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Everyone is hearing a lot about prescription drug pricing lately thanks to a very famous billionaire entrepreneur. What is cost-plus pricing? Is it new? How is it disrupting the industry? In this Fast Five, we share answers to these questions and provide guidance on how to evaluate this model. For a smart insider’s perspective, we consulted with Sharon Faust, Senior Vice President, Lumicera Specialty Pharmacy.
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1. What is cost-plus pricing?
The fast five definition of cost-plus pricing is: charging consumers the same price it costs to make the product plus a markup and/or an additional fee. This pricing model is also used in other industries.
Here are a few more details to help understand this concept in the context of prescription drug pricing and the models in the media lately:
- A drug company or pharmacy negotiates directly with manufacturers to get generic medications at a wholesale price.
- Then, for example, they sell those medications to consumers with a 15% markup, a $3 pharmacy fee, and a $5 shipping fee.
- Directly negotiating with manufacturers, rather than through pharmacy benefit managers (PBMs), is an attempt to curb drug costs for consumers.
- Other related terms for this type of pricing are acquisition cost or acquisition cost-plus pricing.
- Generics are the focus; however, brand-name drugs still account for nearly 80% of drug spend.
2. Is this a new concept in the prescription drug industry?
No. However, companies like Mark Cuban’s Cost Plus Drug Company are making a very visible attempt at this model and are therefore viewed as industry disruptors.
Yet, there are companies who have been doing this for years:
- For example, since its origin in 2014, Lumicera Specialty Pharmacy has been using actual acquisition cost pricing.
- In fact, Lumicera is still the only specialty pharmacy using actual acquisition cost that can be tied back to a purchase order. Other specialty pharmacies use a benchmark price or average acquisition price.
- Moreover, Lumicera applies first-in first-out (FIFO) actual acquisition cost-plus pricing which means the actual acquisition price is the exact price Lumicera’s wholesaler charges for the drug package on the date of receipt of the drug from the wholesaler.
Others are paving the way for transparency in a similar, consumer-focused way:
- CivicaScript uses a cost-plus and transparent model to lower the overall cost of high-cost generic medicines, saving consumers millions of dollars annually.
- Moreover, CivicaScript works with health plans, pharmacies, PBMs, and others to pass low prices on to members.
- While many generic medicines sell for low prices, CivicaScript focuses on reducing the cost of select high-cost generics that are more expensive due to lack of competition in the market.
- CivicaScript is working on developing alternative solutions for insulins, a specific drug class that needs immediate cost reduction.
- CivicaScript is quickly gaining traction in the industry as a trusted solution, as evidenced by their partnership with the state of California to manufacture their CalRx Biosimilar Insulins.
- Lumicera and CivicaScript have partnered to further bolster the transparency and savings each solution provides.
3. Disruptors are good…right?
Generally, yes. Disruptors often raise much needed industry questions. In this case, everyone is asking why drugs cost as much as they do (especially when generic medications have been around for decades).
For generics, the answer is simple: the return on investment for manufacturers isn’t there. Therefore, many have exited the market by either selling their business to another generic manufacturer or stopping the production of drugs with low profit margins. Then, the basic laws of supply and demand kick in. When there are fewer manufacturers making a particular drug, they can drive up the cost. Cost-plus models clearly show where this has occurred.
Disruptors often force other companies to innovate, lower prices, or both.
- Specifically, these cost-plus and transparent models are forcing manufacturers to change their price strategy.
- For example, Lilly recently cut insulin pricing by 70%.
- Others are quickly following suit. Novo Nordisk recently lowered their price on several insulin products by 75%, effective January 1, 2024.
- The launch of new biosimilars is also creating important dialogue about prescription drug pricing, specifically why the reference products are so high (example: Humira) and how more market entrants will drive greater affordability.
4. Why isn’t cost-plus the standard pricing model in the industry?
This is the million-dollar question. In fact, it’s the billion-dollar question (billions in fact).
Historical industry pricing is based on average wholesale price (AWP) discounts, rebates, and other variables. The actual cost of traditional pricing models is hidden, with many PBMs keeping the “spread” and benefitting when prices go up.
This is especially evident with high-cost specialty drugs. More than 75% of specialty drugs are processed through four pharmacies. Three of these are PBM-owned, and specialty drugs account for 22% of their revenue on average. Simply put, high prices and high volume at their pharmacies means high revenue.
Meanwhile, the most important stakeholders, patients who need these medications to maintain or improve their health, are struggling to afford them. In the past year, it was recorded that roughly 22% of Americans had to forego their prescribed medications due to their inability to pay the high cost.
Drug pricing disruptors are prompting others to ask this question too, such as Congresswoman Anna Eshoo at the recent House Committee on Energy and Commerce hearing on Lowering Unaffordable Costs: Examining Transparency and Competition in Health Care.
Disruptors like CivicaScript, as referenced by Ms. Eshoo, are showing the true cost in the market, whereas inflated AWPs make it unclear. Moreover, focusing on actual acquisition cost and a flat fee takes away any incentives from the drug cost rising.
5. What factors should advisors (brokers, consultants) and employers examine when evaluating these drug pricing disruptors?
As consumers, we often get excited about the latest and greatest products. Expert marketing teams create flashy campaigns and famous sponsors pique our interest. However, when pursuing any new solution or partnership, we recommend looking at the whole picture and reading the fine print.
Specifically, we advise you to evaluate cost-plus pricing models from a few different angles:
- Look beyond pricing for the top 20 drugs. Evaluate pricing for the entire portfolio instead of just a small subset.
- Examine the company’s incentives.
- Are they aligning to yours?
- Do they have the patient’s best interest at heart?
- Remember – sometimes indicators of misaligned incentives are subtle; for example, auto-refills marketed as a member convenience measure are designed to increase volume, not value.
- Explore the solution’s fulfillment and delivery partners.
- Are all involved parties auditable?
- Despite touting transparency, what information will they disclose? When and to whom?
- Are there other red flags? Sanctions? Bad press?
- Research what patient care and clinical support they provide.
- Is the solution only focused on dispensing drugs?
- What about the important services pharmacists provide for treating each patient?
- Analyze the program’s available drugs that claim the most savings.
- Weigh the utilization of these products and conduct a detailed comparison.
- Your pass-through PBM may offer lower pricing on more common, highly utilized drugs.
We are also watching this trend closely and working to collaborate with the right partners. We look forward to continued momentum in this space with new drivers of affordability and other entities working to repair a broken system.
Thank you to Sharon Faust, Senior Vice President, Lumicera Specialty Pharmacy for her expert insights and for leading the way with this type of pricing model in the industry.
We welcome you to reach out for a full proposal showing the value of our pass-through PBM solution at firstname.lastname@example.org or email@example.com.