High costs, high deductibles inspire cash pay
If innovation is the mother of necessity, the market for disrupting the pharmacy industry could be limitless.
Attention to the cost of prescription drugs intensified this month when the Food and Drug Administration approved the Alzheimer’s disease drug Aduhelm, which manufacturer Biogen has priced at $56,000.
But for policymakers, payers and patients, high drug prices are nothing new. Nearly 90% of consumers believe the federal government should negotiate directly with the drugmakers to drive down prices, according to a June poll by the Kaiser Family Foundation. Respondents across the political spectrum agreed that lowering prescription costs should be a key priority for President Joe Biden’s administration.
“If you look at national poll after national poll, this is essentially the only bipartisan issue out there,” said David Whitrap, vice president of communications and outreach at the Institute for Clinical and Economic Review (ICER). “Across Republicans and Democrats, this is an issue that has consumed the broader public.” ICER estimates that a year of Aduhelm, also known as aducanumab, would actually cost patients no more than $8,300 — still a large sum, but considerably less than Biogen’s list price.
Some consumers are done waiting for government intervention or for the pharmaceutical industry to act on its own to reduce prices. That’s why so many are opting to pay cash for their generic prescriptions rather than use their health insurance pharmacy benefits.
A growing number of startups have built businesses that benefit from this trend. GoodRx achieved unicorn status through a $1.1 billion initial public offering in 2020. The Santa Monica, Calif.-based company connects patients, including those who are uninsured or under-insured, to discounts on generic drugs through its app and website, which allow comparison shopping at local drugstores. Pharmacies also often offer discount programs for cash customers. And some independent pharmacies aren’t accepting insurance at all anymore, instead buying medicines from wholesalers and selling them to cash-pay customers.
The increasing prevalence of high-deductible health plans plus the chronic lack of transparency about drug prices have created a dynamic where it makes sense for a lot of patients to pay for medicines out of pocket. In 2020, 47% of the workforce was enrolled in a high-deductible health plan, up from 36% in 2015, according to the Kaiser Family Foundation. High-deductible policies also are common on HealthCare.gov and other health insurance exchanges and at online brokerages like eHealth.
GoodRx’s success inspired competitors to enter the market, with companies like CoverUS, Blink Health, WellRx and more promising to slash consumers’ drug spending if they eschew insurance.
“It’s easier, it’s convenient. It’s a fixed price. I know what this is going to cost. The reimbursement system feels very complex for the typical patient,” said David Goldhill, who serves on the board of directors at the Leapfrog Group, and is CEO of Sesame, a marketplace for pharmacy and medical services for direct-pay patients. Americans spent $406.5 billion out of pocket on healthcare in 2019, according to the most recent data collected by the Centers for Medicare and Medicaid Services.
And while drug discount startups offer some savings, they still rely on a pricing system that’s fundamentally broken, said Antonio Ciaccia, who heads the 46brooklyn Research firm. The prices consumers pay at the pharmacy counter, even after discounts, are based on negotiated contracts with pharmacy benefit managers who have artificially inflated drug prices, he said.
Pharmacies that only accept cash payments may have a greater potential to disrupt the retail drug market than discount programs and apps, Ciaccia said. Consumers are getting wise to the fact that they might not get the best deal by using their insurance, particularly as high-deductible plans become more widespread, or from sources like GoodRx, he said.
“People are slowly awakening to this reality that the people who have been telling us that they’re saving us money aren’t saving us money — they’re ripping us off,” Ciaccia said.
In Pittsburgh, Blueberry Pharmacy says its customers saved more than $100,000 by paying cash for medicines last year instead of going through their health insurance, for example.
“Some of these generic drugs can be acquired for a penny a pill,” Ciaccia said. “What they’re saying is, ‘Look, we’re throwing away the sticker prices.'”
By cutting out pharmacy benefit managers and buying directly from drug wholesalers, independent pharmacies can offer lower prices, said Kurt Proctor, vice president for strategic initiatives at the National Community Pharmacists Association. Although these startups and pharmacies can’t actually threaten the dominance of PBMs, their mere existence presents a public relations nightmare for the middlemen, he said.
Pharmacy benefit managers have a track record of reducing prescription drug costs for patients, the Pharmaceutical Care Management Association maintains. “While pharmacists play an important role in our healthcare system, the sole focus for everyone in the prescription drug supply chain, including PBMs and pharmacists, should be making prescription drugs more affordable and more accessible for patients,” a spokesperson wrote in an email.
As lines between insurance companies, mail-order pharmacies and PBMs continue to blur, independent pharmacists will face increasing downward pressure on what they get paid to dispense medicines, Proctor said. Ultimately, consolidation among the other players could inspire more pharmacies to drop insurance entirely.
“As those pioneering pharmacies show that they have a legitimate business model, and that it’s sustainable, I would expect others will take a real hard look at it and then say, ‘You know, that might be for us,” Proctor said.