By Christian Hetrick
Americans who can’t afford prescription drugs may have a pair of unlikely allies: billionaires Mark Cuban and Jeff Bezos.
The two tech entrepreneurs, who made their riches disrupting retail, media and other markets, now have their sights set on healthcare. Both have launched online pharmacies claiming to sell drugs at lower and transparent prices.
Their entry into the pharmaceutical industry comes as Americans pay more for prescription drugs than people in other countries. For example, pharma firm AbbVie charged nearly double for blood cancer drug Imbruvica in the U.S. as compared to Australia and countries in Europe, according to the U.S. House Committee on Oversight and Reform. It’s an issue that has harmed many patients – who often can’t afford the treatments they need – and frustrated lawmakers, who haven’t succeeded in moderating drug costs.
“I think that part of what we’re seeing with these entrants is that policy is taking too long and it’s been ineffective in reducing what we, as a society, spend on drugs,” noted Karen Van Nuys, a health and finance expert at USC Schaeffer Center for Health Policy and Economics, which is a partnership between the USC Price School and the School of Pharmacy.
“There is a lot of excess spending and room to cut costs because intermediaries create a lot of waste,” she explained. “In the absence of strong policy, we are seeing a lot of innovation in the private sector to eliminate that waste.”
Cost Plus cuts out the pharmaceutical middlemen
Earlier this year, Cuban launched the Mark Cuban Cost Plus Drug Company, a wholesaler that sells generic drugs at prices lower than traditional retailers. The firm can offer lower rates, in large part, by not engaging with the health insurance system, avoiding middlemen and their markups.
The realm of pharmaceutical middlemen is an area where Van Nuys has done extensive research. She recently co-authored research showing how insurers and pharmacy benefit managers (PBMs) deploy pricing practices that cause consumers to overpay for generics.
In a tactic called “spread pricing,” for example, PBMs reimburse pharmacies one price when a beneficiary fills a prescription, while charging the health plan a higher price and pocketing the difference. Neither the pharmacy nor the health plan knows what the other side was charged.
“That doesn’t happen in the Mark Cuban system because there’s no distinction between what’s being paid to the pharmacy and what’s being charged to the health plan. There’s no PBM in the middle, taking a giant chunk out of it,” Van Nuys said.
One notable example is Imatinib, a drug prescribed to patients with specific forms of leukemia, a blood cell cancer. Cost Plus offers the drug for $14.40, whereas consumers buying it through insurance elsewhere could pay hundreds of dollars in co-payments, Van Nuys noted.
Cost Plus pricing model is similar to Costco’s
Cost Plus charges a flat 15% margin on top of their acquisition costs, plus pharmacist and delivery fees. The pricing model is a bit like Costco, the wholesale retail giant, said Arvind Bhambri, an associate professor of management and organization at the USC Marshall School of Business. Instead of always trying to charge the highest price they can, both firms start with the cost that they incur and just have a fixed markup, he noted.
“You’re not always sure that what you’re buying at Costco is going to be the lowest price that you can find anywhere,” Bhambri said. “But what you are very sure about is that you’re not being gouged.”
Healthcare has long been in the crosshairs of technology leaders because the size of the market is too big to ignore, Bhambri said. It’s unlikely, then, that the motivations of tech gurus are entirely altruistic, even if they pitch their ventures as a social benefit.
“Because healthcare is so inefficient and fragmented, there is an opportunity to both cut down on costs and still create a profitable company,” Bhambri said. It’s become a win-win. It has a social impact, plus it’s a good business to be in.”
Amazon Pharmacy and Cost Plus seek to disrupt the industry
Bezos’ Amazon Pharmacy isn’t as innovative as Cuban’s Cost Plus, in that Amazon still deals with health insurance and PBMs, Van Nuys said. Amazon Prime members can compare drug prices across pharmacies online and pay with insurance or Amazon Pharmacy’s discount card, which cuts up to 80% off drug prices. Much like its e-commerce business, the company offers free two-day delivery for Amazon Pharmacy purchases.
Amazon – which has subsidiaries in e-commerce, grocery stores, film production, cloud computing and more – looks for industries that have high margins and inefficient supply chains, Bhambri said. Amazon will typically come in, cut costs and price low enough to ensure that it is cheaper than alternatives that are equally convenient.
It remains to be seen whether Cost Plus and Amazon Pharmacy will meaningfully disrupt the pharmaceutical industry. One initial problem with both solutions, Van Nuys noted, is that they rely on mail order delivery, which isn’t great for drugs like insulin that need to be refrigerated.
“The Cost Plus Drugs model works well for inexpensive generic drugs that are straightforward to ship,” she said. “We don’t yet have good solutions for drugs like insulin that require special handling, or for really expensive drugs that aren’t affordable without insurance. We need to come up with creative solutions for those segments as well.”