Mystery and Margin
[00:00:00] Stacey Richter: Episode 526. Generic Compliance Ratios, Pass-Through Contracts, and Other Pharmacy Plumbing. Today I am speaking with Mark Cuban and Cora Opsahl.
[00:00:32] Stacey Richter: Hello, all you Relentless Tribe members. If you have listened to this show for any length of time, you know one of our favorite truths around here, which is where there's mystery, there's margin. But today we aren't just here to point out the mystery. We're here to look towards figuring out how to solve for it.
If we wanna build a healthcare system that actually works for patients and plan sponsors, then we have to transition from being passive price takers to active, highly informed decision makers. And to do that, we really need to understand the actual operational mechanics of how, for example, the pharmacy supply chain is put together.
Meet Cuban And Opsahl
[00:01:17] Stacey Richter: My guests today are two absolute titans who are leading this charge from different angles, and having them sit down together is an absolute masterclass in how to dismantle the complexity.
First, we have Cora Opsahl. Cora is a brilliant, deeply sophisticated expert in how to be a jumbo plan sponsor, and she's legendary in our community for actually reading the fine print, asking the tough questions in, for example, RFPs and negotiating contracts that protect members dollars.
And then sitting across from her, we have Mark Cuban, the co-founder of Mark Cuban Cost Plus Drug Company. Mark did not just look at the high cost of generic drugs and complain, he rolled up his sleeves and built a transparent alternative that proves medicine does not have to be a black box.
What happens when you bring a sophisticated purchaser and a disruptor together? Well, you have a wild conversation with lots of tangents, and the show today being a tangent from the original show with Cora and Mark, which aired last fall. It is actually a really, I'm gonna say empowering, 301-401 level conversation.
Drug Dollar Plumbing
[00:02:30] Stacey Richter: So today, Cora and Mark are gonna help us trace the drug dollar. We walk through the actual operational friction points, like the old generic compliance ratio that forces, for example, independent pharmacies to buy high from a consolidated wholesaler.
Discount Theater Exposed
[00:02:47] Stacey Richter: We also dig into the discount theater, as Benjamin Jolley [Episode 422] talked about at great length in the episode with him from a couple of years ago.
There's a lot of discount theater with, for example, the old classic imatinib example, which is a generic drug, a generic “specialty”, drug that cash pay pharmacies can sell for like $25. $25. But which can end up costing an employer thousands of dollars through a traditional PBM all while being touted as a massive discount, off an inflated reference price.
There's a reason why AWP is called Ain't What's Paid. There's a reason why WAC has the reputation that it has. Do go back and listen to the episode with Luke Slindee [Episode 429] for 45 minutes on this topic, which is actually really important.
To help you take action on your next RFP, Cora and Mark, break down some of the mechanics of pass-through PBM contracts. I think it's one thing to know the facts and it's another thing to realize what those facts add up to. So we talk about the realities of pass-through PBM contracts.
And much like Chris Crawford [Episode 465] in the episode with him again has warned us pass-through PBM may pay the pharmacy using one secret algorithm while charging the plan, using a completely different formula.
I am reminded of what Dr. Stan Schwartz from ZERO.Health said on the episode with him. He said, “So much of what we call expense in medicine is simply pricing failure.” And this is probably another example of that.
And probably, I'm gonna say most of this conversation with Cora and Mark that follows is about knowing enough about that pricing failure to start to figure out how to solve for it.
A plan might want to consider walking through this with their broker, or if you're a broker, consider walking through this with your plan or PBM or consultant or tech partner in a policy meeting.
It sort of defines what transparency means to a certain extent relative to contract terms, which enables you to demand it and protects plan assets, members, patients, constituents. Yeah. We have a lot of decision makers and change makers across many lines of work who listen to the show.
Sponsors And Setup
[00:05:07] Stacey Richter: I'm Stacey Richter. This is Relentless Health Value. This podcast's founding sponsor is Aventria Health Group.
Also, I would like to thank our series underwriter in 2026, Payerset, which is a leader in price transparency. Go over to their website and check out what they are up to over there.
I also really would like to thank Patient Rights Advocate, which is a nonprofit advocating for the rights of patients and also transparency. They have a bunch of free resources also on their website. Check out what they're doing, and I would like to thank all of these sponsors so very much for providing the financial support to keep this show on the air.
With all of that, here is my conversation with Mark Cuban and with Cora Opsahl. It is an outtake from our earlier conversation [Episode 488] and go back and listen to the whole thing if you like. It aired last fall.
Wholesalers And Underpayment
[00:05:59] Mark Cuban: Yeah. And, the pharmacy side, it gets even worse, right? There's three major drug wholesalers in the country, and the pharmacies pick one of them typically to be their primary supplier.
What happens with the pharmacies, particularly the small pharmacies, they have to buy at wholesale acquisition costs minus a few points.
And then when a patient comes in, they run the claim through the TPA for that insurance company. But the insurance company via their PBM, doesn't reimburse them for the full amount that they paid to the wholesaler. It is so, if you know Department of Justice, antitrust ripe. But nobody, like literally, I didn't understand how all these pieces worked together with the wholesalers until they sat down with a wholesaler and had a secondary wholesaler and had them explain, but wait, there's more too. Right?
Imatinib Price Shock
[00:06:54] Mark Cuban: So let's just say you're a pharmacy and you have a patient that uses Imatinib, which has, it varies what the wholesale acquisition cost is, but let's just say your primary wholesaler sells it to you for $200. You realize that Cost Plus Drugs sells it for $25 and you want to buy it through Cost Plus Marketplace.
[[00:07:17] Stacey Richter: Benjamin Jolley in episode 422 references the classic Imatinib example directly. The figures that he discusses are that branded Gleevec costs $27,000 a month, or that's what it used to cost. Generic Imatinib, which is the generic for Gleevec through a traditional PBM/insurance channel, at least at the time when I interviewed Benjamin Jolley, was $9,000 a month, which the PBMs would tout as massive savings. Like, look, you're saving $18,000 a month off the original branded Gleevec.
Now Mark Cuban's Cost Plus Drugs cash price is $25 a month, not $9,000 a month. $25, not $2,500. $25 a month compared to $9,000. So what was happening was PBMs were charging employers and plan sponsors literally $9,000 a month for a generic drug that a cash pay pharmacy was selling for 25 bucks.
And they had the audacity obviously, to frame the $9,000 as a deal because it was discounted off the $27,000 branded price.
This is exactly why situations like this, probably 150 guests on Relentless Health Value have hammered the point that discounts are meaningless without knowing the absolute price.
A discount off inflated made up reference price is just theater and WAC, wholesale acquisition costs; an AWP, average wholesale price are theater. They are prices that are set by either manufacturers or generic manufacturers. I mean, there's a reason why AWP is called Ain't What's Paid.
Anyone who trots in and starts touting their discounts as opposed to talking about what the absolute price is, discounts are just a way that somebody in the middle is making money. Again, going back to our classic Where There's Mystery, There's Margin, and if you're wondering why pharmacies often don't just buy from Cost Plus or directly from a manufacturer, etc, themselves. Here's Mark explaining why.
Generic Compliance Trap
[00:09:28] Mark Cuban: Well, there's this thing called Generic Compliance Ratio that the wholesalers create for pharmacies, and they say to them, typically, you have to buy at least 92% of your generics from us because we're your primary wholesaler, and if you don't, we're gonna hit you with all these chargebacks and fees which is going to eliminate what little margin you have.
And so now, because that pharmacy is having to pay a premium from their primary wholesaler because they're afraid of not making their generic compliance ratio. When you have a high deductible plan and you walk in the door, if it's a brand, well, the whole pricing is based off of the WAC. That's effectively what the patient pays when they walk in if they have a thousand dollars deductible.
If they're getting Imatinib and they don't know about Cost Plus Drugs and our price, they're going to the local pharmacy who paid a premium to the wholesaler so they don't get hit with chargebacks and meet their Generic Compliance Ratio.
And so now we've seen, Imatinib patients pay thousands of dollars because it's less than their deductible and they had no choice but to pay it before they got into their insurance part.
But then it still gets worse because they have this thing called specialty tiers that apply to just specialty generics as well. And we're talking just about pills here. There's nothing special about them, but because it's a specialty tiers, they have to do co-insurance based off of the WAC price.
So they're paying 25% of this inflated price that the wholesalers initiated in collusion with the PBMs that are owned or owned the insurance companies, so that the insurance companies can then game the whole system against their medical loss ratio, against the reports they're sending to states against what they're doing for Medicare. And so who pays? Who gets hit the worst? The patients.
And so when we talk about high deductibles, it's not even as much can they afford the amount of money in a country where 37% of people have $400 or less, it's just also that the entire system is gerry rigged gerrymandered to use a common word these days, right? So that the PBMs that own or owned by the insurance companies can set the retail price known as WAC so that the patients have to pay even more and have less chance of being able to afford their deductible.
[[00:11:57] Stacey Richter: So if you think about this like a pharmacy, there certainly is the potential there for a pharmacy to fill a script and lose money. The pharmacy who's trying to figure out how to not blow their generic compliance ratio.
So they're gonna continue buying from the wholesaler. They're sort of locked into buying from the wholesaler, while at the same time you have patients, with a GoodRx coupon, trying to minimize their out of pocket. And now we have the potential for issues.]]
[00:12:28] Cora Opsahl: Now, let's think about the demand side being the employers who are going out to RFP. They go out for request for proposal. Again, goes back to hiring a consultant. Because the math is hard. It shouldn't be. And I think Mark and I have had this conversation.
The math should not be as hard as it is. But now I'm going to get a bid, and I'm gonna get a bid that gives you the AWP discount, which is your average wholesale price, which by the way, doesn't match your WAC price.
So they're buying over here and they're actually, by the way, I've learned, and I think, Mark, you probably know this too, I've learned that the PBMs are not reimbursing at AWP. They're not reimbursing at AWP. They actually, their contracts are probably reimbursing at an acquisition plus model.
Meanwhile, they're charging the employers at an average wholesale price discount.
[00:13:14] Mark Cuban: So they're reimbursing the pharmacies who want at WAC minus some amount they're reimbursing underneath that amount. For brands, for generics, it varies, right?
But for brands, they'll underpay pharmacies by $130 on a GLP-1, and pharmacies just say, I'm not taking those scripts anymore.
[00:13:35] Cora Opsahl: But so you're right. So they're doing that. Meanwhile they're over here charging the employer and functionally the patient at a different price mechanism. So then this is how you end up with your guarantees that are really just, you know, functionally a black box of math to protect the margins.
[00:13:52] Mark Cuban: Tell everybody what guarantees are and how they work.
[00:13:54] Cora Opsahl: Well. I only have snarky answers first.
[00:13:58] Stacey Richter: We did have Chris Crawford on talking about this topic, [Episode 465] but go for it, Cora.
[00:14:01] Cora Opsahl: Yes. I mean, I think the, the thing is all guarantees do, it says you're gonna pay a little bit more, you're gonna pay a little bit less. We're gonna just put it all together at the end of the year.
[00:14:09] Mark Cuban: By therapeutic category.
[00:14:10] Cora Opsahl: And so don't be fooled, by the way, folks out there, you're not actually paying, and I had this big discussion in my RFP for a PBM recently about this and I said, so you are guaranteeing me AWP minus, we'll make up a number minus 50.
Because that way I can't get in trouble for anything that might look like my contract. But what are you reimbursing them? Well, we're reimbursing them our contract.
Pass-Through Illusion
[00:14:33] Cora Opsahl: Okay, so, but it's a pass-through deal. So what are you actually reimbursing them? They're reimbursing them a dollar amount. That might be their acquisition cost plus a dispensing fee plus something else and equals whatever it is.
Then they have to take it and put it into a computer, do some sort of fancy magical mumbo jumbo and put it out to have it be, oh, well that was AWP minus 49, but the contract for that drug is not AWP minus 50.
[[00:15:00] Stacey Richter: How interesting is this and the point Cora is making, just to underline it. Is that if a PBM says that they are a pass-through PBM, that might sound like it's easy math. Just pay the pharmacy and then charge the employer the same amount.
But it doesn't work that way. The PBM is paying the pharmacy using one formula and then they're charging the employer plan sponsor using a whole different formula.]]
[00:15:23] Cora Opsahl: That contract is acquisition cost plus some sort of fancy schmancy algorithm.
And so what we're doing is, again, introducing additional complexity and asking an employer as senior manager in HR to figure this out. When Mark, you have become a PBM expert, I'm arguably a PBM expert and I can't even clearly articulate this.
[[00:15:46] Stacey Richter: And yeah, so you have the PBM paying the pharmacy using one formula, charging the employer using another formula.
And meanwhile, the pharmacy is buying the drug through a completely other channel that is totally another math problem.
Back to Mark here, talking about employers trying to figure out a PBM contract.]]
[00:16:06] Mark Cuban: Because the math doesn't math, right? They go to a consultant who they have a relationship with and the consultant says, well, this is better than, this is only up 4% or 6% from last year.
So generally
[00:16:19] Cora Opsahl: Only. Only.
[00:16:20] Mark Cuban: Right? And it's just. And you know, and they have a relationship and it's not even that, like there are times when the big PBMs will pay the consultants for every RFP that they complete.
Audits and Data Lockout
[00:16:32] Mark Cuban: And God forbid you try to audit. I mean, Cora, what happens if you try to audit your claims? You know, or just get the claims data for a lot of companies to be able to audit it.
I've never heard of a company who did an audit and found out that their rebates or other, the math balanced out and they weren't ripped off by a good 30, 40%.
[00:16:52] Cora Opsahl: I mean, I will say on the PBM side, every audit, whether it's a rebate audit or a pricing audit, somehow results in me getting more money. Every single time.
If every single time results in, you know, checks written to me, that means they've been holding onto money that belongs to me in the first place.
[00:17:11] Mark Cuban: Oh, yeah. And on top of that, when you ask to audit, they'll say, okay, we'll have somebody do it for you.
[00:17:15] Cora Opsahl: On a pre-approved list. Mind you.
Yeah. Pre-approved list.
[00:17:18] Mark Cuban: Of drugs and claims, right?
[00:17:21] Cora Opsahl: 250 claims. The fact that the standard in a health contract for a jumbo client of my size is 250 claims on a medical benefit for, to make it a statistically significant, and there's probably a one or two asterisks that say you cannot actually apply that to cross your book of business. You could only do a so far look back.
And look. We're a sophisticated purchaser, and I've got a template contract out there that tells you that you should get more than that.
But in the end, it's too much of healthcare comes down to a negotiation where I have to fight and negotiate. I have to sit across the table and negotiate with a PBM or an insurance carrier for the right to see my data, the right to understand what the allowed amount is, the right to rebates. Like let's not even, I mean, that's a whole different kettle of fish.
But I should not have to fight to be able to see the data and then be able to validate that it's correct and the fact that I have to hire someone else 'cause they still don't want me to see it. The fact that you have to hire an auditor to do your auditing, that I can't do it myself because it would violate my contract.
[00:18:27] Mark Cuban: And what's even worse, the fact that, you know, you need to hire an audit means you shouldn't and can't trust them. That's the whole point.
And if you want to get bigger rebates, the easiest way to get bigger rebates and better terms, just make part of the RFP require that Cost Plus Drugs as part of the network and they will immediately give you a better deal to try to exclude us from the network.
[00:18:48] Cora Opsahl: I may have been there, Mark. I may have been there.
Simplify And Wrap Up
[00:18:51] Stacey Richter: So I just want to jump in here and say, we started out talking about, and I think we have ended in a place which validates this. That if you start getting multiple vendors in the middle to solve complexity, you wind up adding additional complexity because what you wind up actually doing is putting more parties in between the buyers and the sellers. You wind up getting all these.
Dr. Stan Schwartz was on the pod [Episode 486] and one of the things that he said, which I think is very apropos here, he said, so much of what we call expense in medicine is simply pricing failure.
And that is what we're talking about. And when we say pricing failure, you just named 17 different pricing mechanisms and now we basically have to have an exchange rate or something to try to figure out, it's like a Rosetta Stone to figure out this price. It's that right?
[00:19:40] Mark Cuban: It doesn't have to be that way. You don't have to work with the big PBMs.
[00:19:44] Stacey Richter: Mark Cuban and Core Opsahl, I'll thank you so much for being on Relentless Health Value today. Thanks so much, Stacey.
[00:19:48] Mark Cuban: Great as always. Thank you Stacey. Thanks Cora.
[00:19:51] Cora Opsahl: Thanks, Mark.