In the pachinko machine that is the healthcare industry, with just so many intermediaries, with so much regulatory capture and conflicts of interest that may or may not be visible, so much margin that is shrouded in mystery in an ecosystem as messy as this with so many variables, you just, you have to be really careful what levers you push because you can't see what they're attached to. And in an attempt to fix something, you could wind up having the exact opposite effect than what was wanted or intended.

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This is why a lot of times we can't have nice things, right? It's such a challenge getting patients affordable drugs and affordable care.

And my biggest gripe with a lot of policy decisions—and I know I won't be alone when I say this (listen to the episode with Ann Kempski [EP444] about certificates of need or read her posts on LinkedIn)—because, look, I can guarantee you that any enterprise in the private sector, for profit or nonprofit alike, just did a three-day off-site anticipating whatever is afoot and figuring out how to make more money if the afoot whatever policy happens. Let's just not be naive here or pretend to be.

I just said regulatory capture earlier and conflict of interest, and let's please not underestimate the breadth or depth of this. Here's Bryce Platt, PharmD, with a reminder for anyone trying to pretty much fix or make healthcare affordable anywhere across the healthcare industry.

Bryce Platt: The drug channel doesn't have a villain. It has a structure, and every structure has consequences. A drug channel is a network of competing interests and hard limitations.

Manufacturers, PBMs, employers, plan sponsors, and patients each operate within the boundaries that they have, even when they're inconvenient. When one cost gets addressed, the money was someone else's revenue, and not everyone is willing to accept less money for the same work.

Stacey: Right? Bryce wrote a whole post about this.

You always have to trouble yourself with what the intermediaries or others in the marketplace are going to do. Some are very smart. Some of them do not have as their prime directive putting patients first, right? Your cost is their profit. Patient's cost is their profit, and they are going to try to do whatever they can in order to protect it.

So, in any affordability policy conversation or any affordability effort, I would strongly suggest that an opening question—maybe the most important opening question, not sure—is there a functioning market for said thing or not? Because those two are entirely different scenarios to plan for, and there will be entirely different reactions by intermediaries when there is a market versus when there is not.

If there is a functioning market, intermediaries have the potential to make less money. They don't really want functioning markets is another way to think about it. I mean, you can't double down on spread pricing if the higher the cost goes, right, like, the higher your price goes, the lower your volume is.

Right? Like, you can't, without consequences, just jack up unit costs, because when there's not a functioning market, right, for every a hundred dollars that you raise a price, you just made a hundred dollars more in profit. When there's a functioning market and you jack up the price a hundred dollars because you're trying to take the spread or whatever, you have the potential to be undercut by a competitor who's charging less money.

So, to a certain extent, if you raise your price too high, you're gonna wind up losing money. That is what a competitive market means. And that is why it is often said that the invisible hand can keep prices fair. Because if you overcharge, a competitor will come in with a more fair price. So, right. That's how supply and demand works in a functioning market.

And again, one scenario on one side of the house, there's a functioning market. The other is a very different scenario. When there is not, there is not a functioning market. The Franken machine when there's not a functioning market has just messed up the market to such an extent that there's no actual competition to successfully make care affordable for patients.

And again, I'm repeating myself, but this is really important as a policymaker in particular but even really as a plan sponsor or anybody else, you gotta take this underlying factor into account whether there is a market or not.

Okay … so, I'm gonna talk about a use case right now. For the purposes of this episode, and also for the purposes of not making this episode like four hours long, let's limit our use case. We're gonna limit our use case and only talk about making sure that generic medications are affordable, trying to get Americans access to affordable; and we're gonna limit this to pharmacy-dispensed generics.

So, what we're talking about now are your average, you know, pills or capsules that are handed to the patient or sent to the patient in those little orange pill bottles with a teal-colored top.

Okay … so, first off, again, let's just reiterate what the goal is here. No one would argue (at least I hope not) that a patient who, for financial reasons, is not taking a relatively cheap, necessary generic medication. I don't think anybody thinks that that patient should go without. Right?

And I'm saying this as our goal for reasons, not just of, like, what kind of society we all want to live in but also because of the downstream financial consequences of patients not taking meds that they need.

And, for sure, this is happening right now. We do have a cohort of patients in this country—maybe because they're not insured, can't figure out how to get covered by Medicaid or they're underinsured, could be a whole bunch of different reasons—but consider the not insignificant number of folks or their children (listen to the show with Mick Connors, MD [EP495]) who show up in the ER because they could not get or could not afford their medications.

And now, like, their underlying condition is a full-on acute medical emergency and requires, you know, like, now they need dialysis. The cost and the health consequences of not taking necessary medications—and again, we're talking about generics today—can be profoundly more than the cost of (probably relatively speaking, at least) a pretty cheap generic medication.

So again, just underlining our goal today, which is trying to figure out how to make medications affordable across the board, recognizing that affordable if you're making 200 grand a year is a very different equation than if you're unemployed, making minimum wage on fixed income, etc. But again, we are limiting our conversation today to what is normally (relatively speaking, at least) pretty cheap generic medications.

Why are those medications pretty cheap, though? The reason they are pretty cheap to begin with is because they are possibly one of the very few areas in US healthcare that has a functioning market.

I just wanna say one thing. If there's any smarty-pants out there, I am talking about multisource generics right now, which is not the situation with Martin Shkreli, "Pharma Bro," in case anyone was itching to pick a fight with me. Now I'm on a roll fighting with myself.

If someone did hypothetically slap me with a "what about Pharma Bro talk to the hand" comment, this is what I would say, which actually further proves the point I'm making. One of the reasons why the Pharma Bro story was even a story to begin with was because it's kind of unusual in the generics drug space, right? If Pharma Bro had jacked up the cost of an infusion or a CABG procedure or an ambulance ride, or, like, whatever else you can probably think of in the healthcare industry, if he had jacked it up 50 times or whatever multiple, he jacked up the price of that single-source generic medication that he started manufacturing, no one would've even noticed, right?

The reason it got noticed is because generics purchased by consumers or clinical organizations in ways that honor the underlying cash prices, in general, those meds have a real marketplace where there's real competition. Invisible hand sets the price via supply and demand curves, and yeah, this is why, again, the prices of generic meds.

I paid $1 the other day for a 30-day Rx. I do not even understand how this is possible. Right? Like, $1.

So, right … yeah. We want patients to be able to get their generic medication without financial barriers. There are many, many people who can pay $1 or $10 or $20 or even $50 a month for a script. There are some who cannot.

The goal is keeping medications affordable, and it's hard to argue with. The question is, how do you attain affordable for those where generic drugs are not currently affordable?

Because if the answer to that question is, for example, routing everything through the insurance/PBM layer to adjudicate the patient responsibility to less or for free, it may turn out somewhat counterintuitively that this actually raises underlying costs, raises premiums, raises prices, and ultimately has the opposite effect of making generic meds more affordable because we have potentially ruined the only market that possibly exists in healthcare. Was that confusing? Let's do the math. Let's start from the beginning.

The reason again cash-pay generic drugs are cheap right now is precisely because there is a functioning market for them. As Ge Bai, PhD, CPA, explains in episode 420, generics are already subject to real manufacturing competition that holds prices down. That competitive dynamic—I said multisource before—there's multiple manufacturers who are competing for cash-paying customers. Multiple manufacturers make the same molecule, prices get competed down, and the result is drugs that cost a dollar or a few dollars or even $18. I mean, like, what else can you buy that is classified as healthcare for less than, like, 20 bucks?

Again, this is the market working. No carrier needed. No PBM needed. The invisible hand showed up and did its job. And just to make a really important point here, if we're thinking about the value prop of PBMs, generally speaking, the idea there is that they can throw around their market power to get and achieve lower drug prices.

And that might be true if we're talking about, for example, branded drugs that cost a whole lot of money, that there is, in fact, it's a patent, right? That means there's not actually a market.

But we're talking about the price of cheap generics. This is the smoking gun statistic from that Ge Bai research that we talk about in episode 420. This is what she says.

Ge Bai: A study published in Annals of Internal Medicine, so they found among the 20 most prescribed generic drugs in the United States, 43% of them actually will have a higher out-of-pocket payment from patients than the GoodRx price. That's 43% of the prescriptions.

Then if you look at the prescriptions in the deductible phase, almost 80% (actually, number is 79%) of the prescriptions would have a higher out-of-pocket payment than the GoodRx price. We found a similar result for Amazon Pharmacy.

But overall, the evidence suggests, right, if PBMs don't have such a big cut, why would we see a huge difference between the out-of-pocket cost and a lower GoodRx price.

So, there are, something's taking the money out, right? That is really the, for the most part, the PBM spread pricing.

Stacey: To reiterate what Dr. Ge Bai says there, almost half of the most prescribed generic medications have a higher price. If someone uses their insurance/PBM rate to get the medication than if they just wander in off the street with, like, a GoodRx card or bought the med on Amazon or probably Mark Cuban Cost Plus Drugs or from a cash-pay pharmacy.

And for prescriptions in the deductible phase, keeping in mind that many patients never make it out of their deductible phase, this number jumps to 79%, almost 80%. Four out of five generic prescriptions are cheaper when a patient does not use their insurance and the PBM associated with that insurance.

So, yeah … anytime pretty much anybody can wander in, again, and get a better price than a Fortune 15 PBM. Getting PBMs in the mix just seems to make the drug prices higher for patients.

This is how Benjamin Jolley, PharmD, puts it in episode 422. Benjamin Jolley is a pharmacist in Utah.

He says, "Patients pay more to pay more when they get their generic drug dispensed using their insurance/PBM."

Here's Benjamin Jolley in 422 making an important point.

Benjamin Jolley: One of the things PBMs and pharmacies don't often talk about is most generic medications, these cheap ones, they're a patient-paid benefit. They're a member-paid benefit.

They're not actually, like, when you ask me to bill your insurance, they're not paying anything most of the time. If you have a large deductible, they're not paying anything ever. You're never gonna reach your deductible.

And so why should I give this PBM the authority to do all of this stuff if they're not paying anything anyways?

Why? Why do we societally do this? And, like, this is why GoodRx exists. People realize, you know, they're not actually giving me the best price. If I pay out of pocket, even if I'm paying this other middleman, I actually still end up paying less money for my medicines.

Stacey: Back to episode 420 with Ge Bai. You know who makes the most money in a generic drug transaction when a PBM gets in the mix? No, it's not the generic med manufacturer. It's not the pharmacy. Right … it's the PBM.

The PBM by a margin of 10 points makes the most money. The PBM is extracting $41 out of every $100 spent on generic drugs that cost, on average, like 47 cents to manufacture. The administrative cost burden is actually the most expensive part of buying a generic drug using a patient's insurance that's going through the PBM.

That's the insurance layer, not adding value. It's consuming value that already existed in a working market. Why are they taking 41%? What are they doing here? It has to do with what insurance actually is. It has to do with risk pooling.

What is risk pooling? Risk pooling is like, if you think about insurance. So, your house burns down, whatever, right? You have a large expense, and what's happening with that large expense is that that large expense is being spread over the risk pool. So, the entire risk pool is paying that expense. That's why you get insurance.

But if we're talking about a generic drug that costs 47 cents or a dollar or $5, we're taking that $5 expense and we're paying to have $5 spread out over the entire risk pool. That's just how much insurance is gonna cost. It's expensive to administer.

But again, if we're talking about a really cheap thing, the administrative burden of administering that risk pool is the highest, it costs the most, right?

So, bottom line here, the generic drug market is the closest thing to a real functioning market in all of US healthcare, probably. Then when you add an insurance layer or when an insurance layer inserts itself, it's gonna extract 41% as overhead. But that's also, I mean, don't forget, somebody's cost is somebody else's profit.

So, now you've got PBMs who are gonna try to protect that profit center, and they're gonna use usual suspects here, contractual mechanisms to try to suppress cash competition. But when they do that so that they can take the 41% or whatever, it leaves patients paying more than they would have if they had no insurance at all. Right? They're paying more for the privilege of having insurance.

But if we're talking about PBMs protecting their business interests here, there's another reason why PBMs insert themselves into the mix. Listen to episode 517 about the business of prior auths and how profitable it is to exclude generics from formulary.

Here's Bryce Platt (LinkedIn post) on the topic.

Bryce Platt: PBM formula decisions now determine when generic and biosimilar adoption happens. And that's primarily because pricing became secondary to coverage access.

Between 2009 and 2013, generic drugs reached 57% of their peak uptake within one month of launch. In the last five years, it took six months on average to reach that same level.

The slowdown in adoption isn't necessarily from reduced competition or prescriber resistance. It's coming from more control of the coverage from the PBMs and the payers.

Stacey: Thanks much to Bryce Platt for this stat. The whole point being when a generic drug is launched these days, there used to be really fast uptake. Many patients got the cheaper medication, right? It used to be a brand; it went generic. They got the cheaper generic real quick.

But lately, because of those in the industry protecting their profit centers, which is what we talked about before, one way that they do that, one profit center that they have, is by slowing adoption of generic drugs.

Using their market power not to help members get the benefit of the actual real market that exists for generic medications, not to make the medications more affordable, but they're using their market power to prevent patients from getting the lower prices that the market that exists will produce. Again, listen to episode 517 for a bead on what they're up to there.

And I probably should be repeating this more often in this show, but we are talking about primarily the big status quo PBMs right now, especially the ones with offshore GPOs that are negotiating with branded pharma manufacturers.

But yeah, you have those in the industry locking down their profit centers or trying to find new ones. And I say that as foreshadowing for a big potential land mine for policymakers who are trying to figure out how to make generic drugs affordable for those who maybe can't afford them now and then wind up making them cost more for everybody.

Let's talk about another way that some big PBMs are choosing to hinder patients/members from availing themselves of the lower available cash-pay rates that, again, are available due to there actually being a market.

And again, I'm gonna go over this next point because if we're trying to figure out how to make generic meds more affordable for everybody, maybe even free for some, this matters.

All right … so, I wanna talk about one solution that came up in the episode with Luke Slindee, PharmD (EP439), and I'm mentioning this because I have so rarely heard policymakers talk about it.

You talk about making generic drugs more affordable, and sometimes, so very often the only solution that you hear about or hear presented is this idea to get some PBM or some insurance carrier in the mix to adjudicate the transaction to determine the patient co-pay.

Which, again, ignores all the evidence that shows that 80% of the time for the top prescribed generics do that and the patient responsibility will be higher than it would be otherwise for these already-cheap generics. Argh!

Okay … so, here's another idea when that, again, I have so rarely heard policymakers talking about, probably because it's complicated. This solution really requires that someone really understands this market.

But I'm gonna play this clip from Luke Slindee from episode 439. And what he's talking about is the Most Favored Nation clauses. There's these "lesser of" clauses that are in the contracts between PBMs and pharmacies. There's specific contractual mechanisms that prevent the cash-pay market from being, I'm gonna say, as robust and as available to pharmacies across the country as it could be.

So, even if pharmacies wanna get into the cash-pay business and offer lower cash prices, they often can't if they are, if they accept, you know, insurance coverage, if they're in network with some PBMs. Here's Luke Slindee.

Luke Slindee: I wanna 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 anticompetitive 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 Nation 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?

Stacey: In other words, PBM contracts punish pharmacies for offering lower cash prices. If a pharmacy drops its cash price, the PBM claws back reimbursement on the insurance side of the house to match it. So, the pharmacy gets paid less for every insurance transaction then, too.

The result: Pharmacies are contractually incentivized to keep their cash prices artificially high. That's why, like, you have to go into a pharmacy with a, for example, coupon. Otherwise, if you just say to a pharmacy, "What's your cash price?" it's gonna be high.

The Most Favored Nation clause is essentially, it's an anticompetitive contract, right? So, Luke's conclusion is really important, and he's talking about getting rid of the MFN, Most Favored Nation, contract clauses.

He says it would allow pharmacies across the country to participate in this generic marketplace that already exists, but it could even be more robust. There's a reason Patrick Moore, MBA, wrote, he wrote this on LinkedIn the other day. He wrote, "So frustrating. Cash is coming. [There's just] too many hands in the cookie jar."

And look, again, no one is saying here that those who cannot afford the price of some of these meds, even though they are affordable for many, they shouldn't get help.

I think the point that Patrick Moore, I make, many are making that if you're trying to make healthcare affordable and there is actually a market somewhere such that the underlying prices are actually pretty affordable, I don't know, "mess around and find out" scenario. I'm censoring my potty mouth in case there's kids in the car.

Back to Luke Slindee, who offers perhaps the most vivid illustration (again, in episode 439), where he talks about the physical proof of a lot of what we're talking about here.

Luke Slindee: 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 outta the equation entirely."

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.

Stacey: Okay … so, if our goal is affordability and if we understand that we have to protect that market or expand that market so that those who can afford the cheap generics (which many can afford them now because they're cheap) can still afford these still-cheap generics because the cheap generics don't suddenly become really expensive generics because now we're forcing risk pooling and we're forcing all these things that can add layers onto the Franken machine that just really unnecessarily add costs.

So, let's start talking solutions.

One of them, the first one I'm gonna say, is to get rid of that usual and customary "lesser of" logic, that Most Favored Nation anticompetitive clause that Luke Slindee was talking about, from the PBM pharmacy contracts. Let's talk about some other ideas.

Ge Bai talked about this. Luke Slindee also discusses it. None of these, by the way, I have studied and done any sort of, like, analysis on—so I'm just throwing out ideas that others have suggested as your starting point.

So, after the get rid of anticompetitive clauses, my second idea here would be something like a funded wallet or a prepaid card. Maybe something HSA style, which may be more possible subsequent to the OBBB being passed, right?

Maybe this is possible, but again, the rate-limiting success factor here is to enable the cash price, again, without inserting the PBM and that administrative without requiring risk pooling and the adding of the 41 cents to every dollar, you know, onto the top. We gotta make sure that we're keeping this competitive market.

So, that would be the second idea, doing some kind of funded wallet or prepay card or whatever that a subset of patients have so that it wouldn't ruin the overall market.

The third idea is to do some stuff with cash-pay pharmacy relationships—like, for example, Cost Plus or Blueberry or Freedom, there's a number of these cash-pay pharmacies—maybe where the employer or plan sponsor simply pre-funds access.

Listen to the episode with Chris Crawford (EP465) about another way to do this.

There are some ERISA considerations to take on board, so maybe part of the policy plan of action here is to figure out how to deal with the ERISA issue that sometimes gets mentioned.

A fourth idea, figure out how to remove generics from PBM adjudication entirely. Again, you'd have to figure out how to do that while still ensuring that low-income members or individuals have the dollar support that they may need through other mechanisms. So, there's some ideas to start.

Okay … so, in summary, if a drug costs three bucks, just think about the administrative burden that goes into adjudicating the three bucks or risk pooling the three bucks, spreading the risk across the risk pool.

We gotta really think about whether it is worth it. That administrative cost burden could very well be more burdensome than the actual cost of the cost of the drug. And all we're really doing here is driving up the price of healthcare. We are adding this not only administrative layer, but we are also opening up the door for perverse incentives.

We are opening up the door for market perversions that will just make cheap generic drugs more expensive for everyone inadvertently. If we're trying to make drug costs more affordable and then we inadvertently drive up the underlying costs, the chances of those drugs becoming less affordable is very, very real.

I hope this was helpful, and I just really wanna underscore, again, the complexity of the pachinko machine that is the US healthcare system. When you really start to understand the dynamics here and the complexities and the intermediaries and what they're up to and the lengths that they are willing to go to to protect their profit centers, sometimes the most obvious ways are not the best ways; and also there may be less obvious ways that are kind of buried in the belly of the beast that might very much work better.

But you have to really understand, for example, the usual and customary Most Favored Nation pharmacy clauses. Like, no one who's a tourist in healthcare is gonna think of that.

This podcast is sponsored by Aventria Health Group. We additionally thank you so much to our series underwriter Payerset for their financial help keeping this series on the air.

And I also very much would like to express my appreciation for Patient Rights Advocate, who gave us a really, really nice donation recently that has been very, very helpful this year. Thank you so much to Patient Rights Advocate.

Thank you so much for listening.

Also mentioned in this episode are Ge Bai, PhD, CPA; Bryce Platt, PharmD; Luke Slindee, PharmD; Benjamin Jolley, PharmD; Ann Kempski; Chris Crawford; RxSaveCard; Mick Connors, MD; Patrick Moore, MBA; Aventria Health Group; Payerset; Patient Rights Advocate; and Tom Nash.

For a list of healthcare industry acronyms and terms that may be unfamiliar to you, click here.

You can learn more at aventriahealth.com and follow Stacey on LinkedIn.

00:00 Introduction to this episode.

01:30 EP444 with Ann Kempski.

02:43 LinkedIn post by Bryce Platt, PharmD, on drug pricing structure consequences.

03:48 Intermediaries versus functioning markets.

05:30 The use case for today's episode.

07:18 EP495 with Mick Connors, MD.

10:56 The reason why cash-pay generics are cheap right now.

11:03 EP420 with Ge Bai, PhD, CPA.

11:42 The value proposition of PBMs versus cheap generics.

14:13 EP422 with Benjamin Jolley, PharmD.

16:09 What risk pooling is and how it plays into all of this.

17:47 EP517 with Stacey.

17:55 LinkedIn post by Bryce Platt, PharmD, on PBMs' slow generics adoption.

20:35 EP439 with Luke Slindee, PharmD.

23:58 LinkedIn post by Patrick Moore, MBA.

26:16 Solutions to keeping generics affordable.

27:58 EP465 with Chris Crawford.

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