Who Moved My Prescription? Part IV: The Rise of Cash Pharmacy

Pharmaceutical CommercePharmaceutical Commerce - June 2024
Volume 19
Issue 3

An analysis of the general medicine portion of the pharmacy market amid ensuing challenges.

Bill Roth

Bill Roth

In Part I of this series, I covered what is happening; in Part II, I introduced why it’s happening; and in Part III, I unpacked why this is a hard problem for the pharmacy to solve on their own with pharmacy benefit managers (PBMs) and wholesalers bundling their reimbursement and cost of goods. In this installment, I open the door to what is likely to occur in the general medicine (non-specialty) part of the pharmacy market as a result of these challenges with pharmacy.

I presented at the National Community Pharmacy Association Multiple Locations meeting in March and was asked where I see retail pharmacy going. My answer was simple: it’s highly likely that it returns to what it looked like before the PBMs got involved—to a cash market. The answer received a standing ovation and even an “amen” from the back of the room.

Let me explain as I’m sure 99% of people will think that I’ve lost my marbles. As noted in prior columns, retail pharmacy has reached a breaking point due to sourcing and reimbursement pressures, with a third of community pharmacies poised to close by mid-year and reimbursement rates at all-time lows, pharmacy deserts on the rise, and stories of pharmacies struggling to service what business they have.

I was told directly by community pharmacy leadership to tell our pharma clients that community pharmacy is walking away from brands, and we are moving our pharmacies to cash. Based on the hundreds of discussions I have with all flavors of retail pharmacy, I’m confident this is more than threats and conjecture. We see it play out in our primary research, and our manufacturers finally see it in the data. Pharmacies are actively moving away from brands and in many cases stop supporting 90-day fills and return to 30-day. The losses to pharmacy are simply too intense.

Cash pharmacy is nothing new. We’ve seen this since 2004 when Walmart announced the first $4 generics and see it today with Amazon Pharmacy and Mark Cuban's Cost Plus Drug Company. Pharmacies are selling product at their wholesale cost hoping for a $15 mark-up to cover the cost of operations and their professional services.

What is rapidly becoming new, though, is cash pay for brands. My consulting firm, Blue Fin Group, conducted a project for a manufacturer opening a direct-to-patient pharmacy, similar to the recently announced Lilly Direct. The impetus for this move was data reflecting that when the product was covered by the insurance plans, the market was more suppressed than anything. What was bizarre was that the demand for the molecule shot up to 3x the demand for the brand.

So the following notion was considered: As opposed to paying all these discounts to PBMs, great purchasing organizations, and distributors, and then hearing from pharmacies that they still lose money, why don’t we just sell through the cash vehicle? The product could rid itself of prior authorizations and step edits, no more suppressed pharmacy economics, and practically complete control of the price to the patient/consumer. Sounds lovely, doesn’t it?

In my opinion, we have been trying to put the proverbial genie back in the bottle for decades. While I personally think insurance works very well for orphan and rare disease products, we are seeing states push back by capping prices. We see cell and gene therapy products without medical policy being set. Specialty is set to go through its transformation for the balance of the decade, with roughly $240 billion at risk to conversion to biosimilars and specialty generics. But with general medicine already converted to generics for 92% of all prescriptions and pharmacies declining to fill brands due to profit loss, this last market is ripe for disruption back to cash.

PBMs are asking for all-time high rebates if generics are available in the drug class, and national drug code blocks have skyrocketed from about 50 in 2013 to more than 700 in 2024.1-3 And for the novel science that tries their hand at the specialty lite price point, they can expect a rigorous prior authorization and likely relegation to a third- to fifth-line therapy.

Where brands are not excluded, patient out-of-pocket (OOP) costs have grown alongside an expansion in high deductible plans, which now account for ~30% of commercial lives.4 Given the sharp increase in abandonment above $50 copays,5 manufacturers have been driven to spend ever more, driving down OOP through copay cards and patient assistance programs, while battling copay accumulators and maximizer programs.

Many products in the branded general medicine space are obsessing on how to get a $35 OOP to patients while charging $600 to $800. This game appears to be nearing its end. And with the Inflation Reduction Act and most favored pricing, wholesale acquisition cost reductions, and more on the way, the message from government, commercial payers, and plan sponsors is to stop pricing products high because that’s how you think the game is played. The PCSK9 class was the poster child of that. And it appeared when it came time to launch the CGRPs for migraine, the message was received.

Rewinding on PBMs and pharmacy benefits

As my wife likes to remind me, everything eventually comes back around. Cash pharmacy is not a new concept. It’s the original form of pharmacy and has continued to exist for at least some portion of patients. That portion is growing.

It’s good to remind ourselves that the presence of PBMs and pharmacy benefits is relatively recent in the scheme of things. The first entities appeared in the 1960s. These original PBMs were founded by pharmacists and initially focused on claims processing while reimbursing pharmacies at their usual and customary cash price; notable examples include PAID Prescriptions founded in 1965 and Pharmaceutical Card System (PCS) in 1969.

The 1970s and 1980s saw significant shifts with vertical and horizontal integrations, driven by cost-containment strategies allowed by the Employee Retirement Income Security Act. In the 1990s, manufacturers began to acquire PBMs, such as Merck with Medco and Eli Lilly with PCS. However, this model was relatively short-lived with both spinning the PBM back out within 10 years, and with Eli Lilly recouping only a quarter of its purchase price.6

The durable, impactful, and now-recognizable model borne out by the 1990s through the 2000s is the vertical integration of PBMs with national pharmacy chains and insurers, or consolidation among all three. This began with Rite Aid’s acquisition of PCS from Eli Lilly in 1998 and Express Scripts’ acquisition of DPS in 1999, but was most notably marked by consolidation a decade later of CVS and Caremark, and Express Scripts and Medco. These moves aligned two of the country’s largest pharmacies with two of the largest PBMs. Concurrently, UnitedHealth clawed back its $11 billion drug benefits business from Medco and consolidated pharmacy management into Optum.7

Recall that Medicare was cash up until 2006 when we added Part D via the Medicare Modernization Act. But Medicare is now going through its evolution with a $2,000 OOP cap that comes in 2025. All that sounds great if that patient can find a pharmacy willing to dispense the brands that currently run at $50- to $200-a-month losses on a growing number of branded drugs. Reimbursement is going down and pharmacy costs of goods are going up.

I, and those in my firm, see the science, its value, and its demand being challenged. The GLP-1s are a great example. Great science. Great clinical profile. Benefits appear to be building by the day, and with limited coverage, patients are coming OOP for $900-$1000/month. A majority of patients are already willing to situationally pay cash when it results in short-term cost reduction,8,9 and pharmacies and manufacturers are realizing that the future of retail pharmacy, cash pay, insurance-based coverage for general medicine brands support is at a crossroads.

About the Author

Bill Roth is the SVP of IntegriChain’s consulting business, which includes Blue Fin Group, a strategy consulting company he started in 2001, and the IntegriChain advisory services business.

1. Performance Drug List - Standard Control for Clients with Advanced Control Specialty Formulary. CVS Caremark. January 2024. www.bsu.edu/-/media/www/departmentalcontent/payroll/pdfs/oe-2024/medical---prescirption-plans/p11---performance-drug-list-2024.pdf?sc_lang=en&hash=21B89DC77C0880F3E0224F0EF3291764427B7CF7
2. 2024 National Preferred Formulary Exclusions. Express Scripts. April 1, 2024. www.express-scripts.com/files/hub/pdf/formulary/NPF_Preferred_Formulary_Exclusions2024.pdf

3. 2024 Premium Standard Formulary. Optum Rx. January 1, 2024. www.optum.com/content/dam/o4-dam/resources/pdfs/guides/formularies/Jan2024_Premium_Standard_Abridged_508.pdf

4. 2023 Employer Health Benefits Survey, Section 5: Market Shares of Health Plans. KFF. December 8, 2023. www.kff.org/report-section/ehbs-2023-section-5-market-shares-of-health-plans/

5. The Use of Medicines in the US 2023. IQVIA. May 2, 2023. www.iqvia.com/insights/the-iqvia-institute/reports-and-publications/reports/the-use-of-medicines-in-the-us-2023

6. Cook, A.; Kornfield, T.; Gold, Marsha. The Role of PBMs in Managing Drug Costs: Implications for a Medicare Drug Benefit. January 2000. KFF. www.kff.org/wp-content/uploads/2013/01/the-role-of-pbms-in-managing-drug-costs-implications-for-a-medicare-drug-benefit.pdf

7. Overland, D. UnitedHealth Brings Back PBMs in House. Fierce Healthcare. June 10, 2011, www.fiercehealthcare.com/payer/unitedhealth-brings-back-pbms-house

8. Why 'Cash' Pharmacies are Booming—and What it Means for Health Care. August 24, 2022. www.advisory.com/daily-briefing/2022/08/24/cash-pharmacies

9. Rewriting the Script: Independent Pharmacy Trends. 2022 Research Report. Prescryptive, October 10, 2023. prescryptive.com/2022-pharmacy-study/

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