Although many participants in the healthcare supply chain like to shroud drug transactions in a cloak of complexity and regulation, drugs are just ‘packaged technology’ and could be transacted much like other technology-based products, albeit regulated ones. As those in the Rx supply chain know, drug transactions have been carefully engineered to be anything but simple.
There is a lot of scuttlebutt about retail powerhouse Amazon bringing its proven brand of simplicity to the drug markets. We at VIVIO Health applaud this effort and hope it becomes successful as the result will be significant progress toward a market-driven industry, a much-needed first for healthcare consumers. Unfortunately, Amazon, even with its storied history of disrupting archaic industries must overcome four key structural roadblocks.
It’s easy to see the Amazon experience starting with consumers who are buying generic prescriptions either without insurance, when the price is lower than their copay, or as purchases counting toward plan deductibles. Beyond this point, Amazon’s path gets significantly bumpier. After satisfying deductible requirements, many consumers only pay 10-20% of the purchase price as coinsurance cost while the plan pays the rest. Amazon knows many people’s post-deductible out-of-pocket costs, especially on higher cost generic and branded drugs, will be significantly lower when using their plan rather than the Amazon platform. This is the first structural challenge they need to overcome.
To overcome this obstacle, Amazon will need to be designated as ‘in network’ by the major pharmaceutical benefit managers (PBMs) which is the second structural challenge. Without this designation, Amazon won’t be reimbursed as a supplier since these benefit managers control who gets reimbursed and who doesn’t. All major PBMs have their own mail order operations and as a result prevent other suppliers to ship via mail by removing them from their network. Amazon has a few options here. They could develop partnerships with independent pharmacies, but this introduces one-by-one negotiation, supply chain and regulatory complexity. A turnkey but expensive solution to immediately achieve scale would be for Amazon to buy a large PBM. If Bezos and team aren’t willing to do either, then an indirect but still viable path would be to convince large employers and employer purchasing groups to mandate in network status for Amazon and disallow any surcharges.
Third, today’s drug transaction model requires prescriptions (‘scripts’) to be delivered electronically to pharmacies. While on the surface that sounds like it would make the process easier, like most things healthcare-related, it too is controlled by a little known company that dominates the majority of script transactions in America. Coincidently, this company is owned and controlled by PBMs and legacy pharmacy chains. It along with large electronic medical record (EMR) vendors have implemented prescription workflows in a manner that has effectively removed even the few consumer choices that existed when we had paper scripts. Default choices on EMR systems dictate where scripts go preventing most consumers from choosing pharmacies based on typical preferences like price and convenience. Worse, state pharmacy boards have been the drivers of arcane pharmacy drug transfer laws making e-script movement from one pharmacy to another a manual and arduous process. It really is as if the pharmacy now ‘owns’ a consumer’s scripts. Yes, Amazon has the clout to fight state pharmacy boards and give the script back to the consumer, but this process will be a tough uphill battle. Amazon could of course jumpstart this by evolving and creating technologies that can create a new pathway.
Fourth, Amazon will have to cut through a Gordian knot of perverse supply chain incentives that have made Heather Bresch of Mylan (Epi-Pen) and Martin Shkreli (Daraprim) household names. Mysterious rebates amount to kickbacks of hundreds or even thousands of dollars per script that rarely benefit the consumers, employers and taxpayers who actually pay for healthcare. Killing these nearly invisible rebates would be another nail in the coffin of today’s opaque drug supply chain while opening the door to competitors like Amazon to create efficient markets for high cost drugs. Brand rebates, will likely force Amazon to follow the easier path of selling generics that comprise 90% of all scripts, but only about 20% of dollar volume. Cracking the remaining 80% of spend will require directly negotiated agreements with pharmaceutical manufacturers or better yet development of new processes that allow open market competition for brand drugs.
While there have been recent announcements of innovation in this space, it’s reasonable to question whether these new solutions are really wolves in sheep’s clothing. For example, there is a new low cost offering from a partnership between an online discounter and a PBM. Great, right? Unfortunately, the fine print in this program disallows employer-sponsored plans from reimbursing cost conscious consumers for purchasing the drug for less than what the plan normally pays for the same drug, effectively squashing adoption of this program for the majority of Americans. Why would these two well-known companies construct their service in this way? It’s pretty simple: lowering initial costs helps drive brand drug use before the consumer deductible is met, while continued purchases through the consumer’s plan are subsidized by employers paying highly inflated prices. This ingenious scheme has the same net result as copay cards; namely, making American consumers unbelievably price insensitive to the actual cost of the drug.
Realistically, history shows just how difficult it is to crack the Rx code. Two examples are worth mentioning. First, one of the world’s largest companies tried to disrupt the drug industry a decade ago when they offered a revolutionary generic drug pricing program. Fast-forward to today and you’ll find this company has single digit market share, certainly better than nothing, but still a rounding error compared to the incumbent legacy players. A second example showcases just how much control PBMs wield even on large established incumbents. A few years ago, when a contract between a large public pharmacy chain and one of the major PBMs failed to materialize. Wall Street’s brutal response to the well-regarded retailer was a 33% loss in market cap forcing the retailer to bow to the intermediary’s demands.
The US drug industry is playing a brilliant game of cat and mouse against disrupters like Amazon. Over the last five years, margins and revenue have shifted from generics and brand drugs to specialty and even more exotic orphan drugs. In 2003, specialty drugs comprised 1% of all scripts but accounted for what we once thought was an outrageous 11% of total drug spend. Fourteen short years later, specialty drugs still comprise about the same percentage of scripts, but will soon account for 50% of total US drug spend.
I am not privy to boardroom discussions at entrenched supply chain players, but it’s a fair bet they believe themselves to be several steps ahead of Jeff Bezos even in the unlikely event that Amazon captures a majority of scripts written in America. But American consumers desperately need innovators who have the scale and deep pockets to reengineer the drug supply chain along with the strength of character to stand up to a powerful and entrenched industry. Jeff Bezos and Amazon stand as good a chance as any to break some china and crack the Rx industry and that would be a consumer problem worth solving.
PRAMOD JOHN is CEO of ViV!O Health