Drug Discount Distortions: How Middlemen Increase Costs and Reduce Access

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Hubwonk Drug Discount Distortions: How Middlemen Increase Costs and Reduce Access


[00:00:00] Joe Selvaggi: This is Hubwonk. I’m Joe Selvaggi. Welcome to Hubwonk, a podcast of Pioneer Institute, a think tank in Boston. On January 1st, the popular asthma drug Flovent disappeared from pharmacy shelves, leaving its users scrambling for alternatives and policy observers to wonder what happened. A closer look at the puzzle reveals that though Flovent’s producer, GlaxoSmithKline or GSK, was responding to regulatory pressure to lower the price of the drug, The Byzantine system of rebates that circulate between insurance companies, pharmacy benefit managers, and consumers serve to effectively eliminate coverage for a drug that had safely and effectively treated asthma patients, many of them children, since the year 2000.

[00:00:45] The Flovent story mirrors that of many drugs used to treat other chronic illnesses such as diabetes, shining a spotlight on a process that keeps the price of name brand therapies high while also serving to discourage the adoption of their generic substitutes. How does our healthcare system decide which drugs we can purchase and at what price?

[00:01:03] And how can incentives designed to reduce costs for consumers actually result in drugs like Flovent being removed from our pharmacy shelves? My guests today are Pioneer Institute’s Senior Fellow for Life Sciences, Dr. Bill Smith, and Pioneer Institute’s Visiting Healthcare Fellow and Founder of Conquest Advisors, Pharmacy Doctor Robert Popovian.

[00:01:23] Dr. Smith and Popovian will explain how drug therapies find their way to patients using a complex system of rebates coordinated by intermediaries known as pharmacy benefit managers. They will share how rebates originally negotiated as product discounts now provide pharmacy benefit managers with distorted incentives to cover more expensive name brand drugs and reduce access for those less expensive therapies when they go generic.

[00:01:49] We will discuss alternative models for drug access such as direct to consumer programs. And what steps policy makers might take to realign incentives for the benefit of patients. When I return, I’ll be joined by Drs. Bill Smith and Robert Popovian. Okay, we’re back. This is Hubwonk. I’m Joe Salvaggi, and I’m now pleased to be joined by frequent Hubwonk guest and Pioneer Institute Senior Fellow for Life Sciences, Dr.

[00:02:14] Bill Smith, and by Pioneer Institute’s Visiting Healthcare Fellow and founder of Conquest Advisors, Dr. Robert Popovian. Welcome to Hubwonk, gentlemen.

[00:02:23] Bill Smith: Thank you, Joe.

[00:02:23] Robert Popovian: Glad to be here.

[00:02:24] Joe Selvaggi: Okay. All right. So we’re going to be talking about some familiar topics. Certainly Bill, you and I have talked about drug prices, how we got here, what can be done, what the dynamic is before we as consumers ultimately buy and pay for that drug.

[00:02:38] but today we’re also going to talk about a phenomenon that happened just this past January 1, 2024, where a popular drug, in this case it was Flovent, the drug manufacturer actually reduced its price, and it fell off what’s called the formulary, meaning I can’t go out and my insurance company may not cover this anymore.

[00:02:56] I speak from experience. I’m sure there’s a lot of other drugs out there but let me give the listeners a little bit of background. I’m asthmatic, and I discovered albuterol and Flovent, and this was maybe 20 years ago, and I’ve run 13 marathons. Running is my drug, and if it weren’t for these drugs, on a cold day like this, I wouldn’t be able to walk down the street without developing a painful hacking cough.

[00:03:17] So this is near and dear to my own heart, which is a kind of an unusual step, but let’s talk about it. For instance, let’s use Flovent as our example. but before we do, before we figure out why Flovent isn’t any longer covered by my insurance company, Bill, explain to our listeners, where do drugs come from and how do we ultimately buy them in the drug store?

[00:03:36] Bill Smith: Where do they come from? They come from 1000 ideas. there are 1000 thousands and thousands of researchers, both in academia and in industry, that have ideas about different compounds and how it might affect a certain disease state. And they pursue 90 percent of those.

[00:03:54] Projects fail, but 10 percent succeed. and, that’s a good thing that they do. and pricing them is an art, not a science. It’s, a lot of it, it’s not just based on the R and D costs. As some people think it’s based on what market. forces you’re entering. What is their competition?

[00:04:11] Is the competition better than your own product? Is there generic competition? There’s a whole host of factors that companies have to consider when they set prices.

[00:04:21] Joe Selvaggi: And you and I have talked about the fact that whereas we all agree, healthcare prices are high and continue to go up. the cost of drugs really over time as good as those drugs are seem to over time.

[00:04:31] not really represent a larger percentage of our health healthcare costs meaning Though they do cost a lot when they’re new they fall off. into what’s called generic where whereby they’re no longer extremely expensive Robert, why don’t you share with us? Why is it that drug costs haven’t really escalated over time the way sort of the popular myth portrays it?

[00:04:51] Robert Popovian: It is a popular myth, and the reason that drug prices have stayed stable on average is because, as you mentioned, Joe, these medicines come out, they’re brand medicines, for a finite number of years.

[00:05:04] brand companies have an ability to price these medicines as they wish. After they lose their patents, these drugs become what they, typically generics or biosimilars. And with the introduction of biosimilars and generics, the prices started to plummet. So, what I always tell people is that the value of the medicine never goes away.

[00:05:25] the flow that you were, you’re used for your asthma, the value will continue in perpetuity, but the price will fluctuate. The price will be high for several years in the beginning, but then it will plummet after it goes generic. And that’s what we have seen. And this is why, on average, prices of medicines have not gone up significantly over the last.

[00:05:46] Okay. And that’s because we have more and more generics that come into the market as brand name products lose patents.

[00:05:53] Joe Selvaggi: Okay, that’s a good answer. We have why they cost money and why they over time cost less money. But unlike many of the products we’re used to buying, let’s say a gallon of milk, we have a manufacturer and a distributor, maybe the grocery store, and we buy that gallon of milk.

[00:06:07] But we know with drugs, there’s a different dynamic. There are many intermediaries, but we like to, we’ve covered this on earlier shows. but our insurance company buys it perhaps on our behalf and we do a copay, but they use intermediaries known as PBMs, pharmacy benefit managers explain for our listeners.

[00:06:23] Bill, why don’t you feel this one in basic terms? Who is it? That’s in a sense, buying these drugs are negotiating for these drugs on our behalf.

[00:06:32] Bill Smith: Pharmacy benefit managers, the PBMs are consultants to the health plans that ultimately pay for the drugs, or although the employers ultimately pay for the drugs through the health plans, and the pharmacy benefit managers serve as consultants to negotiate with the numerous drug manufacturers to try to get the most reasonable price for health care, for those products for the health plans and you know that in the abstract sounds fine, but there are many perverse incentives that we can talk about and Robert’s expert on this at how PBM’s actually increase the costs for both health plans employers and patients themselves.

[00:07:09] Joe Selvaggi: That’s a good tip. Robert, how is it that an organization, a PBM, that their express purpose for being there is to make sure my drugs are as cheap as they can be.

[00:07:19] They’ve got the knowledge; they’ve got the market power. They, in a sense, put it to those big, bad drug companies and say, give us the best price. How is it that they might be distorting the price that I ultimately see?

[00:07:29] Robert Popovian: because the way that the PBMs work though, is that they arbitrage the price of the medicine.

[00:07:35] So they buy the medicine at a certain price, but that’s not necessarily the price that the employers or the patient ends up paying at the drug store, at the pharmacy counter. So, what happens is that they have contracts with these manufacturers. for example, if the drug is, for sale for a hundred dollars.

[00:07:53] They end up negotiating the price down to a 50, but the price that ends up being paid by the patient at the pharmacy counter or by the employer generally ends up being 100 still. What they do is that they make money off of the margins and these margins have grown over time where they used to be maybe 5 or 10 percent now over 50 percent of a value or price of a medicine, a brand name medicine ends up in the hands of the PBMs.

[00:08:23] And because of lack of accountability and lack of transparency, we have no idea what they do with these. Negotiated prices, whether or not they keep. All of the 52, 3%, or they pass a certain percentage back to the employer or the federal government. Nobody knows that even the federal government doesn’t know exactly what the amount is.

[00:08:43] And that’s because it’s a very convoluted system that they’ve created. And 1 thing to also mention that Bill said there used to be independent. And as consultants now, because they are being either acquired or have been acquired by insurance companies, it’s become even more money. The waters have become even more money because now they can even hide more money in the supply chain where in the past.

[00:09:06] The insurers, where they were separate from the PBMs, were sort of a gatekeeper, and, but that no longer exists in the marketplace.

[00:09:14] Joe Selvaggi: Yes, Bill and I have talked about PBMs in that they, their revenue, rivals or even exceeds that of the drug companies themselves. In other words, as intermediaries, they make more money than the people actually producing the drugs.

[00:09:25] again, I’m going to put my economist hat on here and say there’s some real flaws with the model of a PBM, which is, as you say, they get paid by the discount they negotiate, right? So, the more that drug costs, the larger the discount. Explain, I’ll throw that one to you, Bill. Am I right? Or is it a weird sort of, codependency whereby the more the drug company charges, the more attractive they become to the PBM because they’ve got more room to negotiate?

[00:09:51] Okay.

[00:09:52] Bill Smith: Yeah. So, you know, let’s have a simple analogy. Suppose you go in and get a generic drug and you pay 10 for it. the PBM doesn’t make very much money on that prescription. but they say there’s an equivalent branded drug that costs 200 and the PBM gets 100 rebates on that drug. They’d much prefer the patient to be on the rebated drug than they would on the 10 generics.

[00:10:17] And that’s the perverse nature of the PBM system. They sometimes favor much more expensive drugs. It doesn’t help their clients, it doesn’t help their health plans, it doesn’t help their employers, and it doesn’t help patients. They should be steering patients to the lowest possible cost drug, and they have a disincentive to do that, because they make so much money from rebates.

[00:10:37] Joe Selvaggi: So I want to tie some of the ideas we’ve had so far, because I’m sure our listeners are, maybe their eyes are glazing over, they’ve heard all this alphabet stuff, PBM and all that, but All they know is, look, we all agree we want drugs, Robert explained the reason drugs have remained relatively, a fairly stable portion of our health care bill, they not, they have not gone substantially up is because of this move towards generic.

[00:10:58] But Bill, you just explained that if they go generic, they become less attractive to the PBMs because there’s less money to be made are you saying that effectively the fact that we pay so much in drugs is not quote unquote greedy pharmacies But rather PBMs preferring and I don’t know if we’ve made this clear But I think we should the PPM doesn’t just negotiate it tells us what drugs we can buy so it may not allow us To buy that cheaper generic.

[00:11:23] It may insist that we buy the more expensive branded drug is do I have that right Robert or am I exaggerating?

[00:11:29] Robert Popovian: No, you’re not exaggerating and that’s what the problem is the formularies that you refer to which is a list of medicines that are covered by the pharmacy benefit management companies Formulars started as a way to promote less expensive medicines over more expensive medicine.

[00:11:43] So What they’ve turned out to be are now rebate or profit maximizing machines. And the best example is what you refer to, the Flovent issue, which was covered by the Wall Street Journal article this last week. Flovent, brand name drug, it’s been around for a long time. The manufacturer, GlaxoSmithKline, decided to withdraw the product from the market and instead introduce an authorized generic.

[00:12:09] That means it’s a product that Glaxo actually makes. But it’s a generic version of it at about 35 percent discount the pharmacy benefit management company at that point decided that they no longer are going to cover the generic and they took the generic off the formulary and the reason they gave is that the net price.

[00:12:30] Or Flovent is higher. The generic is higher than the net price. They were negotiating for the brand name. The question is the net price to whom the net price to the PBM may have been a little bit higher. But remember, Joe, you, me, Bill, everybody pretty much in the marketplace today within our insurance design, we have what it’s called a deductible or a coinsurance.

[00:12:55] A deductible is when you have to meet a certain number of dollars before your insurance kicks in. And a coinsurance is a percentage that you have to pay of the price of the medicine. So, for somebody who is a patient, the generic version is far less expensive, about 35 percent less expensive. Because remember, I have a deductible and coinsurance.

[00:13:16] So when I walk into the pharmacy, I’m going to pay less if I have a deductible or a coinsurance on the generic version of the Flowback. And that’s been the incentive driven, rebate incentive driven problem that, again, what you alluded to, there’s an incentive in the marketplace for them to cover more expensive drugs with higher rebates and higher fees and everything else that goes along with it.

[00:13:39] Latin land, lower expense of medicines. And Flovent is just one example. We did a study with which I was a co-author at the Global Healthy Living Foundation. We looked at the Express Scripts formulary, which is the second largest PBM. And for two years in a row, the number of times that a generic was excluded in front, in favor of a brand-new drug grew.

[00:14:02] And it’s now on the formulary that Express Scripts have. There were about, I think, 15 cases this last year. Where generic, the actual generic was removed, and the brand name was covered. So, it tells you all the bad incentives that ultimately help the bottom line and the profitability of PBMs to the detriment of a patient who has to pay a coinsurance or a deductible at the pharmacy count.

[00:14:26] Joe Selvaggi: So, profits aside, again, I hate to keep introducing my own personal concern is there’s two products. The same product is either generic or branded, Flovent or it’s generic, made by the same company. Right now, it says January 1. I can’t get either. So I have to find a different drug, than the one that’s been working for me for 20 years.

[00:14:45] the PBM has not just said, I want my cut, I want my money. They’re saying, you can’t have your drug as, how is that possible? Where did that go?

[00:14:54] Robert Popovian: And that’s the problem right now. You’ve caused not only for you as a patient, you have to look for a new medicine that works for you. So guess what you have to do.

[00:15:04] You have to go visit your physician. The physician has to now re-diagnose you and prescribe something new for you as an asthmatic. What ends up happening is that drug may or may not work for you. You have to try it out, you may have some side effects, or it may not work for you, it may not be as efficacious, you have to go back again and get adjusted on the dosing or get another drug.

[00:15:27] what it’s doing is to add the bottom line of the PBMs to profitability. It’s increasing costs for the patient, because now you have to go to the physician and pay coinsurance or copayment or even pay cash. It increases costs for the health care system, but the only entity that’s really saving money.

[00:15:48] And making the money is the PBM And so it creates a lot of problems in the marketplace when these products are removed indiscriminately From the formularies and patients are left to fend for themselves.

[00:16:00] Joe Selvaggi: So, I want to get a little more technical and I want to understand why it was on January 1 I you know, I don’t know if this is too technical.

[00:16:07] But let’s go there, you know all these perverse incentives existed On December 31, but now again, I’m beating the drum because I can’t get the drug that I, I need my running. If I don’t get out there and run, I’m a monster. So, if I can’t cure my asthma or treat my asthma, I’m in trouble. So why did this happen January 1 specifically?

[00:16:31] Robert Popovian: It’s a simple explanation. Plan year. Plan year starts January 1. So even though we enroll for Health insurance, generally in October, November, every year, the plan year actually starts January 1st, so all the formulary shifts and all the physician coverages and hospital coverages, everything starts anew on January 1st, and that’s what happened.

[00:16:53] Bill Smith: Yeah, and it also has to do with the Medicaid rebate.

[00:16:57] Joe Selvaggi: Which is more about that because I think, yes, it does reset on January 1, but I’ve heard a lot about this rebate cap, but that there was legislation, albeit maybe well meaning, but that cap goes away. Explain that bill. What? Why is that?

[00:17:10] Bill Smith: So, Medicaid requires at least a 23 percent rebate, but it also has what’s called an inflation rebate.

[00:17:19] So if a drug company raises a price of a drug above. The inflation rate, they have to rebate back that money. Products like Flovent who have been on the market for a long time can reach 100 percent rebate. Because year after year, they’ve taken price increases and suddenly they’re maxed out.

[00:17:39] So they’re essentially free to the Medicaid program. It used to be that it was capped at a hundred percent once you reached a hundred percent of rebates. That’s it. The pharma company didn’t have to pay Medicaid. The Biden administration got rid of that cap. And basically, now If you go over if your med your inflation rebates for your particular product go over a hundred percent because the park is the product’s been on the market for 20 years You have to pay Medicaid for every prescription that is written for your own product.

[00:18:12] That’s the reason Flovent was taken off the market. Glaxo didn’t want to pay for every prescription that was written for their brand Flovent product. So, they basically said, we’re taking this off, we’re reducing the price on our generic, so we won’t have to pay for every prescription. Instead, patients and Medicaid will actually pay for the prescription.

[00:18:32] Joe Selvaggi: Robert, do you want to add anything to that?

[00:18:34] Robert Popovian: No, I think Bill explained it really well. It was a cap on the average manufacturer price. An average manufacturer price when that cap was removed. Technically, the easiest way to say is that manufacturers had to pay Medicaid to cover their own medicines. So, every time they got a prescription in Medicaid, Glaxo would actually have to pay.

[00:18:52] in my opinion, and this is a little bit different, I think that even though it was the Biden administration that did the rule, this was not something that the Biden administration came up with, Alex Azar, the previous, HHS, secretary and the Trump administration actually had proposed it. And as an economist, I think it’s one of the ways to force the market to correct itself.

[00:19:18] Because what it did is that it forced Glaxo to reduce the price of its medicine. And again, I have to go back. This benefits patients because at the end of the day, A Flovent brand name drug, if it’s 100 and you show up to the pharmacy and you have deductible, you’re paying 100 or if you have coinsurance, you’re paying 20 percent of that 100 versus now that price is 65, 35 percent less.

[00:19:42] So if you show up to the pharmacy and get the generic version of the Flovent, which is the same exact drug, you’re paying 65 or 20 percent of that 65. So, this is a good thing for the patient. Unfortunately, it’s a bad thing for the profitability of the PBMs. And it was made inevitable by the rule that was administered.

[00:20:04] And it’s forcing the issue that the pharma companies are saying, you know what? I’m just going to roll back the prices instead of having to pay Medicaid. And at the end of the day, that’s not a bad thing for patients.

[00:20:17] Joe Selvaggi: And yet, okay, so we’re trying to reconcile, square the circle. You think it’s a favorable rule change that maybe we’re stumbling in the transitional period, but nevertheless, my Flovent isn’t available.

[00:20:27] And you, we’ve touched on the fact it’s not just my Flovent. I was reading about, many of the diabetes drugs. These, again, these are not optional. These people absolutely need these things. How is it that a rule that was perhaps well intentioned to give an incentive to reduce prices will lead to the drug that is demonstrably effective, leaving the formulary. Again, I’m asking this genuine question, not as a rhetorical.

[00:20:51] Robert Popovian: No. I think it’s a fair question. And the reason being is because we have a broken market in pharmaceuticals where we have rebate contracting driving what’s available for patients.

[00:21:04] If rebate contracting did not exist, right? Think about it. What would be the incentive? For at this point, for PBM to cover the brand name versus generic, if they would be even happier if Flovent went to generic and it was 35 percent cheaper, that would automatically cover it. But because of rebate contracting, because they’re so dependent on their profitability due to this rebate contracting, it creates misaligned incentives such as this one.

[00:21:32] And the one that you just mentioned, also with the diabetes drugs, that has been happening for several years. And it’s not just the diabetes drugs, it’s the hepatitis C drugs, too. Manufacturer comes out with a brand name. Same manufacturer comes out with a generic. The generic is excluded from the formulary and only the brand name is covered.

[00:21:50] In your case, the Flovent. Branding was completely excluded. All the drugs were excluded from the formula. But this is the bad incentives that rebate contracting creates. And until we get rid of rebate contracting as an incentive, we will always have this misaligned situations where less expensive drugs are sacrificed or to favor more expensive medicines.

[00:22:12] Bill Smith: Joe, I hate to be simplistic, but. Formularies now are assembled like a rug bazaar. It’s all opaque, no one knows what’s going on, and it’s all about money. And, you may be frustrated you can’t get the rug you want, but you got to understand, if you’re not, if the price is not high enough for that rug, it’s not going to be available. And PBM’s view. Formularies, they want to maximize revenue.

[00:22:37] Joe Selvaggi: So, if, let me imagine a brave new world in which PBMs don’t exist. And we have, everybody’s in my mind in that universe, insurance companies want to pay as little as possible for drugs. And so, they should, can negotiate with pharmacies, because why do they want to pay less? They want to have. Lower premiums and attract new customers, or frankly, if they don’t want lower premiums, they want to pocket the money, it’s better for shareholders. But you know that those are healthy. Those are normal incentives that intermediaries have. the grocery store wants, but Walmart wants the best price for its products so they can deliver the best price to its customers. Why can’t insurance companies just do the same thing?

[00:23:11] Robert Popovian: They can, but they don’t want to because it’s more profitable. If you look at the insurance companies in general, now that they own PBMs, for example, which is the largest insurer in this country and has the largest, third largest PBM, which is, I’m sorry, United is the largest insurer.

[00:23:30] Optum is the third largest PBM. Optum makes more profit for United Healthcare as an entity within United than any of their other divisions. So pharmaceutical contracting and rebate contracting is a very lucrative business model. Now, do we have a model in this country that Insure doesn’t use rebate contracting and your Flovent, now a generic version of the Flovent, will be available in the formulary?

[00:23:58] Yes, it’s the largest insurer in our most populous state in the United States, it’s in California. The largest insurer in California is Kaiser Permanente. Kaiser Permanente uses no incentives, no rebate contracting, they just do net price contracting, they go with the lowest price. And guess what? I’ll put money on it, that Flovent is still covered within the Kaiser formulary because they do not have that rebate contract in the center built in.

[00:24:28] Joe Selvaggi: Yeah. All right. again, I don’t like to just complain. I say, we’re a think tank, but we think a think and do tank. So, let’s shift our conversation because we’ve identified a huge problem. You even identified a place. Where it isn’t a huge problem. What would a consumer, I’m going to count myself among those potential consumers, and ultimately, legislators, people who really, see no one winning, but it’d be PBM, employees.

[00:24:49] What could we do to make this better? It seems an epic problem that’s not well understood.

[00:24:55] Robert Popovian: I think starting, and Bill can add to this, starting point is the, get rid of rebate contracting, but that’s going to be very difficult because that’s been built into the model for a long time.

[00:25:06] I think what people are saying now is that, okay, if you’re not going to get rid of rebate contracting, then as a consumer, as a patient, I should benefit from that negotiated price when I show up to the pharmacy counter. Joe, when you show up at the pharmacy counter. You should benefit and pay based on that negotiated price that’s been done on your behalf instead of the inflated retail price in every other segment of the health care system, whether it’s your dental care, your optometrist, your physician care, your hospital care, when you show up to pay for your services, you’re paying based on a negotiated price that’s been done on your behalf.

[00:25:43] Except for pharmaceuticals, where the PBMs have bamboozled the entire business community, including legislators, to think that the only way you can contract is through this rebate, convoluted rebate contracting, and Patients should not benefit from it directly.

[00:26:01] Bill Smith: Joe, you can envision a world where PBMs were not necessary. Suppose a health plan wanted to get rid of the rebate contracting system. They just wanted the lowest price. They open up bidding in every therapeutic area. for psoriatic arthritis, they say, Okay, manufacturers, submit your bids. For your drugs, and those bids get submitted, no rebates involved, just here’s what our price is going to be, and a drug comes in at the lowest price, and it’s not the greatest drug, it’s a good drug, but it’s not the greatest drug, so the health plan could decide, okay, the three lowest bidders, we’re going to put those drugs on formulary, and we’re going to make the prices available, those low bid prices, we’re going to make them available to the patients at the pharmacy counter, no rebates involved, just The lowest prices they can get based on bids that manufacturers submit that’s an that’s the way the Chinese do it.

[00:26:55] If you can believe that they do it in their national health care system, open up therapeutic areas, ask for low bids and then construct the formulary based on the bids that come in. And you don’t necessarily just put the lowest bid on the formulary as the only preferred drug. You might put a handful of them that come in at low prices.

[00:27:14] Robert Popovian: And that’s exactly, by the way, Joe, that’s exactly how Kaiser does it. They don’t have one product on the formulary, they have several products in the class, but they allow, they just do it based on net pricing. And say that’s net price, I’m paying as Kaiser, you as the patient is going to be paying for it.

[00:27:32] Joe Selvaggi:  What? So let me just ask what might seem like an obvious question. We all here believe in markets or market dynamics, I hope, and we say, okay, look, I have a need and we’re dealing in a world with the Internet and sort of the disintermediation of everything, right? Which is we almost directly communicate with providers, with producers.

[00:27:53] Why isn’t that? I can’t go get on Amazon and get Flovent provided I have well documented, prescription and, I like the generic, why can’t I just get my drug on Amazon?

[00:28:06] Robert Popovian: You can, and it’s not just Amazon. You can go get it at Costco and you can get it at the Mark Cuban’s pharmacy, and you can pay cash for it.

[00:28:15] Unfortunately, you, insurance companies are not. Paying for those things. And the reason that these pharmacies exist, these cash pharmacies, whether it’s Amazon, whether it’s Cuban’s Pharmacy, whether it’s Costco, is because they fill a void. We haven’t even talked about this other issue, which is a lot of times, about 70%, about 25 percent of the time, not 70%, 25 percent of the time, when you and I are purchasing a generic medicine, a typical generic, we’re overpaying by using our insurance card.

[00:28:48] As a consumer, we’re paying more out of pocket than if not, if we would have walked down the street to Costco and paid for it in cash. And that’s where I’m, that’s where the market is moving towards is that patients are looking at it and saying, wait, if I use my insurance card, I’m going to pay 25. If I walk down the street to Costco or call Cuban’s pharmacy, I’m going to pay 20.

[00:29:09] Guess what? I’m going to do that instead. And that’s what we’re moving towards as a society. In consumerism needs to take place in the pharmaceutical marketplace and more consumerism is a good thing.

[00:29:24] Joe Selvaggi: Indeed. Bill, would you like to amplify on, what. Robert, you said?

[00:29:28] Bill Smith: No. No. I think Mark Cuban has hit upon something great. Basically, PBMs were making great money off generic drugs. They could buy a generic prescription for five bucks. It’s, it doesn’t cost anything to manufacture a generic drug so they can buy ’em for five bucks. And then, the patient may have a $15 copay under their health plan. So, they go in and pay $15 for a drug that costs the PBM $5.

[00:29:50] So they’re overpaying. So, Mark Cuban stepped in and said, this is ridiculous. They should be paying. 5 plus maybe 50 cents for me, and that’s the way he has made money. I’m skeptical about how well this model can work in the branded space. I’m just not sure how well it’s going to work. branded drugs are a very different economic model.

[00:30:13] Joe Selvaggi: And of course, when we talk about expenses to insurance companies, nobody’s hoping that insurance companies are profitable. And of course, all of our premiums are comprised of all the money that our insurance company pays on our behalf. collectively, if insurance companies are paying too much.

[00:30:29] Or we’re paying too much to them. It’s costing us more in health care. If our goal is to help reduce or create the market dynamics that make health care less costly, going around our insurance companies is, makes sense. One thing, again, we’re getting close to the end of our time together when we do go off, in on our own Rx or whatever Mark Cuban’s, new enterprises called none of that money we spend is applied towards our deductible or that It’s innocence. Our insurance company doesn’t know it’s there. So, we may save money on that prescription, but ultimately, if it doesn’t help us get to our deductible, ultimately, at the end of the year, we may actually spend more because we spent less because it didn’t get applied to our deductible.

[00:31:10] Right.

[00:31:11] Robert Popovian: You’re right, but it does work for patients who are multiple generic drugs that are going to pay a lot more and they never are going to be on a brand name drug, really, that’s going to hit that deductible. it depends on the patient, but at the end of the day, Whether it’s Costco or, Amazon or Mark Cuban’s pharmacy or row.

[00:31:30] com, there’s a lot of these cash-based pharmacies. The reason that they exist is because there’s a consumer marketplace that figured out, they’re overpaying by using their insurance card. And they’ve done the math. We all do math, right? It’s just doing your budget and you figure out that if I’m paying 25 for a copay instead I can pay 5 for this generic, for example, I’m saving so much more money and even if it applies to my deductible because most of us have deductibles in the thousands, we’re not going to never going to reach the deductible anyways, right throughout the year for especially for people who have chronic diseases on multiple generic medicines.

[00:32:09] Now, if you’re on a brand name is and I agree with Bill, I don’t know how well this will work in the brand marketplace. but in that case, that’s insurance, but. Joe, this is not a bad thing. I think what we’re doing now by forcing these issues is going back to what insurance is meant to be.

[00:32:26] Insurance is meant to be for the purposes of covering expensive, traumatic type of events. Just like we buy homeowner’s insurance, or we buy car insurance. Healthcare insurance has evolved into being the opposite covering everything that’s not supposed to be covering and when it gets to expensive medicines like brand name medicines and things like that doesn’t want to cover it because it’s too much.

[00:32:52] So we’re doing the reverse almost in health care, what we have done in the insurance marketplace and other.

[00:33:02] Bill Smith: Yeah. And Joe, you’re always looking for legislative ideas. So what about those requiring that those cash purchases of generic drugs through Mark Cuban’s pharmacy be counted towards your deductible or out of pocket costs? It’s a healthcare expense.

[00:33:18] Joe Selvaggi: Yeah. And right. It should. And of course, now, again, what we are always trying to do as lovers of markets is align incentives. If the individual has an incentive. positive incentive to go direct and cash, and it helps them. and there’s no longer a negative incentive that they must go through the insurance company.

[00:33:38] it gives, as Robert was saying, it gives incentives for, drug manufacturers to keep their prices lower and move, when they get to a generic, produce a useful generic. and we’re back into reality, right? I want to echo, I agree with you, Robert, that our idea of health insurance is so bizarre and so distorted.

[00:33:55] I use the analogy of if, as you mentioned, our car insurance, imagine if our car insurance. paid for our new tires, our windshield wiper blades or our gas, it would be absurd. we have car insurance for God forbid we slip on the ice and smash into a tree. This happens, maybe once in a lifetime and the insurance is there when we need it.

[00:34:15] Our health insurance has become some sort of a payment program or, collective, payment.

[00:34:21] Bill Smith: Yeah, let’s cover every preventative possible, medicine or, it’s, they’ve loaded it up to cover everything.

[00:34:28] Joe Selvaggi: Yeah. And ironically, the people who really need it. We accept that there are people with some rare diseases that are profoundly costly, but because we’ve loaded it up with all this nonsense, those people are the ones that are not served by. Classic insurance. They, that’s when the insurance company says, sorry, can’t cover you. I’m too busy covering, Flovent.

[00:34:48] Robert Popovian: Exactly. And that’s the problem. And you just put the word rare diseases. that’s the thing we want insurance to cover rare events and expensive events, right? You want an insurance to cover you, when you’re having a cardiovascular event and you need a cabbage, for example. You don’t want your insurance to be covering your aspirin.

[00:35:08] that’s what it’s doing covering the aspirin, not necessarily the cabin or not fully, not well enough. And it’s exposing patients to significant out of pocket costs. But now what we’re finding out. With humans’ pharmacy and everything else and that even though they’re covering the aspirin they’re overcharging for the aspirin now It’s both sides. They’re making money off of the patient.

[00:35:32] Joe Selvaggi: So this is a couple you mentioned it was good Yeah, we’re getting at the end of our time together So I want to give our audience some place to go and continue to read about this because they’re probably you know Almost incredulous they you know, it’s hard to believe this is going on You mentioned the Wall Street Journal article, of course, I read that in a couple other Pieces they’ve done throughout the year.

[00:35:50] Who’s studying this and where can our listeners go to learn more about, what’s going on with the dynamics and, what they might do to mitigate the, the harm to if they need some of these drugs.

[00:36:00] Robert Popovian: I would say Pioneer Institute, since we’re doing most of the work in this space, I don’t want to pat ourselves on the back, but Bill started it.

[00:36:07] And, since I’ve come on, we’ve done a ton of work in this space, and we’ve tried to expose a lot of these perverse incentives in the market. And we what we try to do is do it individually. We’re not trying to do a holistic look at the entire system. We’re saying, look, this is a problem. This is the solution for this problem.

[00:36:24] For example, 340 be pricing or we’re looking at accumulators and maximizers. So, I would say. By far, Pioneer Institute has done more work in this space in the last 24 to 36 months since Bill came on board.

[00:36:38] Bill Smith: And Robert’s done some great stuff with the Global Healthy Living Foundation, which is a kind of patient advocacy group, which he’s affiliated with, so I’d point to some of his studies, too.

[00:36:49] Joe Selvaggi: Wonderful, good. I want to get our, our plug, our self-congratulatory plugs in the ad at the end. I appreciate it. This has been an exciting topic for me only because it touched his home, and it’s, it’s fun to, dive into something, as personal as this. So, thank you both for joining me on Hubwonk today. Thank you, Robert. And thank you, Bill. You’re always great.

[00:37:06] Bill Smith: Sure, Joe, we’ll try to talk to our friends at GSK and see if we can find Flovent for you.

[00:37:13] Robert Popovian: As a pharmacist, I hope you do get your Flovent, and you just keep running.

[00:37:17] Joe Selvaggi: Yeah, I, good. Yeah, I say if running were as a drug, I think it would be the best, most prescribed ever, let me pitch for that drug as well. Thanks guys. Thanks for joining me.

This has been another episode of Hubwonk. If you enjoyed today’s episode, there are several ways to support Hubwonk and Pioneer Institute. It would be easier for you and better for us if you subscribe to Hubwonk on your iTunes Podcatcher.

[00:37:40] It would help make it easier for others to find Hubwonk if you offer a five-star rating or a favorable review. Of course, we’re grateful for any word-of-mouth recommendations. If you have ideas or comments or suggestions for me about future episode topics, you’re welcome to email me at Hubwonk@pioneerinstitute.org. Please join me next week for a new episode of Hubwonk.

Joe Selvaggi talks with Drs. Bill Smith and Robert Popovian about how the complex system of rebates from drug companies to insurance firms serve to increase costs and reduce access for patients.


Dr. William S. Smith is Senior Fellow & Director of Pioneer Life Sciences Initiative. Dr. Smith has 25 years of experience in government and in corporate roles. His career includes senior staff positions for the Republican House leadership on Capitol Hill, the White House Office of National Drug Control Policy, and the Massachusetts Governor’s office where he served under Governors Weld and Cellucci. He spent ten years at Pfizer Inc as Vice President of Public Affairs and Policy where he was responsible for Pfizer’s corporate strategies for the U.S. policy environment. He later served as a consultant to major pharmaceutical, biotechnology and medical device companies. Dr. Smith earned his PhD in political science with distinction at The Catholic University of America.

Dr. Robert Popovian is Senior Visiting Health Policy Fellow at Pioneer Institute. Dr. Popovian is the Founder of the strategic consulting firm Conquest Advisors. He previously served as Vice President, U.S. Government Relations at Pfizer. One of the country’s foremost experts on every significant facet of biopharmaceuticals and the healthcare industry, he is also a recognized authority on health economics, policy, government relations, medical affairs, and strategic planning.

Dr. Popovian has published extensively on the impact of biopharmaceuticals and health policies on costs and clinical outcomes in the most prominent medical sources and media publications, including the Clinical Economics and Outcomes Research, The Oncologist, Journal of Vaccines and Vaccinations, Health Science Journal, USA Today, Managed Healthcare Executive and Morning Consult. He is also a sought-after speaker and has been invited to provide detailed presentations, briefings, and expert reviews for the U.S. Congress, dozens of state legislatures, and at conferences and medical symposiums throughout the country and around the world.

He is one of the select few researchers to study and publish both clinical and policy-related economic analysis as well as empirical data regarding emerging payment models in the U.S. healthcare system and for biopharmaceutical reimbursement. His insight and analysis also led to one of the first inclusions of health outcomes data regarding a biopharmaceutical labeled indication.

Dr. Popovian was recently appointed as the Chief Science Policy Officer for Global Healthy Living Foundation. He also serves on the Board of Councilors of the University of Southern California School of Pharmacy, Senior Health Policy Fellow at Progressive Policy Institute, and Board of Advisors for Equideum Health. Robert completed his Doctorate in Pharmacy and Master of Science in Pharmaceutical Economics and Policy degrees at the University of Southern California with honors.  He has also completed a residency in Pharmacy Practice/Adult Internal Medicine and Infectious Diseases at the Los Angeles County-USC Hospital and a fellowship in Pharmaceutical Economics and Policy at USC.