute.

As a third-party payer, “They’re an insurance company, essentially,” Ross Goetz, PharmD, director of business development at HealthWarehouse Pharmacy, said in an interview with First Report Managed Care. From the commercially insured patient’s perspective, they pay into their employer-funded pharmacy benefits plan and can pay their copay and benefits package cost to cover their prescriptions. Behind the scenes, PBMs negotiate with pharmaceutical manufacturers and decide whether their drugs will appear in a health plan’s formulary; in exchange, they receive a percentage of the pharmaceutical manufacturer’s rebate for that drug and charge a fee for a portion of the drug’s listed price.“If you take that concept, historically, PBMs were pushing people toward a lower cost drug because it saves the patient money. It also costs them less to fill a product like that,” Dr Goetz said.

But PBMs have also been linked to business practices associated with the rise in drug prices. In 2021, Senate Finance Committee Chairman Chuck Grassley (R, Iowa) and Ranking Member Ron Wyden (D, Oregon) released a report outlining their investigation how into manufacturers of insulin raised their prices “in lockstep—sometimes within hours or days of each other—a practice known as ‘shadow pricing.’”

A press release describing the findings of the report noted that “insulin manufacturers were sensitive not only to their own bottom lines, but the bottom lines of PBMs and of health plans that set formularies, without which a manufacturer’s product would likely lose significant market share.” Senator Wyden characterized the situation this way: “PBMs, acting as middlemen for insurers, fanned the flames to take a bigger cut of the secret rebates and hidden fees they negotiate,” noting that consolidation of PBMs “has not improved the situation.”

Some PBMs also participate in what’s known as “spread pricing”—essentially keeping the difference between the payment it receives on a drug from a state-owned or managed care organization and what it pays to a pharmacy.

When PBMs gravitate toward drugs that are higher in cost, “It seemingly is incorrect because they’re pushing toward something that’s more expensive. And sometimes, there’s justification for that,” Dr Goetz said. But while PBMs make a profit through their role in the pharmaceutical supply chain, the situation is a little more complicated than PBMs being the “bad guy” in the process.

“They do have a large financial risk, and they [can] provide benefit to a patient who is low-income status and has an oncology drug or specialty drug that they wouldn’t be able afford otherwise,” he explained. “They get to pull from that money pool that everyone contributes toward, so they provide a good service.”

“But by not exposing all the transparency and values,” Dr Goetz explained, “that’s to their benefit. Because they get to say, ‘Hey, we saved you [money],’ so they get to use that as a marketing piece.”

Russell Spjut, PharmD, director of formulary management, said in an interview that PBMs are “often the first entity vilified when speaking about rising drug costs while not having direct control over drug pricing.”

“While PBMs play a role in the good and bad of the industry, just like every other player in the supply chain, my experience in working in formulary management for PBMs is that expensive drugs aren’t covered just for the sake of covering expensive drugs,” he explained. “Our decision-making processes have been focused on optimizing drug value in each class. As clinical end points between drugs in a class are often quite similar, value decisions are often driven by the lowest net cost product which may be a high list price, high rebate product with a member coupon available.”

“Although it may look like the PBM is favoring high list prices from the outside—with all the information in hand, it is actually favoring the lowest net cost for the plan and the member,” Dr Spjut added. “I have personally never been in a meeting where we look to favor a more expensive net cost drug unless it offers a clear clinical value over the alternative options.”

Coverage and formularies are encouraged to use generics with a lower cost, and to choose lower priced brand drugs to reduce costs, he explained. “Even within the generic space, PBMs are managing cost with programs that either eliminate coverage for predatory products or incentivize members to the use of the lower cost drugs within a class that has many options,” said Dr Spjut.

It is well established that brand name drugs are often priced too high for patients to afford. To remedy this, manufacturers provide copay coupons or cards to patients that allow the drug manufacturer to share the cost of the copay of the drug with the patient, with the patient’s insurer covering the rest of the cost. Proponents of manufacturer coupons argue that they help patients access drugs that would be too expensive otherwise, while opponents of the practice say manufacturer coupons bypass formularies and generic substitution of medications. There is also evidence manufacturer coupons drive up drug prices.

In 2018, researchers at the USC Schaeffer Center in Los Angeles examined the effect of copay coupons on drug spending. They looked at the top 200 drugs based on spending in 2014 and found that 90 of 132 (68.1%) brand drugs had copay coupons, but no coupons were offered for generic drugs. However, 49% of brand drugs with copay coupons had an equivalent generic that was cheaper—but that also meant 51% of brand drugs with copay coupons did not have a generic substitute.

“These results suggest that most copay coupons are not affecting generic substitution, and many may help patients afford therapies without good alternatives. As such, the copay coupon landscape seems more nuanced, and proposals to restrict coupons should ensure that patients who currently rely on them are not harmed,” the researchers wrote in their report.

The cost of brand medications, particularly specialty medications, can still be out of reach for patients even through manufacturer coupons. In these situations, assistance programs can help patients make these medications more affordable or connect them with companies that can. Often, “these programs are fully or mostly funded by the manufacturers of the medications covered,” Dr Spjut said. “They are often a lot more expansive than the tradition copay coupon card that helps with a copay once the drug is covered on a patient’s plan, and oftentimes provides coverage even when the plan does not.”

For example, Novartis offers a program for their drug Cosentyx (secukinumab) which will help cover the cost of the drug for up to 2 years while their team helps the patient navigate the process of getting covered through their insurance. Other consultants and vendors, like the nonprofit Prescription Hope, “take advantage of these patient assistance programs and specifically work to identify members on enrolled plans who have recently been prescribed one of these products, and to actively enroll the patient in these programs with the goal of saving the patient and plan money on the drug,” Dr Spjut said.

Then there are companies like TailorMed that use technology to link patients to assistance programs based on their situation. “It starts with patient discovery, that automatically looks for patients with financial needs based on a future-looking out-of-pocket projection, continues with matching them with the right funding from thousands of available assistance programs, and enrolling them into these. The system then supports postenrollment steps that include the ordering of free drug and the utilization of the assistance programs,” Mr Dvorsky said in explaining his company’s program.

Prescription discount cards have had an increased role in the pharmaceutical supply chain over the last decade, with companies like GoodRx leading the pack. “I think that GoodRx has been quite successful in marketing, leading to increased consumers awareness of drug pricing in general,” Dr Spjut said. “Many patients have been helped by GoodRx and other coupon saving companies to realize that there may be options to reduce their drug cost.”

Stakeholders like PBMs, retailers, and membership organizations like AARP, and even Amazon offer discount cards to patients. Initially, prescription discount cards were typically contracted through PBMs, insurance companies, or third-party administrators, but that relationship has changed in recent years. “GoodRx and other coupon cards later on kind of broke that model because they say, ‘Hey, we want to make a card that’s not funded by any employer or third party.’ It’s free to the customer, but it gives [them] and the patient access to that volume contract that’s already negotiated on the backbone of that PBM,” said Dr Goetz.

Although discount cards cut into profit margins for pharmacies, Dr Goetz added they serve as “a way for retail pharmacies to give a true cash price to a patient.”

Dr Spjut agreed that some patients will benefit from the price transparency, and noted that whether a prescription discount card benefits a patient will depend on what their insurance covers.

“For patients without insurance coverage, savings cards can be quite helpful to contain drug costs, as pharmacy cash pricing is often not tied to actual drug costs and may be unrealistically inflated,” he explained. “In my opinion, savings cards been a positive influence on the market but are not the end all be all solution for drug pricing.”

The idea behind cost-plus pricing is just that—it’s the cost of a product plus a markup for the business selling it. The benefit, again, is price transparency, said Dr Goetz, whose company HealthWarehouse Pharmacy uses a cost-plus pricing model that bypasses insurance and offers direct prices to patients.

“If someone goes and they’re looking for a common blood pressure medication that costs a penny a pill because it’s been out for 40 years, there’s a reasonable markup that can be placed on that,” Dr Goetz explained. “You have your cost of product, your cost of labor to fulfill it, and then you have a reasonable market to justify the business efforts on it.”

How does MCCPDC fit into the equation? “This initiative, among others, is trying to disrupt the way generic drugs are priced for consumers, and in some cases allows patients to purchase their drugs in a cheaper way,” Mr Dvorsky said. “The affordability gap to care is so big, and we will see more initiatives that try to close it and allow patients to afford and adhere to their medication.”

Functionally, Dr Goetz said, MCCPDC isn’t much different from how HealthWarehouse Pharmacy is structured. However, attaching Cuban’s name to the initiative “opens up different doors, and people are willing to try different things, so they have an opportunity for some improved cost of acquisition.”

“I think it’s a great idea. I love seeing the focus put in the industry to promote more transparency,” Dr Goetz said. “[W]e now have players like Amazon and Mark Cuban that are giving reasonable access at a fair price to patients, so it’s a victory for all.”

Dr Spjut said he believes the cost-plus model is catching on. “I think they will have positive impacts on the market, especially in the generic space,” he said, but “will have a hard time helping with the branded space.” He added that MCCPDC is “specifically interesting” because it combines a PBM and pharmacy discount pricing into one service.

“[W]hile the [MCCPDC] website only lists discounts on generic products for now, this may indicate that they are looking to also offer discounts on branded medications with the PBM arrangement,” he said. “I’m not certain that this will catch on, as many of the PBM contracts out there today already include pass-through pricing and pass-through rebates to the plan. Only time will tell, though, and out-of-the-box thinking may put some positive pressures on the market to adjust costs.”

The other problem? Cash-only pharmacies like HealthWarehouse Pharmacy and MCCPDC “will still be at the mercy of what the manufacturers charge for their base cost,” Dr Spjut explained. “[With] some of the high-profiles drug cost examples like epinephrine autoinjectors and insulin, if the manufacturers charge the pharmacy an inflated cost still, the savings won’t be as high as we might like to see.”

Despite the “abundance of resources,” providers, pharmacies, and the pharmaceutical industry have largely fallen short in helping patients afford their medications,” Mr Dvorksy said. “So far, there has been limited success to address the affordability challenges for patients. Most providers and pharmacies are not able to identify patients in need early, and don’t have the capacity to connect these patients with financial resources,” he said.

Ultimately, it will take a “coordinated effort” to create a system that would allow patients “to use financial assistance across the continuum of care,” said Mr Dvorsky.