In February, I wrote an Innovators Worth Watching blog highlighting Mark Cuban’s Cost Plus Drug Company, his new pharmaceutical venture selling generic medications at a fraction of the cost of other pharmacies. After putting his company to our six-question test, we concluded that Cuban’s online pharmacy could be a disruptive solution for individuals looking to fill prescriptions. Now, new research shows the cost-savings for Cuban’s pharmacy go beyond the individual and have the potential to impact larger-scale payers.
Researchers from Harvard Medical School found that Medicare could have saved upwards of $3.6 billion over the course of one year if, instead of managing their prescription drug program through a number of private insurers, they covered drugs provided by Cuban’s pharmacy.
A Quick Overview of Medicare Part D
Medicare implemented their pharmaceutical coverage program back in 2003. Medicare Part D coverage is offered and managed through a network of private insurers, who compete with each other to provide prescriptions at the lowest cost to Medicare beneficiaries. Individual beneficiaries pay a premium to their selected insurance provider for their drug coverage; these private insurers are then reimbursed by the federal government. As different plans offer different coverage, individuals pick which plan matches their needs, and pay that insurer a monthly premium. The list of what prescriptions individual insurers cover is called a formulary. Individuals are prescribed their necessary medications by their doctor, and then pick them up at their preferred pharmacy, or can order them through an online pharmacy.
Generic drugs made up 88% of the medications covered by Medicare Part D in 2020; some plans only cover generic drugs. For the purpose of the study, researchers looked at the cost of the 89 medications currently offered by Cuban’s pharmacy, and compared them to the amount Medicare spent on those same drugs. Medicare spent almost $10 billion on those medications in 2020, which amounted to about a quarter of Medicare’s total generic drug costs for that year.
Medicare Part D is also famous for its coverage donut hole, the term for the gap in coverage that starts when drug coverage hits $4,430 and ends when costs reach $7,050.
What does this mean for the health industry?
When I previously profiled Cuban’s pharmacy, we looked at the disruptive potential relative to bricks and mortar pharmacies. I concluded that the company should be able to leverage its online platform to sell an expanding list of drugs, while continuing to keep costs low and expanding access to a far broader audience than incumbent bricks and mortar pharmacies.
What this new study shows is that Cuban’s pharmacy holds disruptive potential relative to not only bricks and mortar pharmacies, but also PBMs and private payers more broadly. For years, innovators have looked for ways to tackle the $365 billion dollar pharmaceutical industry, hoping to make costs lower for patients. This study quantifies potential savings, which could incentivize Medicare and other large-scale payers to change how they cover prescriptions.
Instead of continuing to work with myriad individual health insurers, Medicare could choose to contract directly with Cost Plus Drug Company for all generics. This would transform the entire value network of Medicare Part D coverage. Part of what makes Cuban’s business model innovative is its removal of pharmacy benefits managers from the picture. Pharmacy benefits managers (PBMs) are the entities that negotiate with drug manufacturers and pharmacies to manage prescription drug benefits for consumers. Instead of utilizing a PBM, Cost Plus cuts out the middleman and negotiates directly with pharmaceutical companies. If Medicare worked directly with Cost Plus, they would transform the value network of the Medicare Part D program by eliminating private insurers, PBMs, and other pharmacies from the equation for generic medications.
Medicare historically acts as a guidepost for other private insurers; often, when Medicare acts, other insurers follows. If Medicare makes changes to their prescription benefits, other payers may follow, triggering a massive value network transformation for how payers offer drug coverage. Cost Plus is built on not just the premise of affordability, but also on transparency. Changing the value network of Medicare Part D makes the consumer (i.e., patient) and customer (i.e., Medicare) journey simpler and more convenient—two hallmarks of a disruptive innovation.
The use of Cost Plus could make this donut hole more manageable for patients. With out of pocket costs significantly lower than those paid through traditional insurers and pharmacies, the coverage gap for patients may be less of a financial burden.
While this recent study is promising when it comes to the cost and coverage of generic medications, it does nothing to tackle the high costs of brand-name prescriptions. While generics made up 88% of Medicare’s drug coverage in 2020, they only accounted for 19% of actual spending; brand-name medications are still a driver of high prescription costs, and this study did not account for those.
Cuban’s pharmacy has broader disruptive potential than I originally articulated, as its potential is not just in steering individuals away from purchasing drugs through other pharmacies, but it could also alter payers’ approaches to drug coverage—creating drug cost savings on a much larger scale and threatening more business models along the value chain.