As the use of patient-paid prescriptions continues to grow, it is posing a challenge to the pharmacy benefit market, contended longtime industry expert Adam J. Fein, Ph.D., CEO of Drug Channels Institute, during a recent webinar. And with some industry developments such as the Inflation Reduction Act likely to impact the uptake of high-price/high-rebate drugs, patient-paid prescriptions could become an even bigger disruption within the market than they already are.
The issue of patient-paid prescriptions — which include both cash-pay claims and discount-card claims — is “potentially something that’s going to actually be genuinely disruptive, actually something that could change the structure of both the PBM industry and how plan sponsors” think about benefit design, Fein asserted. Both approaches, he explained, remove the third-party payer, allowing patients to make a transaction directly with a pharmacy.
During the March 31 webinar, titled Discount Cards, Cost-Plus Pharmacies, and PBMs: Trends, Controversies, and Outlook, Fein pointed out that the share of cash-pay, 30-day-equivalent prescriptions has declined since 2017 due to various factors. For one, more people have insurance coverage, particularly coverage via Medicaid, which “is now on track to be almost the second-largest insurer. Over 90 million people have Medicaid as their coverage right now,” although that likely will change due to redeterminations resuming after being paused during the COVID-19 public health emergency. However, as independent pharmacies such as Mark Cuban Cost Plus Drug Company launch, this trend may reverse somewhat.
The second reason for the decrease in these prescriptions is that “they are being crowded out by discount cards,” he contended, citing IQVIA data. “Now, one out of 12 prescriptions is being handled by patient-paid” approaches. “And that is a real change in the way we think about prescriptions.”
A variety of steps are involved in determining pricing for generic prescriptions at retail pharmacies, explained Fein.
- Starting with the wholesale acquisition cost, which is the manufacturer-set list price, drugmakers set the average wholesale price (AWP) at about 120% of WAC.
- Then the National Average Drug Acquisition Cost (NADAC) is the pharmacy’s invoice cost from a wholesaler, before any rebates or discounts, and it’s about 12% of WAC.
- The pharmacy sets the list price, known as the usual & customary (U&C) price, at about 156% of WAC.
- Then PBMs will determine reimbursement “using generally one of two methodologies.” They may base it on the AWP, which is usually about 40% of WAC. Or they may set a limit, a maximum allowable cost (MAC). MACs are not public, but Fein cited a study that found that “MACs are generally above NADAC and often available at some discount comparable to AWP,” perhaps around 35% of WAC.
Beyond this are a few other factors impacting the drug channel. First, “the generic lifecycle affects generic acquisition costs for pharmacies a lot,” said Fein. “The first-to-file generic has a period of exclusivity; there may be a second generic and perhaps an authorized generic from the manufacturer. And then over time, more companies enter.…The more manufacturers there are, the more this looks like a commodity market,” with average discounts dropping to about 90% of AWP.
In contrast to brand-name drugs — where “the formulary power really sits with the payer and the PBM, and the wholesalers and pharmacies are kind of just pipes to the market” — with generic products, “the formulary, such as it is, sits with the channel, sits with the wholesalers and the retailers. If they decide to have this product in the warehouse or on the shelf, that’s the version of the product, the therapeutically equivalent generic, that you’ll get at the pharmacy.”
It’s important to remember, Fein said, that the NADAC is above what pharmacies pay for a drug. “And so conspiracy theorists out there can speculate as to whether as NADAC gets more adopted, the channel has some incentives to try to focus on off-invoice discounts and after-the-fact rebates to try to keep that invoice price looking higher. But we don’t know. and there’s no data on that. That’s just idle speculation.”
Finally, he explained, “there is a very important distinction between the dollars of profit you make and your actual profit margin percent.”
Multiple Patient-Paid Offerings Exist
Different types of entities make up the discount-card market. Independent brands comprise the first bucket, with the biggest example being GoodRx. In addition, some PBMs have developed their own brands; Inside Rx, for instance, is operated by Express Scripts. And there are brands associated with retailers, such as Amazon Prime Rx.
“But a number of these retail brands are not actually run by the retailers,” he observed. “There’s actually another level behind it. Amazon is actually relying on Inside Rx, which is Express Scripts, which is Cigna,…to run their Amazon Prime Rx discount card.” These cards, he clarified, are not the same as manufacturer-provided copay support, which usually is provided for brand-name drugs, or patient assistance programs by drugmakers.
As a share of total prescriptions, discount-card claims have continued to grow, said Fein, citing IQVIA data.
Unlike many brand-name drugs, generics “generally don’t have rebates paid by the manufacturer to the PBM,” he noted. “They do have rebates paid to wholesalers and pharmacies, and if the PBM is a pharmacy, they might be getting a rebate as a pharmacy. But that’s because the formulary, the selection of which particular generic is used, really has shifted to the distribution system, that distribution channel.”
When someone uses a discount card, the pharmacy gets paid at the PBM network rate, not the U&C cost, “because now this is essentially a PBM network pharmacy,” and patients are paying that PBM-negotiated rate, stated Fein. “And then after that transaction occurs, the pharmacy pays a fee back to the PBM, who shares some of that fee with the discount card. So in some sense, when we’re talking about the discount-card market, it is a PBM-operated market. PBMs are behind the scenes, and the fees that are coming from the pharmacies are going to PBMs and being shared with the discount cards.”
So with these cards, while patients are paying out of pocket, these actually are PBM claims “because the PBMs are adjudicating these discount cards,” explained Fein. In addition, “those discount-card fees are a form of spread pricing,” and pharmacies “hate these fees. But what it means is that the payer…is paying some amount for a prescription, and the pharmacy is getting less than that amount. And part of that is being taken by the PBM,” which is “then sharing it with the discount card.” So the PBM fee is cutting down on a pharmacy’s profits, while the discount-card fee reduces a PBM’s profits.
When it comes to cash-pay pharmacies, they often can offer a price less than what a consumer would pay using their insurance. These entities are separate from traditional pharmacies in that they are “pure cash pay, no third-party payment,” Fein clarified. Two types of these models exist. The first is cash-only pharmacies, with the best-known probably being Mark Cuban Cost Plus Drug Company, although there are other independent examples.
A second type of model “typically will bundle a telehealth prescribing component with the cash-pay [model]; they don’t accept insurance. They tend to focus on just a few different categories, typically ones with self-diagnosis, sexual health, hair loss, smoking cessation,” he observed, pointing to examples such as Ro and Hims & Hers Health, Inc. These companies “typically are trying to brand a generic drug, repackage a generic drug.”
As with discount cards, with cash-pay pharmacies, “the patient is again the payer. There is no third party; there is only a first party: you and me, the patient.” These entities also have “no pharmacy benefit infrastructure.” He pointed to Mark Cuban, who initially said he was focused on “screw[ing] the pharmaceutical manufacturers.” But recently, “he’s realized that’s not his target” and has singled out PBMs as the problem and is bypassing that system entirely, as opposed to discount cards.
Industry Trends Have Prompted Innovation
“Now, I think this is an incredibly interesting development,” Fein contended, noting that “90% of all the physical activity in the [drug] channel — dispensing, claims processing, payment — is dealing with generic drugs. So it’s a lot of physical activity. There’s a lot of distortions in this market. And so these kinds of innovations,…they’re innovations in the sense that no one was really trying to do this at the scale that is being attempted right now. And that’s why I believe it’s very challenging to both PBMs’ business models” and the way that plan sponsors think about benefits.
Over the last 10 to 20 years, explained Fein, “we’ve seen a very big change in the way plan sponsors think about prescription drug coverage. And one of the things is even patients who have insurance are increasingly exposed to prescription drug prices. Twenty years ago, it was not common to see formularies with four or five, six or seven tiers. Now it is. Twenty years ago, it was very uncommon to see the use of coinsurance or deductibles like we see now.”
He shared data showing that among workers in employer-sponsored plans, “29% of them have a coinsurance on tier one, the generic tier, and 41% face a coinsurance for preferred brand-name drugs — not specialty drugs, preferred brand-name drugs.”
Fein pointed to the incorrect assumption that discount cards are for people who lack health insurance. An IQVIA report revealed that among people with at least one discount-card adjudication, more than half did not have insurance. “But what really blew me away, what stunned me, is the share of people who have at least one discount-card claim but also have insurance.…GoodRx has said for years three out of the four people using our cards have insurance.
“So they, the patient, and their employer or the government is paying some amount of money. Let’s take a commercially insured individual. Their total insurance cost is probably, for a family, $20,000 to $25,000, of which the patient, the beneficiary, has to pay a portion of that. And yet, they find it’s cheaper to go outside their benefit claim. And what’s happening here? Well, one, they’re just doing the math: ‘It’s cheaper for me to use this card than my insurance plan,’ which is kind of crazy. This means either I have a coinsurance or a deductible I don’t think I’m going to hit, or I have the opportunity to access the network rate of another PBM.”
Or, he continued, “the rate that the person using the discount card inside a benefit could be the same PBM that is quoting a rate to their plan. But it could be a different rate. PBMs have different rates for a lot of reasons.” Each PBM “has multiple networks with multiple rates.”
Besides saving money, patients may go outside of their plan to get around “utilization management hell,” including “refill-too-soon” limits, prior authorizations and formulary exemptions, stated Fein.
“So there’s something going on under the under the hood here of pharmacy benefits that’s allowing this to occur. And the same thing is happening with cash-pay prescriptions,” he said, pointing to a study showing savings via cash-pay pharmacies vs. Medicare Part D. And with direct and indirect remuneration fees today, “one could argue that the way DIR works,…it’s better for the plans…to have higher DIR and kind of raise the pharmacy reimbursement and then get it back in DIR.” Bypassing utilization management may also prompt patients to go outside their plan.
“So what’s happening is many people are starting to discover” that their “insurance apparently is valueless,” he maintained.
Patient-paid prescriptions, however, have some issues when patients with pharmacy benefits use them. Because a claim isn’t submitted to the plan, it may appear that a member is not adherent to a medication, and “adherence and compliance are factors in Part D Star Ratings.”
Patient out-of-pocket costs also are not generally applied to deductibles. People can get past that by “scal[ing] paperwork mountain,” he noted. “But many people don’t know how to do that, or the plans don’t make it easy to do that. So you end up essentially never chipping away at the deductible, which for people who are generally healthy and taking generic drugs might be fine. But it’s kind of a weird thing to think about. And…it kind of makes you scratch your head when you’re like, ‘Wait — don’t I have good Insurance? Why is it cheaper for me to download some app and get a better price than what my supposed great insurance has?’ It creates a lot of cynicism.
“So because of all these problems and these challenges, we’re starting to see discount cards come into the pharmacy benefit,” he continued, such as Price Assure, a partnership between Express Scripts and GoodRx, and Optum Rx’s Price Edge. When Optum Rx launched this offering, its press release noted that “Optum Rx already offers a lower price nearly 90% of the time,” pointed out Fein. So “at least 10% of the time, Optum Rx does not offer a lower price” than direct-to-consumer offerings do. “So this is the kind of stuff that can make people insane about our health care system.”
There is a lack of transparency within the discount-card model, Fein maintained, adding that he has questions for plan sponsors. “Why is the discount-card/cash-pay cost less than the plan cost for my beneficiaries? Do I know that? Do I want that to be the case? What’s happening? Why can my beneficiary find a better rate from another PBM than the rate you’re providing me? I thought you were a great PBM. What’s going on here? Have you built margin into the rate that I’m paying? Are you just not good at negotiating with pharmacies?”
“And what really is going to make them insane is well, is the discount-card rate that my beneficiary is getting, is that the rate that you provided the discount card, but, somehow, it’s better than the rate you’re providing me? Like I know there’s historical contracts and things really adjust to market in a timely fashion, but what’s going on? What is happening? And so discount cards, by adding this other layer inside of the benefit, create another level of opacity into a business that is not known for transparency.”
Fein also wondered, is it “possible that this discount-card model is causing the retail pharmacy shakeout that’s going on right now?” Mass merchants with pharmacies such as Walmart and supermarkets with pharmacies such as Kroger have 28% of the overall retail prescription sales but 61% of the discount-card claims, he noted.
He pointed out that “this market has been enabled by a massive period of generic deflation” due to numerous industry developments. “Is that going to continue? I think so. Never say never. If this were to reverse and go back to where we were 10 years ago, for whatever reason, that would really challenge this entire discount-card/cash-pay market, but at least for now, looks like smooth sailing, I think. We’ll find out.”
Currently, most of the patient-paid prescriptions are for generic drugs, he observed. But that may change. “I think we’re on the cusp of this whole model starting to impact brand-name prescriptions. And that’s a really interesting story, and it’s starting to happen, and there are some factors that I think are going to accelerate it and make this much more relevant to everyone in the system.”
Indeed, just a few days after Fein’s webinar, Mark Cuban revealed that his company will sell the diabetes drugs Invokana (canagliflozin) and Invokamet (canagliflozin/metformin) from Janssen Pharmaceuticals, Inc., a Johnson & Johnson company.
Currently, payers are incentivized to prefer high-price brand-name drugs that have much lower net prices because they have high rebates — so-called gross-to-net-bubble products “that have intense competition, that aren’t technically generics for a variety of reasons.” But a variety of factors may “pop the gross-to-net bubble,” making gross prices more in line with net prices. “Once that happens, the entire market opens up. And given the presence of discount-card and cash-pay pharmacies, it really changes the market,” Fein maintained.
One of those factors is the end of the Medicaid rebate cap, resulting in manufacturers actually paying Medicaid to use their drugs. The Inflation Reduction Act’s (IRA’s) Part D redesign “essentially makes high-list/high-rebate products much less attractive to Part D plans. In fact, standalone Part D plans are in big trouble.…There are going to be opportunities to get on the formulary without having to give the big rebate.” The IRA’s inflation rebate also will come into play. And the drugs whose prices will be negotiated are being decided by their gross, or pre-rebate, spending. And the negotiated price “is essentially going to take that list price and make the new price in the market the net price,” and pharmacies will be reimbursed at essentially the net price.
The 340B Drug Pricing Program also will play a role, as its “ceiling price is mathematically equivalent to the Medicaid net price. So when you start monkeying around with these gross-to-nets, you also start monkeying around with your 340B discount liability,” he explained. “So potentially, some of these drugs that really couldn’t be sold on a cost-plus basis or under a discount-card model, because of the rebate structure, are going to essentially have some of that rebate taken out.”
A shift in the importance of high-price/high-rebate products, said Fein, “would really upset the apple cart for PBMs and plans who baked their entire business models around rebates coming back from manufacturers and spreads and profits.”
Ultimately, he said, “the drug channel’s warped incentives allow relatively inexpensive generic drugs to be sold at widely varying prices. That creates a lot of opportunities for mischief and a lot of opportunities for margin that is not seen by anyone. And these new models are challenging that.…These kind of innovations that are truly disruptive bubble up from the margins, and no one thinks they’re serious because they’re kind of niche solutions, they don’t really apply, and by the time they get scale, the incumbents are taken off guard.
“This, to me, is a truly potentially disruptive kind of scenario for the economics, which will make us have to challenge the traditional economics of PBMs and plans and how they’ve made money, how pharmacies have made money, how the PBMs have made money and who is making money from these generic drugs? And to some extent, it’s kind of an interesting opportunity to rethink the whole concept of prescription insurance.”