Getting a Better Price by Not Using Your Insurance on Generic Drugs

So … let's start here. Mostly this whole episode is about the so-called "Big Three" PBMs that provide between the three of them pharmacy benefit services for 95% of insured Americans. PBM stands for pharmacy benefit manager, and the Big Three PBMs being ESI, otherwise known as Express Scripts; OptumRx, which is a part (a big profitable part) of United Health Group; and then also CVS. Yes, CVS is not just for your retail pharmacy needs; they are also a huge pharmacy benefit manager.

Now, we get to the GoodRx part of our story. If you don't know how GoodRx works, I would strongly encourage you to go back and listen to "An Expert Explains" with Dr. Ge Bai from last year (AEE13). That said, here's the super short semi-reductive version to keep us all level set here. If you already know how GoodRx works, you can skip forward about four minutes.

So, first of all, let's all understand that GoodRx's business model only exists because the pharmacy supply chain dominated by these three big PBMs that we just talked about is such a cluster. GoodRx profits from that dysfunction. So, as I said, here's the short version of how they do that. It all hinges on so-called spread pricing, and this is what I mean by that.

Patient goes into pharmacy with a prescription for generic drug X. The patient has insurance—good news! Pharmacist checks the computer and sees that this patient should be charged, I don't know, $50 for drug X. The patient's insurance carrier picks up, say, $30 of the $50 cost; and the patient is left with, say, a co-pay of $20.

Who did that little math there in the computer? The PBM (the pharmacy benefit manager) did that math. That's their thing, these PBMs. They adjudicate claims. That's what this math is called. Anybody who goes into a pharmacy with a prescription, it's the PBM on the back end who figures out how much the patient owes and how much their insurance will pay and what the patient responsibility is, etc.

Goodness, you might say. How much are the PBMs being paid to perform this useful service? Turns out, it's free. That's right … the Big Three PBMs do all this adjudication for free. No charge to plan sponsors. Isn't that nice?

Except it's actually not free if you dig into it. The PBM is certainly getting paid by means of arbitrage. They're taking a little something something out of the middle of every single transaction. Here's what that looks like in the example aforementioned. Recall the patient's insurance paid $30, and the patient themselves paid $20.

The question is, how much did that drug cost the PBM? Remember, that's commerce: Buy low, sell high, and all that. You buy something, and then you sell it for more than you bought it for.

OK, so we're talking about a generic drug here. They're cheap (usually). So, let's just say drug X costs, I don't know, $5. The PBM pays the pharmacy $5 for that generic script—and you can see how much money the PBM just made right there. The patient and their plan sponsor got charged $50, and the PBM's cost of goods was $5. Multiply that profit margin by the billions of generic prescriptions in this country that run through insurance, and you have a tidy little business model there. UHG, the parent company of OptumRx, made $24 billion in profit in 2021. Not all of that was from generic drug arbitrage (ie, taking advantage of spread pricing), but some of it was. And $24 billion is an awfully big amount when you consider whose paychecks all those pennies were lifted from.

PBM services are anything but free. PBMs are collecting massive windfalls in the so-called spread between what the patient and the plan pay and what the PBM is actually buying those drugs for.

Here's another wrinkle: When a PBM contracts with a pharmacy, part of their contractual terms is that the pharmacy's list price for drugs cannot be lower than a certain amount usually having something to do with the PBM's rates. So, pharmacy list prices become artificially high as a result, meaning that cash-pay patients who just wander into a pharmacy and try to pay cash pay an artificially high price.

Into this mess swoops GoodRx with a killer idea. They see all that money on the table that PBMs are cleaning up in that spread. They want a piece of that action. And in the beginning, PBMs were fully on board with this. They were fully on board because the market GoodRx was going after was the uninsured market, meaning untapped turf for PBMs. And because PBMs make so much money off of each transaction, PBMs are always hungry for more transactions (the Big Three PBMs, anyway). They love more transactions. The more more more with the transactions, the more more more with the money.

So, GoodRx goes to the PBMs and says, "Hey … if a cash-pay patient shows up in a pharmacy, what price would you charge them for you to adjudicate that claim? You know how much money you have to pay the pharmacy, so what can the patient price be? What spread are you willing to accept? GoodRx will take a little off the top, but you can keep your spread on this new frontier of patients that you haven't historically had access to because … uninsured. Oh, by the way, we, GoodRx … we're gonna go around to all your competitors, too (just saying)—the other two PBMs—and we're gonna show their prices, too, in our GoodRx app at different pharmacies. So, you're gonna have to compete with other PBMs in this model."

This is why GoodRx cash prices for generics are so very very often less than what the patient will pay if they use their insurance. In the GoodRx app, PBMs have competition. So, by not using their insurance, patients often pay less for generic drugs—which, by the way, are 90% of the scripts written in this country—and also, as an added bonus, patients don't have to jump through all the weird and arduous prior auths or step therapies or other hurdles that a PBM might toss in the mix. So, from a patient perspective, using GoodRx could save money, save time, and you could get your drugs faster because you don't have to wait around for some prior auth to go through.

But this was not what PBMs had originally thought they were signing up for. They were working with GoodRx to gain new market share from the uninsured market, not lose market share to more and more patients forgoing their insurance, meaning forgoing shelling out to the PBM their spread on the transaction.

Cue my conversation today with Dr. Ge Bai. Ge Bai, PhD, CPA, is a professor of accounting at Johns Hopkins Carey Business School and a professor of health policy and management at Johns Hopkins Bloomberg School of Public Health.

In this healthcare podcast, Ge Bai and I discuss the reactions of the Big Three PBMs to consumers getting all consumer-y when it comes to buying their generic drugs—despite the fact that, in my interview with Dr. Sunita Desai (EP334), she said that studies have shown that 67% of patients are unaware that they might be able to get a better price by not using their insurance and shopping around on GoodRx or Amazon or at a cost-plus pharmacy like Blueberry in Pittsburgh or Mark Cuban's new thing. Despite that, it means 33% (one-third) of patients are aware that they can price shop and potentially get a better price not using their insurance on generic drugs; and apparently, it's making some people at some PBMs nervous.

Check the ESI (Express Scripts) blog post about their new prescription benefit that automatically applies discounts. Hmmm … sounds like a defensive play to me? What do we make of this? That's my first question to Dr. Ge Bai in this episode.

Also, if you're really intrigued by generic drug goings-on, go back and listen to the show with Dr. Steven Quimby (EP344) when you have a chance. It's about the high cost of generic drugs, and we go deep into supply chain machinations.

You can learn more on Ge's Web site at Johns Hopkins University. You can also connect with her on LinkedIn.

Ge Bai, PhD, CPA, is professor of accounting at the Johns Hopkins Carey Business School and professor of health policy and management at the Johns Hopkins Bloomberg School of Public Health. She is an expert on healthcare pricing, policy, and management. Dr. Bai has testified before the House Ways and Means Committee, written for the Wall Street Journal, and published her studies in leading academic journals such as the New England Journal of Medicine, JAMA, JAMA Internal Medicine, Annals of Internal Medicine, and Health Affairs. Her work has been widely featured on ABC, CBS, NBC, Fox News, CNN, and NPR and in the Los Angeles Times, New York Times, Wall Street Journal, Washington Post, and other media outlets and used in government regulations and congressional testimonies.

08:45 What is ESI doing by automatically applying discounts to generic drugs? 10:00 Why are PBMs losing money when consumers don't use their benefit? 10:46 "GoodRx disrupted the ongoing game." 11:04 How are PBMs using the Amazon discount card to discourage their patients from moving away from using their benefits? 12:13 Amazon pricing versus GoodRx pricing. 12:50 How much money is a PBM really making? 14:00 EP344 with Steven Quimby, MD.14:29 EP334 with Sunita Desai, PhD.14:43 How is future fear playing into the PBM business model? 16:55 Is there a negative consequence to subtracting from the bottom line in a PBM model? 17:50 "I think to have strong PBMs does not mean necessarily bad things for patients." 19:39 What happens if everyone uses Amazon for drugs? 22:40 If every PBM gets their own discount cards, what will happen? 25:38 "We are actually witnessing a potential sea change." 26:25 How do cost-plus pharmacies factor into the current market? 29:16 Is a profit shortfall inevitable? 29:35 "PBMs have to give a slice of their profit back to consumers. That's just reality." 30:11 Can anything be done on the PBM side to generate a higher margin in the generic space? 31:41 "Naive plan sponsors are a big problem."

You can learn more on Ge's Web site at Johns Hopkins University. You can also connect with her on LinkedIn.

@GeBaiDC of @JohnsHopkins discusses #PBMs on our #healthcarepodcast. #healthcare #podcast #healthcarepricing

What is ESI doing by automatically applying discounts to generic drugs? @GeBaiDC of @JohnsHopkins discusses #PBMs on our #healthcarepodcast. #healthcare #podcast #healthcarepricing

Why are PBMs losing money when consumers don't use their benefit? @GeBaiDC of @JohnsHopkins discusses #PBMs on our #healthcarepodcast. #healthcare #podcast #healthcarepricing

"GoodRx disrupted the ongoing game." @GeBaiDC of @JohnsHopkins discusses #PBMs on our #healthcarepodcast. #healthcare #podcast #healthcarepricing

How are PBMs using the Amazon discount card to discourage their patients from moving away from using their benefits? @GeBaiDC of @JohnsHopkins discusses #PBMs on our #healthcarepodcast. #healthcare #podcast #healthcarepricing

Amazon pricing versus GoodRx pricing. @GeBaiDC of @JohnsHopkins discusses #PBMs on our #healthcarepodcast. #healthcare #podcast #healthcarepricing

How much money is a PBM really making? @GeBaiDC of @JohnsHopkins discusses #PBMs on our #healthcarepodcast. #healthcare #podcast #healthcarepricing

How is future fear playing into the PBM business model? @GeBaiDC of @JohnsHopkins discusses #PBMs on our #healthcarepodcast. #healthcare #podcast #healthcarepricing

Is there a negative consequence to subtracting from the bottom line in a PBM model? @GeBaiDC of @JohnsHopkins discusses #PBMs on our #healthcarepodcast. #healthcare #podcast #healthcarepricing

"I think to have strong PBMs does not mean necessarily bad things for patients." @GeBaiDC of @JohnsHopkins discusses #PBMs on our #healthcarepodcast. #healthcare #podcast #healthcarepricing

What happens if everyone uses Amazon for drugs? @GeBaiDC of @JohnsHopkins discusses #PBMs on our #healthcarepodcast. #healthcare #podcast #healthcarepricing

If every PBM gets their own discount cards, what will happen? @GeBaiDC of @JohnsHopkins discusses #PBMs on our #healthcarepodcast. #healthcare #podcast #healthcarepricing

"We are actually witnessing a potential sea change." @GeBaiDC of @JohnsHopkins discusses #PBMs on our #healthcarepodcast. #healthcare #podcast #healthcarepricing

How do cost-plus pharmacies factor into the current market? @GeBaiDC of @JohnsHopkins discusses #PBMs on our #healthcarepodcast. #healthcare #podcast #healthcarepricing

Is a profit shortfall inevitable? @GeBaiDC of @JohnsHopkins discusses #PBMs on our #healthcarepodcast. #healthcare #podcast #healthcarepricing

"PBMs have to give a slice of their profit back to consumers. That's just reality." @GeBaiDC of @JohnsHopkins discusses #PBMs on our #healthcarepodcast. #healthcare #podcast #healthcarepricing

Can anything be done on the PBM side to generate a higher margin in the generic space? @GeBaiDC of @JohnsHopkins discusses #PBMs on our #healthcarepodcast. #healthcare #podcast #healthcarepricing

"Naive plan sponsors are a big problem." @GeBaiDC of @JohnsHopkins discusses #PBMs on our #healthcarepodcast. #healthcare #podcast #healthcarepricing

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