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Introduction
[00:00:00] Stacey Richter: Episode 439, "Fixing the Generic Drug Pricing Problem, Where Patients Pay More When They Use Their Insurance". Today, I speak with Luke Slindee.
[00:00:21] Luke Slindee: American Healthcare Entrepreneurs and Executives You Want to Know, Talking. Relentlessly Seeking Value.
[00:00:30] Stacey Richter: In the Ge Bai Show episode 420 one solve was offered for helping patients pay the lowest possible price for generic drugs. Today, Luke Slindee offers another solve. That's where this conversation is going, but now let's start from the beginning.
The Problem with Generic Drug Pricing
[00:00:46] Stacey Richter: It's a thing that traditional PBMs make billions of dollars on generic drugs these days when patients pay more at the pharmacy. Then what the PBM reimbursed the pharmacy for the drug for. And then the PBM and its shareholders clean up the difference there. PBMs have a unique opportunity to buy low and sell high, and they are certainly not averse to fully taking advantage of that opportunity.
So patients pay more, pharmacies get reimbursed less, and PBMs smile all the way to the bank by sucking out the cash that's sloshing around in the middle there.
This can have serious patient and self insured employer and plan sponsor implications, this whole thing. It's a big reason why, as Ge Bai talked about in episode 420, 79 percent of the time, if a patient is in their deductible phase, using GoodRx, a GoodRx coupon, or buying the drug on Mark Cuban or Amazon or from Blueberry or Freedom will be cheaper than using their insurance 79 percent of the time, is a lot of the time.
More than 3 out of 4 patients will pay less not using their insurance for a generic drug if they haven't reached their deductible. And keep in mind, most don't reach their deductible.
Ben Jolley in episode 422 put it that patients pay more to pay more, right? They pay for their insurance. And then they pay more at the pharmacy counter for a generic drug than they would if they, again, wandered in, not copping to having insurance and using a GoodRx card or going to one of the cash pay pharmacies.
I say all this to say, don't forget, we have a weird, weird situation in this country where PBMs tell the pharmacist how much to charge the patient, but they also tell the pharmacy how much they'll pay the pharmacy for the transaction. So now let's talk about how to fix this.
Potential Solutions to the Pricing Issue
[00:02:31] Stacey Richter: I'm going to call it spread problem, generic spread problem.
In the Ge Bai episode, she talks about not letting PBMs get their mitts on generic drugs. I mean, why pool risk, which is kind of what insurance is, why pool risk on a generic that costs like 47 cents is how she put it. Pooling risk is an administrative burden and it costs more to administer the pooling of risk than it costs to pay 47 cents for the drug.
They're sort of two schools of thought that we talked about earlier in that earlier show. One is to just not cover generic drugs, which can get dicey because even if a generic drug, one of them costs 47 cents, sometimes people take a lot of these generic drugs, especially if they're polychronic, and it can add up in ways that are not good for patient outcomes.
Another idea is to give patients HSA, health savings accounts, or a wallet of some kind, or a prepaid credit card, and put money in that wallet or on that prepaid credit card, and then the patient can use that to go buy their generic drugs. So again, it's not pooling the risk, but it's giving them a way to purchase the drugs that is outside of the purview of a PBM.
There's much more to that story, which you can hear all about in episode 420 with Ge Bai at your leisure, because today I am talking with Luke Slindee about another solve to the generic spread pricing problem. And this one involves making, I'm going to say, a fairly minor adjustment relative to the so called usual and customary prices for generic medications.
Understanding Usual and Customary Pricing
[00:04:04] Stacey Richter: If you do not know what a usual and customary price is, never fear, that is the whole first part of this conversation with Luke Slindee today. We talk about what the usual and customary price is as a construct. We talk about the logical, behavioral, economic reasons behind how this usual and customary price has gotten wildly inflated and how that winds up getting us into the pickle that we are in now.
After you listen to this show, do go back and listen to the other episode 429. With Luke Slindee, where we follow the dollar through the pharmacy supply chain, because that will fill in probably a few remaining gaps in your knowledge. Or the show with Dr. Steve Quimby, that was episode 344, for even more details about the profit machine that is a traditional PBM when it comes to generic drugs.
Luke Slindee's Background and Expertise
[00:04:50] Stacey Richter: My guest today, Luke Slindee, is a second generation pharmacist. His family owned a pharmacy in Minnesota when he was growing up. Now he is a senior pharmacy consultant for Myers Stauffer, which is the firm that calculates the NADAC, the National Average Drug Acquisition Cost Price Benchmark, on behalf of CMS and the federal government.
Listener Engagement and Show Support
[00:05:10] Stacey Richter: Before we kick into the episode, I just want to thank VBC Warrior for the super nice review. VBC Warrior wrote "A must listen for VBC Warriors for anyone interested in transforming the delivery of healthcare in America. Every guest outlines a clear path forward that we only need the courage to start down. I can't wait each week for the next episode, and I only wish there were more".
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Oh, lastly, lastly, we are hiring for a few roles over at my day job. The day job actually that pays to produce Relentless Health Value, I probably should mention this because it seems that many assume that RHV, Relentless Health Value, is some kind of profit making endeavor.
And I am here to tell you that no, it is not. It is an expensive endeavor, actually, which is funded by my aforementioned day job here at Relentless Health Value corporate headquarters. We haven't even managed a non profit status or a negative profit operation, which is why it always strikes me as somewhat jarring, I have to say, when people pitch us to come on the show not to talk about fixing healthcare, but they are kinda hellbent to shamelessly pitch their for profit entity.
Uh, no? Buy me lunch at least? This is probably TMI. Thanks for listening. Anyway, I do have a day job that pays the bills. If you are a project manager who is familiar with data, tech, and consulting, or a medical copywriter who knows how to reference your work when you make a medical claim, click on the link that you will find in the show notes.
My name is Stacey Richter. This podcast is sponsored by Aventria Health Group.
The Conversation with Luke Slindee Begins
[00:07:58] Stacey Richter: And here is my conversation with Luke Slindee that culminates in a way to get rid of spread pricing in the generic drug market.
Luke Slindee, welcome to Relentless Health Value.
[00:08:10] Luke Slindee: Thanks. Happy to be here. I'm a big fan of the podcast.
The Complexity of Pharmacy Pricing
[00:08:12] Stacey Richter: So talking about a patient who walks into a pharmacy looking to pay cash for a generic drug and turns out that pharmacy has contracts with PBMs, traditional PBMs, meaning the so called big three. Here's my question. Can I, as a pharmacy, just offer a super low price to my cash paying patients if I choose?
[00:08:32] Luke Slindee: Well, this is where it gets really complicated. Now you're bringing in an industry term called usual and customary. The usual and customary is a number that is set by the pharmacy and it is supposed to represent the total cash price that a cash paying patient would pay without using any insurance. And it is inclusive of both the ingredient cost as well as the dispensing fee.
So the usual and customary rolls those two things together into one number, which makes sense, right? When I go to the auto mechanic and they give me a bill that's, this is the parts and this is the labor, it ultimately, I really just care about what the total I'm paying is. So that is the number that the usual and customary is meant to be.
[00:09:26] Stacey Richter: So the usual and customary is a price, usual and customary price, and it includes both the dispensing fee, which is the labor, exactly what you, how you just described, as well as the ingredient cost, which that sounds like pharmacy talk for this is how much I bought the drug for.
[00:09:42] Luke Slindee: Correct. Yes. And so the usual and customary value, that number is set by the pharmacy.
Historically, the usual and customary, which is, again, set by the pharmacy, is included in the lesser of logic that happens in the algorithm that determines how much the pharmacy will ultimately get paid by the PBM. The PBMs effectively have what's called, in economics terms, a Most Favored Nations Clause, which says basically, alright pharmacy, if you sell this drug to anyone other than me for less than what I was going to pay, then I get to pay that price.
It's a one sided power dynamic where basically the PBM is projecting power onto the pharmacy and saying, if you try to charge less than I would pay, then I'm just going to pay less.
[00:10:39] Stacey Richter: Okay, so this is the behind the scenes for how much a pharmacy gets paid by a PBM. The point that you're making is that there's this usual and customary price, which is the ingredient cost plus the dispensing fee.
But the pharmacy sets this number. Meanwhile, those pharmacies have contracts with PBMs. Those PBM contracts, most of the time, have these Most Favored Nations clauses, and those clauses say that irrespective of whatever usual and customary price the pharmacy has cooked up, the PBM will always pay a price that is either the usual and customary price or lower.
This is the lesser of logic. The PBM will always pay the lesser of.
[00:11:26] Luke Slindee: The way that that gets communicated electronically, because again, keep in mind, this all happens via algorithm and it's processed electronically in a matter of seconds. So it's not like anyone is actually like thinking or talking about this.
It's all done via a computer algorithm. And so the way that that information is transmitted from the pharmacy to the PBM is via this data point called the usual and customary.
[00:11:52] Stacey Richter: So nowadays, not only is the usual and customary price merely a price point set by the pharmacy, but they also have to key it in, the pharmacies have to key it into some system as a data point so that the PBM algorithm can do the lesser of logic on the fly, electronically.
[00:12:14] Luke Slindee: One of the things that's developed over the last 30 years or so since electronics claims adjudication for prescriptions had started in the early 90s, it actually has the perverse outcome of pharmacies, they don't want to make less money than the PBM otherwise was willing to pay them.
And so the pharmacies have responded by basically just inflating and jacking up the usual and customaries that they submit to crazy high levels.
[00:12:46] Stacey Richter: Which lowers their risk exposure because if what I'm, this is what I'm understanding. If I'm a pharmacy, I got to make my usual and customary price.
The price that if a patient just wanders in off the street and says, hi, I need a drug. I don't have insurance, right? That's the usual and customary price. I gotta make sure that that usual and customary price is higher than the highest amount a PBM would ever pay me. Because if it's lower, then on the back end, tink, tink, tink, that algorithm is going to be like, oh, pharmacy, look at you. You were offering a discount to patients because you were trying to be a good community steward. So I'm just going to pay you that lower price.
[00:13:23] Luke Slindee: And so, this perverse outcome has materialized where over 30 years pharmacies have basically just been trained to inflate exactly as you just described their usual and customary prices to absurd levels.
[00:13:38] Stacey Richter: GoodRx exists because another name for the usual and customary price is cash price.
So when the usual and customary started inflating, so did cash prices because they're the same, enter GoodRx with an amazing way to make money off of that market dysfunction while making a path for patients to get a good cash pay price.
[00:14:03] Luke Slindee: And I can give you another even more personal example.
So just timing wise, when I graduated from pharmacy school in 2008, my first job out of school was working for Walgreens. And one of the things that was pushed very heavily by our corporate managers was to sign people up for something that was called the Walgreens Prescription Savings Club. Well, okay, what's that?
Basically, the Walgreens Prescription Saving Club was a system where patients could pay $20 to then join a club. And then that would offer them better pricing on their drugs if they were electing not to use their insurance. Or if for people who are just uninsured entirely, then they don't have any insurance to use.
And so we needed, you know, every pharmacy wants some ability to actually charge a competitive market price. You know, this would be a situation where the market is actually functioning appropriately from a competitive perspective. However they need a way to do that that avoids negatively affecting their usual and customary.
So effectively, we've created a system where pharmacies have a very strong incentive to have two sets of cash prices. There is the usual and customary, which as we discussed is wildly inflated because of the incentives there. And then there is this strong desire to have a separate cash price from that system to actually try to compete on price for true cash paying patients.
Walgreens version of that circa 2008 was called the Prescription Savings Club, and we were very, very heavily influenced to try to sign as many people up as possible for that Prescription Savings Club. And then interestingly, a couple years later, it kind of just went away, like no one talked about it anymore.
We didn't really have any pressure from corporate to sign anybody up for the Prescription Savings Club. So around 2010, 2011, it just kind of stopped and no one ever said, oh, this is ending. We're done with this now. It just, it literally just kind of fizzled out of existence quietly. I later found out that there have been several lawsuits against several pharmacy chains for doing exactly that, creating these savings clubs that effectively allowed them to have two sets of cash prices in 12.
[00:16:31] Stacey Richter: It was the PBMs who were suing the pharmacies.
[00:16:34] Luke Slindee: Correct.
[00:16:35] Stacey Richter: Because the PBMs are like, look, you signed a contract with me. You can't just like partition off a segment of your business unilaterally and then say it's not subject to a contract that you sign. If you're thinking like a PBM, this makes sense.
[00:16:49] Luke Slindee: There's been several lawsuits, some of which have even made it all the way up to the Supreme Court about whether or not pharmacies should be allowed to have two sets of cash prices.
Now, you know, the normal person would say, no, right? That's not okay. But there has been an extraordinary amount of legal arguing around that topic. And historically, most of those savings clubs kind of went away around 20...
[00:17:14] Stacey Richter: Again, it's also the market dysfunction that enables GoodRx to exist, right? The only reason GoodRx exists is because of all of this dysfunction which pushes pharmacy list prices that patients just wandering in as high as possible because they're inflating that usual and customary because they want to get paid as high as possible from the PBM.
[00:17:36] Luke Slindee: And the timing of that wasn't an accident, so as I mentioned, most of those prescription savings clubs kind of started to go away around 2011, 2012, 2013, and then I vividly remember the first time somebody presented a GoodRx app or card to me when I was at Walgreens and it was the summer of 2015.
And because it was, it happened to be the same day that I went on my first date with who's now my wife. And so I remember when that was and that timing was not an accident. So there's this perverse incentive that causes the inflated usual and customary values. It creates the need for pharmacies to come up with this separate system to sell to true cash paying patients.
And previously, that took the form of these prescription savings clubs and then those were basically sued out of existence and then that created the vacuum into which GoodRx entered and has basically existed in ever since.
[00:18:33] Stacey Richter: So, that clears up a lot and you definitely can see just how all this market dysfunction enables additional players to ride in on a white horse, but the only reason we need a hero is because there's just crazy stuff going on.
[00:18:51] Luke Slindee: So on that note, before we leave that subject, I want to just point out the similarities between this dynamic of the, the, that most favored nations clause and forcing pharmacies to include. Usual and customary in the lesser of logic. It's actually very, very similar to what Amazon does to their third party sellers.
So Amazon says to any third party seller, which as you may know, that's the majority of what gets sold on Amazon now is, is the third party sellers. It says to them, you can't charge less anywhere off of Amazon than you are charging on Amazon. And that's been clearly demonstrated to raise prices across the board, so much so that the Department of Justice has actually sued Amazon over that particular business tactic.
And that's been well covered in the lay media, this lawsuit against Amazon with respect to forcing third party sellers to not be able to sell for less off of Amazon. And so I'm watching that very closely because it's the exact same concept as this usual and customary pharmacy issue. If it's ultimately decided by the courts that the Amazon third party sellers are allowed to sell for less off of Amazon and not get penalized for it, then, immediately, every pharmacy should sue PBMs to remove the usual customary from the lesser of payment algorithm.
[00:20:19] Stacey Richter: For sure. Although, I will say, that Most Favored Nation, that is a type of contract. Which has been deemed anti-competitive. That is the name of an anti-competitive type of contract.
[00:20:33] Luke Slindee: Well that's why there's the lawsuit, yeah.
[00:20:36] Stacey Richter: So just even using that term, there was a show with Brennan Bilberry where we talk about this from a hospital standpoint and there's this big Sutter, amongst others, lawsuit and it was a Most Favored Nation lawsuit and Sutter lost.
[00:20:50] Luke Slindee: It's the same dynamic.
[00:20:52] Stacey Richter: We kind of eased our way into the generic stuff, because obviously, if we're talking about a patient walking in and paying cash because they have figured out that actually the cash price for a generic, and this is true, Ge Bai was on the show and talking about these numbers, 79 percent of the time, if a patient is in their deductible phase, paying cash is going to be cheaper if they're buying a generic now, then going through their carrier. And when I say paying the cash price, I mean popping out a GoodRx card. So the GoodRx price is going to be cheaper than the price that if they, in air quotes, use their insurance, they will pay, right?
[00:21:28] Luke Slindee: And again, I want to be clear in that if we were to remove that usual and customary from the lesser of logic, which, as you mentioned, I listened to the episode with Ge Bai, she and others have suggested a more extreme fix, which would be to just remove generic drugs from insurance coverage entirely.
That's certainly one way to go. And that would cause the market to kind of right itself because you'd be removing that anti-competitive aspect from it. But I would argue that you could get most of the benefit without having to remove it from the insurance coverage by simply just removing that Most Favored Nations Clause that PBMs apply against pharmacies.
Because if now I'm a pharmacy and I'm not going to be penalized for lowering my cash price on a drug, then why wouldn't you do it? If you think that that's going to make your pharmacy more appealing to patients, if you can yourself just offer a low cash price and make it competitive in a market sense and not have that penalize your PBM based reimbursement, to me, that would solve the problem, probably.
And you're already seeing examples of this. I mean, you mentioned Mark Cuban, but everybody has to dance around this. Are we doing it with the PBM or are we not doing it with the PBM? And that's all because of this inclusion of the usual and customary in the lesser of logic. You know, one pharmacy in Ohio that I love is Freedom Pharmacy, where there are literally two pharmacies separated only by a door.
One operates using insurance coverage and PBMs, and one is cash only, and just the physical existence of those two pharmacies on either side of a wall is, you know, a physical manifestation of the fact that we have this market perversion, which is the inclusion of the usual and customary and the lesser of logic for PBMs.
[00:23:20] Stacey Richter: Yeah, I think Blueberry in Pittsburgh is doing something similar.
[00:23:24] Luke Slindee: Blueberry has basically just said, we're not doing PBMs at all. Yeah, there's a whole new wave of cash only pharmacies that have recognized this market dysfunction. They've recognized how popular GoodRx is and they basically have just said, you know what, this, these generic drugs are cheap.
Most people that have the means to pay for this stuff out of pocket just will do so anyway, so let's just punt the PBMs out of the equation entirely.
[00:23:51] Stacey Richter: You know, you had mentioned some solutions here and just kind of recapping and summarizing what I've heard in the past couple of shows. So there was the episode with Ge Bai in episode 420, and the one with Mark Cuban, episode 418, which I highly would recommend anybody listening here who hasn't listened to go back and listen.
And my takeaway is it has to do with risk pooling and just like how much insurance actually costs and if you've got a drug that costs 47 cents and then you're trying to spread the risk across like the administrative burden of that is just like higher than the whatever you gain by spreading 47 cents across a risk pool.
If you think about that, one way to go is to just say, you know what, generic drugs shouldn't be covered by insurance at the end. There's definitely one school of thought that thinks that. Then there's kind of this middle way, which is sort of like, it should be covered because even if these drugs are a couple of bucks, there are people that are taking 10 drugs, right?
Like this could add up and it could negatively impact people's ability to afford their drugs. So maybe we should just figure out how to do it with an HSA or give patients a wallet. Effectively, they're direct paying in some way.
But those drugs are still being covered, so you don't necessarily have a PBM in the middle adjudicating things, it's just on the back end, the dollars are covered. So that's another way to think about this, which could solve some issues.
And then you just brought up a third, which is, this is ridiculous. These are obviously, I mean, most favored nations, if you, probably like class one in contract law is, hey, here's the definition of an anti-competitive contract.
It's called the most favored nation version of an anti-competitive contract. So just like even the name of this smacks of this is a problem. So let's just get rid of the usual and customary price, being allowed to be part of a PBM contract. And then just by doing that, some of this is going to go away.
[00:25:41] Luke Slindee: It would allow the generic market to just return to normal competitive situations again. And it's not like PBMs don't know that they have all the pricing information that they need in order to not overpay for generic drugs. I mean, that was the whole point for including the usual and customary in the first place, going all the way back to the 90s, was that if your other options in the algorithm potentially could lead you to an overpayment and so they included the pharmacy's usual and customary as a way to prevent the PBM from overpaying. I mean the PBMs have much better pricing information than anyone so they don't need this usual and customary in their algorithm logic and just removing it.
I believe would solve so many problems.
[00:26:26] Stacey Richter: Yeah, just based on what we've discussed today, that would seem very logical. Luke, is there anything else that you want to mention?
[00:26:35] Luke Slindee: I think we've covered a lot. There is one other thing I'd like to say.
Impact on Pharmacies and Conclusion
[00:26:38] Luke Slindee: It's that all of this dysfunction ends up causing downstream effects with respect to the working conditions for staff inside of pharmacies.
As well as pharmacies closing and create these, this concept of pharmacy deserts, you know, where there's neighborhoods or entire rural areas that don't have access to a pharmacy. All of this dysfunction doesn't solely just waste money for patients and plan sponsors. I mean, it would be bad enough if that were the case.
But all of this wacky math that benefits wholesalers and PBMs often comes at the expense of pharmacies. And that results in less money to pay pharmacy staff. So in the chain pharmacies, you've seen walkouts recently that the staffing is just at such an incredibly low levels that. A lot of the chain pharmacies are just not functioning.
And that's personal to me because I worked for Walgreens for 14 years. So I care about the concept of a chain function, chain pharmacy operating appropriately and delivering good customer service for their patients. And that's just not happening right now. And then also you have all these independent pharmacies just closing because this wacky math that we talked about is just incredibly damaging and it's not possible to run a business in this irrational environment for a lot of independent pharmacies.
So that results in lack of patient access to pharmacies. I just want to draw that connection to, to know that this isn't just patients and health plan sponsors money being wasted. It also has this negative effect of making pharmacies just not function and or not exist.
[00:28:20] Stacey Richter: Luke Slindee, thank you so much for being on Relentless Health Value today.
[00:28:24] Luke Slindee: Thank you so much.
[00:28:25] Stacey Richter: Hey, could I ask you to do me a favor? If you are part of the Relentless Tribe working hard to transform healthcare in this country, I don't need to tell you that we need as many on our side as we can get. The most vital thing that you could do to help expand the reach of this show is to leave a rating or a review on iTunes or Spotify and or share this show with colleagues or decision makers.
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