Cost Plus Drug ditches the middleman, the pharmacy benefit management companies. Those help negotiate benefits for employers, health insurers and government health programs. These could include rebates and discounts.
These companies have been criticized for a lack of transparency. Most times, you can’t tell how much they’re making on rebates and how much they’re actually saving customers.
Cuban’s company shines a light on how these companies contribute to inflated drug prices. Cost Plus Drug buys the medications at wholesale and sells it at the manufacturing prices with a flat 15% markup and a pharmacist fee.
“The biggest, most inflationary thing we see in healthcare overall right now is drugs,” said Paul Segeert, managing partner at the healthcare consulting company PCS Advisers. “It’ll continue to be the case unless we do something about it.”
Segeert said the pharmaceutical industry operates without much transparency. “That doesn’t lead to the best behavior and it ends up inflating the cost of drugs pretty significantly by the time they get to the consumer,” he said.
One example is insulin costs.
Humalog, one of the most commonly prescribed brands of insulin in the U.S., gets wholesaled to a pharmacy (the retailer), and then the consumer shows up and gets their prescription.
“The biggest, most inflationary thing we see in healthcare overall right now is drugs.” – Paul Segeert, PCS Advisers
In the background, there’s also a pharmacy benefit manager involved. They manage the formulary for your health plan.
“The original intent of these pharmacy benefit managers was that they would be the experts in a complicated business model that would advocate on behalf of payers, plan sponsors and members to get more values,” Segeert explained. “Yet, they also were allowed to operate without transparency and their business model put them in a position where they make more money when the cost of drugs increases. So, their incentives are not aligned with the whole purpose that they had in the market to begin with.”
Humalog might get picked up at a pharmacy by someone with insurance coverage through their job.
The consumer's copay may be $10-$50 a month for that medication, but the healthcare plan is paying $550 a month, and “$330 of that, or 60% of it, is waste that’s being added to the cost of the drug by the pharmacy benefit manager who is supposed to be advocating for value for the consumer,” Segeert explained. “Only $220 in that transaction actually funds the real supply chain – the manufacturer making the drug, the wholesaler and the pharmacy. So, we have a real serious problem in our system that inflates cost 30%-60% for lots of prescriptions.”
Another problem, he said, is that pharmacies that take insurance as a form of payment don’t get to set their own cash price for the drugs they sell.
“This gets to the heart of what Mark Cuban is doing that has me pretty excited,” he said.
“You have a situation today where, if I’m a pharmacy and I say I’m going to take insurance, the insurance industry dictates to me what I can sell a drug at cash for and that cash price then is not my choice as a pharmacy, and it’s manipulated significantly,” he said. “It’s an incredibly manipulated market place in the current model and it’s been in big need of disruption.”
Seegert said other big players have tried and failed to do what Cuban is attempting with his new company.
He said said he thinks sometimes these big players find out there’s more money to be made in the traditional model and follow suit.
There have been some smaller players in the space, though.
ScriptCo is a membership-based online pharmacy that’s been operating out of Waco since 2019. They provide thousands of medications and sell them at wholesale price with no markup. They only make revenue off of the membership fees, which cost $140 a year or $50 a quarter.
“We offer literally thousands of different medications, unlike what Cost Plus Drugs is doing,” Zach Zeller, co-founder and president of ScriptCo, said.
Because they don’t markup the drug costs, Zeller said they can beat Cuban’s prices on any medication while offering even more.
Despite this and the fact that Cuban is now somewhat of a competitor, Zeller said he’s glad the Dallas Mavericks owner is stepping into the industry. Zeller thinks this will force the middlemen out or force them to be more transparent.
To Segeert, there’s a way to keep the middlemen and still have the market work for the consumer. They just need to be open.
There are around 300 pharmacy benefit managers in the U.S, he said. Some of them, Segeert explained, will agree to operate transparently and with the sole source of revenue being a per-script fee. “That same [Humalog] insulin will cost that health plan $220 plus a transaction fee, $6 to $8 versus $550,” he said. “Same exact drug, same exact pharmacy, cleaner players involved, more transparency.
"We are dedicated to ensuring anyone who needs a prescription drug can get it from us at a fraction of the typical price." – Alex Oshmyansky, Mark Cuban’s Cost Plus Drug Company
“Everyone can still be profitable and it can be a reasonable price for our system and for the consumer."
He also thinks it’s smart that Cuban is only targeting 100 generic drugs at first.
“Some people might say, ‘Well, shoot, he’s not even targeting where the big waste is and where the really expensive drugs are,'" he said. "I think it’s smart because he’s going to face less opposition initially from the current big players because he’s not yet attacking their most profitable parts of their business, which would be high-dollar brands and specialty drugs."
He thinks if Cuban’s company gets good traction, it will eventually offer some of these other drugs.
"We plan to expand the number of medications as our base of patients grows," Alex Oshmyansky, CEO of Cost Plus Drug, told the Observer by email. "We are dedicated to ensuring anyone who needs a prescription drug can get it from us at a fraction of the typical price."
Either way, Segeert backs the Mark Cuban Cost Plus Drug Co. and what it’s trying to accomplish. “I think this is one of the most exciting potential disruptions to healthcare that we’ve seen in this country in a long time,” he said.