Part 2: Bypassing Prior Authorizations


A few weeks ago, I saw a young patient who was suffering from an ear infection. It was his fourth visit in eight weeks, as the infection had proven resistant to an escalating series of antibiotics prescribed so far. It was time to bring out a heavier hitter. I prescribed Ciprofloxacin, an antibiotic rarely used in pediatrics, yet effective for some drug-resistant pediatric infections.

The patient was on the state Medicaid insurance and required a so-called prior authorization, or PA, for Ciprofloxacin. Consisting of additional paperwork that physicians are required to fill out before pharmacists can fill prescriptions for certain drugs, PAs boil down to yet another cost-cutting measure implemented by insurers to stand between patients and certain costly drugs.

The PA process usually takes from 48-72 hours, and it’s not infrequent for requests to be denied, even when the physician has demonstrated an undeniable medical need for the drug in question.

I saw my patient with the persistent ear infection on a Thursday afternoon. It would be Monday, at the very earliest, that his Ciprofloxacin prescription could be filled – provided the insurance company granted my PA request.  Because he needed the drug as soon as possible, the patient’s mother and I called the pharmacy to see how much a 100ml bottle of Ciprofloxacin would cost if she were to pay out of pocket. The answer was $135 – an almost unthinkable sum for a single mother of three who was working two jobs to make ends meet.

That’s when my frustration led to a breakthrough.

My grandfather was a general practitioner who prepared medications from the “virtual pharmacy” that lined his office walls in order to send patients home with medically-necessary medications.  Washington State allows physicians to dispense medications directly to patients, just as most general practitioners did well into the 1960s.

As my patient and his mother waited, I contacted Andameds, one of the country’s largest distributor of wholesale generic drugs.  I was told that the same 100 ml bottle of Ciprofloxacin that would have cost $135 at the pharmacy could be purchased directly by me for under $20. It arrived at my office the next day, and I sold it to my patient’s mom at cost, thus bypassing the insurer and the Pharmacy Benefit Manager (PBM) entirely.

Bypassing both the insurer and PBM entirely will soon take on a great deal of significance to physicians and their patients.

The PBMs are essentially middlemen, who go between pharmaceutical companies and insurers, negotiating lower prices for drugs bought in bulk and passing much of those savings on to the insurance company. (They make their money on the margin between what the pharmaceutical companies charge for the drugs and the slightly up-charged price PBM’s charge the insurance companies.)  According to recent disclosures, CVS and Express Scripts—two of the largest PBM’s in the nation – are passing 95-98% of the rebates they receive from the drug manufacturers on to the insurers.

While it is not clear exactly what insurers are doing with the revenue generated through drug rebates, it is obvious why a merger between CVS and insurance giant, Aetna, might be so lucrative.  If the Department of Justice approves this merger of titans, it will surely pave the way for another, between insurance behemoth Cigna and Express Scripts – which is, along with CVS and OptumRx, one of the Big Three in pharmacy benefit management entities.  After merging into one entity, it is conceivable that Aetna-CVS and Cigna-Express Scripts will control price, access, and distribution of drugs for the majority of the U.S. population.

Purchasing generic medications through Andameds allows me to bypass the insurer and the PBM, and purchase Epi-Pens for $300, compared to the $600 retail price; Amoxicillin suspension for $2 per bottle, compared with $15; and just about any other generic medication for pennies on the dollar.

Darwin said, “It is not the strongest of the species that survive, nor the most intelligent, but the one most responsive to change.”  At the rate we are going, a bottle of Amoxicillin suspension will soon cost more than $1000.  With the pharmaceutical industry poised to become increasingly vertically integrated, this sort of direct distribution of medications by independent physicians, like me, can be an efficient and effective way to get necessary drugs into the hands of patients who need them at prices they can afford.

Niran Al-Agba (@silverdalepeds) is a third-generation primary care physician in solo practice in an underserved area in Washington State.

22 replies »

  1. Well written.

    It is important to find an efficient and effective way to get the necessary drugs into the hands of patients who need them at prices they can afford.

  2. “Then why didn’t she know the cost before my wife went to the pharmacist?”

    And just how in the world would the physician know that?

    It’s quite possible that the previous five patients with this script got it for $100 and didn’t complain to the doctor – there honestly can be this much variance in the price that different insurers have negotiated for the same drug.

    But it’s more fun to blame doctors for everything.

  3. Peter, every insurance company is different in the way they pay so it is impossible for the physician to know what the patient has to pay. At least in some common places, one can’t even get a price without an actual prescription accompanying them when they are using their insurance so they may have trouble price shopping. That is something they should be able to look up before they travel to a pharmacy. IMO this is done to protect the middlemen and others.

    Most physicians I know care deeply about all prices but have no way of knowing what they are.

  4. “I don’t know a single physicians who doesn’t care about cost”

    Then why didn’t she know the cost before my wife went to the pharmacist? Docs don’t care unless the patient complains, why wouldn’t the doc try to save the system money even if the patient didn’t care.

  5. “The insurer notified her of the cost ($2500) for a very small bottle after which she called the doctor who promptly changed the drug for a fraction of the cost.”

    Doesn’t sound like a PA was involved at all. The patient, pharmacist, and doctor worked together – a practice now considered archaic.

    I don’t know a single physicians who doesn’t care about cost, despite your attack. In our office, we’re always glad to substitute a more economic option if there is one.

  6. You are right Barry, I was thinking of two things at different times forgetting the legislation he signed that I had just mentioned above “By signing the Know…”. I was thinking of his executive orders much earlier in time when I was responding. My overall suspicion is that a lot of the price hikes are coming from middlemen something others deny.

  7. This was HHS policy changes, not new legislation so I am not sure any group influenced the changes or how they could effectuate changes on their behalf. I’ll bet there was more talk behind the scenes than you or I know about. In any event, I think it important to place more focus on middlemen and rent seekers.

    I agree with you that more transparency is required but I note gradually Trump is working in that direction. A lot of players have had undue influence on our health care system and as we peel back that which is hidden we will likely find tremendous savings if only by eliminating some of the rent seekers.

    I think you are too involved with trying to control pricing. I think a lot of the pricing controls could be internal between the hospital and all other billing parties working within the hospital and with the insurers for those that have insurance. I exclude pure emergency hospitalization from this consideration.

  8. The middlemen were involved but even they didn’t fight the legislation that Trump just signed. Now if we can pass similar legislation putting an end to the confidentiality agreements between providers, mainly hospitals and large physician groups, and insurers that preclude disclosure of actual contract reimbursement rates, doctors and patients would finally be able to identify the most cost-effective high quality providers in real time and direct more of their business to them.

    While we’re at it, we should end hospitals’ ability to insist on all or none contracting which means insurers must contract with all of the hospitals in their system or none of them and to insist that all of their hospitals be placed in the most favorable copay tier even if they’re the most expensive places to get care in the region and their quality is no better than anyone else’s.

    Finally, we need special rules limiting how much hospitals can charge uninsured and out of network patients for care that must be delivered under emergency conditions when price shopping, is by definition, impossible.

    Virtually all of the per capita cost of healthcare in the last 15 years has been driven by higher prices per service, test, procedure or drug. Utilization per capita has actually been flat to down. Sunshine is the best disinfectant. That’s why we need price transparency.

  9. Bill, I just read this.

    ““Gag clauses” have long prevented pharmacists from telling patients when they could save money on medications by paying out of pocket instead of relying on their insurance. By signing the Know the Lowest Price Act and the Patient Right to Know Drug Prices Act this afternoon, President Trump is putting an end to these gag clauses for patients on either Medicare or private plans.”

    I wonder where those gag clauses come from and which entities are in cahoots. Again I say the middleman must be involved.

  10. Bill, despite what some think, something is going on in-between the manufacturer and the retailer. This is all fine and good with the insurers since the higher the costs of premiums the higher profits can climb. Companies may be sophisticated but they are sophisticated in what they produce not in health care. Many of the most sophisticated and largest companies self-insure. If a brand name drug can cost $45 cash without insurance yet $190 with insurance where the copay is 50% something is amiss. Where is that $135 going? Who is pushing what to who is the question? The intermediaries have to be involved in at least some of the high prices. On some of the newer drugs, the manufacturer is the cause but that is only due to the fact that there is no constraint on spending when people are so highly insured. On the very inexpensive drugs, there isn’t that much profit but there is a concerted push to use more expensive ones.

  11. The typical chain drug store ranges from 12,000 to 15,000 square feet on 1 1/2 acres with a drive-thru area outside the pharmacy department. Front end merchandise generally costs 10%-15% more than it would at a supermarket or big box retailer but the tradeoff is convenience. Customers can park near the store entrance and get in and out quickly rather than park in a huge lot and try to find the one or two items they want in a 150,000 square foot Costco or Walmart Supercenter.

    They tend to be located in neighborhood shopping centers or in a stand-alone location. Hardly anyone is willing to go to a pharmacy in a giant regional mall to fill a prescription when they’re sick. That’s why you don’t see pharmacies in big regional malls. It’s true that big box and supermarket pharmacies generally don’t make money because they don’t need to. The supermarkets and big box stores can usually fill prescriptions while customers do the rest of their shopping. Their customers appreciate the availability of that option.

  12. The retail pharmacy folks derive a large portion of their net income from the “out front” sales. You may have noticed that the retail pharmacy stores are virtually never located in a shopping mall. For Walmart and the grocery store chains, their pharmacies represent a loss leader as a basis to generate “traffic.” Its a sign of the times that many stand alone pharmacy stores also sell alcohol products.

  13. Dr. Palmer, I’ve been an advocate for price transparency since I started commenting on health policy blogs in 2006. When it comes to the cost of medical services, tests, procedures and drugs, it would be most helpful to me as a patient and to my doctors if we could each easily discover actual contract reimbursement rates in real time so we can both identify the most cost-effective high quality providers in real time. For drugs, I can at least discover pharmacy cash prices in real time by downloading the Good Rx app to my phone. There are other similar apps as well. I can’t do that for hospital fees, imaging, labs or physician fees.

    For entities like PBM’s, insurers, drug and device manufacturers, hospitals, etc., we need to be able to perceive that their profits and their returns on capital are fair for the risks they are taking and that they compare reasonably to other unrelated industries. When I buy a car, for example, I don’t need to know how much profit the manufacturer or the dealer make and when I get it repaired, I don’t need to know how much the garage I take it to makes and when I get gas, I don’t need to know how much the gas station makes. But I do want to know what I’m expected to pay before I pay it. That’s what’s missing in most of healthcare.

    Health insurance is not a high margin business. Pretax margins on Medicare Advantage plans, for example, are 5% or so and managed Medicaid plans generate about a 3% margin. Drug wholesalers make about a 3% pretax margin. Drug and device manufacturers make considerably more but they also take much higher risk and they have lots of R&D failures that need to be paid for.

    In the case of PBM’s, I’ll say again that they have four ways to make money. They are (1) administrative fees, (2) the spread between the amount they pay a pharmacy for a drug and the amount they bill their payer client, (3) rebates from drug companies, and (4) profits from filling mail order prescriptions for generic drugs. Their overall profit margins are also in the mid to high single digits. They want to make a certain amount of money from any given client and they don’t care which combination of the four buckets the profit comes from. Some clients want all of the rebate money but are willing to pay higher administrative fees, for example. Others want narrower spread pricing but will give up some of the rebate money. Each contract is a negotiation. You get the picture.

  14. Barry, We learn a lot from you and we appreciate your view.

    But, let us assume that all of these systems in pharma are working fine and are erhical. We still have an obligation to insist that the patients and their caregivers understand what is going on: the world should be able to describe what is going on, where the profits are being taken, who the middle men are, what the rebates are accomplishing. These are input factors of production. We can’t have opacity when this production is our very mortality and morbidity.

  15. I would also note that large self-funded employers and insurance companies are sophisticated clients. They would not hire PBM’s to manage their drug plans if they weren’t convinced that the PBM’s add value by lowering drug prices from what the PBM’s clients could negotiate on their own and provide tiered formularies that steered patients toward less expensive but equally effective drugs within a therapeutic class.

  16. Two points on this. First, generic drugs, on average, are already cheaper in the U.S. than they are in other developed countries because when there are more than three competitors for the great majority of generics, the free market works just fine. Unfortunately, while generics now account for roughly 90% of all prescriptions written, they account for only about 28% of the dollars spent on drugs.

    Big box retailers like Costco and Walmart can and do often price generic drugs below the big retail pharmacy chains because they have lots of other products to sell their customers so they don’t necessarily need to make money on their pharmacy departments. For CVS, Walgreens, Rite Aid, etc., the pharmacy is their core business accounting for 65%-70% of their revenue. The big boxes, by the way, are rarely cheaper than the drug chains on brand name and specialty drugs because the drug companies hold all the market power on those especially when there are no viable generic alternatives.

    Second, current Medicare cannot offer drug companies access to any more lives than the three largest PBM’s already do. Under a single payer Medicare for all system, Medicare could attempt to dictate drug prices like it already dictates prices for Part A and Part B services that providers receive when treating current Medicare beneficiaries. However, if Medicare refuses to pay high enough prices to sustain medical innovation, we are likely to get a lot less innovation. Is that what you and your fellow physicians really want for your patients? I hope not.


  17. I wish docs could help the patient more in negotiating a smoother drug experience. First of all, our physician organizations need to be tough and squawk more to big pharma about prices. Secondly, we should insist that Medicare negotiate prices—use oligopsony—large purchasing—for heavens sakes. Every country in the world does this except us. Third, we should yell at pharmacies to package drugs for the patient so that he has the correct pills on the right time of day right in front of him in a a daily pill sorter or pressed in some foil or something. Someone who is 90 cannot do this. We know this is needed. We shiuld have insisted on this a long time ago.

    The patients need our help and we are the only agents they have, albeit few of us think of ourselves as patient agents and we have not been good at this. If we began standing up for patients and helping them fight the bureaucracy we would feel good about ourselvers.

    Its so simple too. All we have to do is walk with our patients to the billing office or the pharmacy…as a start.

  18. Doctors historically didn’t consider it part of their job to know or care about costs unless the patient brought it up as a significant issue for him or her. I think that’s starting to change, at least somewhat, and it could be helped along a lot if we could get rid of confidentiality agreements between insurers and providers that preclude disclosure of actual contract reimbursement rates. In the case of drugs, it would also be helpful if pharmacists were allowed to inform patients when certain drugs might be available at significantly lower cost without going through their insurance company.

    I get one of my six drugs from Costco because Costco’s full cash price is approximately half of what my copay would be through Optum Rx. The other five drugs are all Tier 1 or Tier 2 on Optum’s formulary which means the copay is zero for a 90 day supply when ordered from their mail order pharmacy. I can’t beat that at Costco or anywhere else.

    Where prior authorization does make sense is with very expensive specialty drugs. When Gilead Sciences first won FDA approval for Hepatitis C drugs Sovaldi and Harvoni and priced them at $84,000 for a 12 week course of treatment, do you really think that all three million patients in the U.S. with Hepatitis C should have been able to get those drugs and have insurance cover them? What do you think that would have done to insurance premiums? As I say over and over, resources are finite. We have to draw the line somewhere.

  19. “PAs boil down to yet another cost-cutting measure implemented by insurers to stand between patients and certain costly drugs.”

    In my wife’s case (and I bet others) this was an important “barrier” to having the insurance company pay for an unnecessary and very expensive drug, in this case for foot fungus. The insurer notified her of the cost ($2500) for a very small bottle after which she called the doctor who promptly changed the drug for a fraction of the cost. The problem is one I see all the time – doctors have zero knowledge of costs and most don’t care.

    “The PA process usually takes from 48-72 hours, and it’s not infrequent for requests to be denied, even when the physician has demonstrated an undeniable medical need for the drug in question.”

    Who denies the the request? Medicaid, druggist, insurer?

  20. “would have cost $135 at the pharmacy could be purchased directly by me for under $20.”

    Niran, That pathway I believe is only open to physicians which demonstrates the type of weird influences government has over the pricing of medication and other things in the healthcare sector.

    I note the same things when I buy meds out of pocket avoiding my insurance carrier. One drug is charged at $180 per month and is not ordinarily approved so my copay is $90. I pay cash and get the identical brand name product for $45 and the insurer pays zero. Another drug also was not approved, though medically necessary. The original price was $300 per month falling to the mid $250’s a few years back. Without insurance, I got the drug from Costco at about $20 per month.

    This can only happen when the government’s interference in the marketplace has run amok. Government is one of the major causes of prices that have gone crazy.

  21. For equitably available, ecologically acceptable, justly efficient and reliably effective healthcare, our nation’s level of corporate codependency appears to have won-out…again. Something about institutional autonomy to act in the best interests of their most important stakeholders: a patient and their family. We live in a time of progressively diminishing expression of Social Responsibility by our nation’s private and public institutions, at all scales.

    Just to emphasize the observation, I recently ran across an amazing analysis of mass shootings (cited below). From 1984 through 1999, there were 86 events. From 2000 through 2015, there were 206. The analysis should be mandatory for anyone concerned about this epidemic. Many new attributes surface.