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Published: Dec. 22, 2022, 11:30 a.m.

This show was one of the most popular episodes in the past 12 months. So, here it is again for your listening pleasure.

Mostly this whole episode is about the so-called \u201cBig Three\u201d 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 UnitedHealth 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\u2019t know how GoodRx works, I would strongly encourage you to go back and listen to \u201cAn Expert Explains\u201d with Dr. Ge Bai from last year (AEE13). That said, here\u2019s 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\u2019s all understand that GoodRx\u2019s 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\u2019s 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\u2014good news! Pharmacist checks the computer and sees that this patient should be charged, I don\u2019t know, $50 for drug X. The patient\u2019s 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\u2019s their thing, these PBMs. They adjudicate claims. That\u2019s what this math is called. Anybody who goes into a pharmacy with a prescription, it\u2019s 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\u2019s free. That\u2019s right \u2026 the Big Three PBMs do all this adjudication for free. No charge to plan sponsors. Isn\u2019t that nice?

Except it\u2019s actually not free if you dig into it. The PBM is certainly getting paid by means of arbitrage. They\u2019re taking a little something something out of the middle of every single transaction. Here\u2019s what that looks like in the example aforementioned. Recall the patient\u2019s insurance paid $30, and the patient themselves paid $20.

The question is, how much did that drug cost the PBM? Remember, that\u2019s 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\u2019re talking about a generic drug here. They\u2019re cheap (usually). So, let\u2019s just say drug X costs, I don\u2019t know, $5. The PBM pays the pharmacy $5 for that generic script\u2014and you can see how much money the PBM just made right there. The patient and their plan sponsor got charged $50, and the PBM\u2019s 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\u2019s another wrinkle: When a PBM contracts with a pharmacy, part of their contractual terms is that the pharmacy\u2019s list price for drugs cannot be lower than a certain amount usually having something to do with the PBM\u2019s 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, \u201cHey \u2026 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\u2019t historically had access to because \u2026 uninsured. Oh, by the way, we, GoodRx \u2026 we\u2019re gonna go around to all your competitors, too (just saying)\u2014the other two PBMs\u2014and we\u2019re gonna show their prices, too, in our GoodRx app at different pharmacies. So, you\u2019re gonna have to compete with other PBMs in this model.\u201d

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\u2014which, by the way, are 90% of the scripts written in this country\u2014and also, as an added bonus, patients don\u2019t 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\u2019t 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\u2014despite 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\u2019s 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\u2019s making some people at some PBMs nervous.

Check the ESI (Express Scripts) blog post about their new prescription benefit that automatically applies discounts. Hmmm \u2026 sounds like a defensive play to me? What do we make of this? That\u2019s my first question to Dr. Ge Bai in this episode.

Also, if you\u2019re 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\u2019s about the high cost of generic drugs, and we go deep into supply chain machinations.

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You can learn more on Ge\u2019s 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.

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08:39 What is ESI doing by automatically applying discounts to generic drugs?

09:53 Why are PBMs losing money when consumers don\u2019t use their benefit?

10:40 \u201cGoodRx disrupted the ongoing game.\u201d

10:58 How are PBMs using the Amazon discount card to discourage their patients from moving away from using their benefits?

12:07 Amazon pricing versus GoodRx pricing.

12:44 How much money is a PBM really making?

13:54 EP344 with Steven Quimby, MD.

14:24 EP334 with Sunita Desai, PhD.

14:37 How is future fear playing into the PBM business model?

16:49 Is there a negative consequence to subtracting from the bottom line in a PBM model?

17:44 \u201cI think to have strong PBMs does not mean necessarily bad things for patients.\u201d

19:33 What happens if everyone uses Amazon for drugs?

22:33 If every PBM gets their own discount cards, what will happen?

25:32 \u201cWe are actually witnessing a potential sea change.\u201d

26:19 How do cost-plus pharmacies factor into the current market?

29:09 Is a profit shortfall inevitable?

29:28 \u201cPBMs have to give a slice of their profit back to consumers. That\u2019s just reality.\u201d

30:05 Can anything be done on the PBM side to generate a higher margin in the generic space?

31:34 \u201cNaive plan sponsors are a big problem.\u201d

You can learn more on Ge\u2019s Web site at Johns Hopkins University. You can also connect with her on LinkedIn.

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@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\u2019t use their benefit? @GeBaiDC of @JohnsHopkins discusses #PBMs on our #healthcarepodcast. #healthcare #podcast #healthcarepricing

\u201cGoodRx disrupted the ongoing game.\u201d @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

\u201cI think to have strong PBMs does not mean necessarily bad things for patients.\u201d @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

\u201cWe are actually witnessing a potential sea change.\u201d @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

\u201cPBMs have to give a slice of their profit back to consumers. That\u2019s just reality.\u201d @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

\u201cNaive plan sponsors are a big problem.\u201d @GeBaiDC of @JohnsHopkins discusses #PBMs on our #healthcarepodcast. #healthcare #podcast #healthcarepricing

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