Cracking Down on the 'Legal' Drug Cartel

Source: DALL-E via Bing

(A version of this originally ran at Empire Financial Research)

Why does a 60-day supply of a chemo drug cost $17,000 at CVS (CVS), but just $72 at Mark Cuban's Cost Plus Drugs?

That's what a Congressional subcommittee demanded an answer to in recent hearings as it decided unanimously to crack down on pharmacy benefit managers ("PBMs").

I've been ranting about PBMs for years, going way back to 2012, and more recently, in an Empire Financial Daily essay titled, "Scrutinizing the 'Legal' Drug Cartel" – when I wrote...

Talk about cartels... In the murky world of drug pricing, the PBMs are the middlemen – or as the FTC puts it, the "powerful middlemen."

It's great to see Congress finally take a peek, with a second hearing earlier this week, but realistically, jaded as I am, I doubt anything will come of it.

The PBM lobby is simply too powerful, and Congress is simply too divided and weak.

But that doesn't mean I plan to stop ranting...

If you don't know what PBMs are, you're not alone...

They're the middlemen between the pharmacies and the insurance companies. They also handle the distribution and sales of drugs for insurance companies and government programs, like Medicare.

They portray themselves as the good guys who help lower the cost of drugs.

But to most of us, they're just the opposite...

They're the entity that runs the "formularies" that decide which drugs are covered by your insurance plan. That means they have final say in what drugs are available to you, where you can pick them up, and what prices you pay for them.

If you're a pill popper, as I am, you've likely experienced some version of what I like to refer to as the "Formulary Follies."

That's when your doctor prescribes a drug, but then the pharmacy tells you that "it's not in the formulary." So your doctor then has to jump through hoops explaining why that drug is the right drug for you and should be covered. Then, even if it ultimately is, you might have to pay a big premium, because... it's not in the formulary.

And get this: That formulary changes every year, thanks to all sorts of opaque backroom wheeling and dealing the PBMs have with the drug companies, which in turn causes havoc for many of us, especially those of us on Medicare. (If you're on Medicare, you might want to read my latest annual rant on that here.)

It makes absolutely no sense, but there is little you or I can do about it.

Here's the crazy part...

The biggest PBMs are CVS Health's Caremark, Cigna's (CI) Express Scripts, and UnitedHealth's (UNH) OptumRx, which together control nearly 80% of the market.

The latter two are owned by insurance companies, while CVS owns an insurance company.

Talk about conflicts!

But wait, there’s more…

A stunning investigation by the publication STAT, published earlier this week, exposed an equally disturbing and opaque conflict that one attorney called “beyond unethical.” Or as STAT explains…

Some consulting firms often are getting paid more — a lot more — by the PBMs and health insurance carriers that they are supposed to scrutinize than by companies they are supposed to be looking out for.

Consulting firms can collect at least $1 per prescription from the largest PBMs, according to more than a dozen independent drug benefits consultants and attorneys involved with employers’ PBM contracts. That can go as high as $5 per prescription in extreme cases, three of those people said. Consulting firms and brokerages may receive a certain dollar amount for each covered employee and member. Or they may share in the rebates that the PBMs pluck from pharmaceutical manufacturers — money that otherwise could be used by employers to lower premiums for their workers.

As the United States spends more than $600 billion per year on medicines, these little-known arrangements could add up to billions of dollars on their own, some experts estimate.

The irony is that PBMs were devised in the 1960s to lower prescription drug costs...

The idea was that PBMs would use their vast networks to negotiate lower reimbursement rates with pharmacies and discounts with drug manufacturers. Since they were supposedly "independent," they had incentive to pass those savings back to their health plan sponsors, and therefore, to patients.

This setup soured as drugmakers increasingly acquired PBMs.

Think about that for moment...

The drug manufacturers were coordinating pricing policies, spying on competitors' pricing information, and favoring their own drugs over others.

By the 1990s, the Federal Trade Commission ("FTC") cracked down, and before long, those deals were unwound.

And who bought them? If you haven't already guessed, the pharmacies did!

Starting with CVS' 2007 acquisition of Caremark for $27 billion, the idea was that the combination would help it provide customers with a more comprehensive range of services and a more seamless experience. For instance, CVS customers with a Caremark plan could fill their prescriptions at any CVS location.

Seems convenient enough... But did anybody ever wonder what would happen if CVS decided to give pricing preference to drugs dispensed from its own stores?

That's an obvious conflict, right?

Not according to the PBMs, who blame the drug companies for the pricing mess. Their trade group – the Pharmaceutical Care Management Association – goes so far as to warn in big, bold type on its website...

Don't let big drug companies' smoke and mirrors fool you: High drug costs start and end with them.

That brings us back to Cost Plus Drugs, which is proof it doesn't have to be this way...

As I wrote last October, Mark is proving to be the disrupter of an industry that nobody else seemed to be able to disrupt.

Even if others had the idea he has, nobody else has been able to execute on it.

And let me state upfront: I'm a fan because I'm a customer. I'm now using Cost Plus for three of the six generic drugs I take every day. It's better than GoodRx (GDRX) and Costco (COST), and quite often – 50% of the time this year – better than my supplemental Medicare drug plan. And I’m not just talking nickels and dimes, but dozens of dollars.

Cost Plus can do this, it says, because it takes a simple 15% markup to sell only generic and unbranded drugs.

And it hasn't even started manufacturing its own drugs, which it claims it intends to do.

 Of course, there are tradeoffs...

Don't expect to call and talk to someone or get a personal reply to any question you might have... certainly not in a timely manner.

Beyond that, I've found it to be no different than any other mail-order pharmacy. The scripts are filled quickly, they keep me in the loop, and within a few days the drugs are delivered to my front step.

You can only hope that Mark has stumbled on something here and somehow helps disrupt the cartel.

I know I said I don't think Congress will do anything, but doing something on this issue might be the most bipartisan thing they could do.

It would be a win-win for everybody... except, of course, the PBMs.

— A special thanks to Empire's Kyle Wehrle for his research on this piece.

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DISCLAIMER: This is solely my opinion based on my observations and interpretations of events, based on published facts, and should not be construed as investment advice.

(I write two investment newsletters for Empire Financial Research, Empire Real Wealth and Herb Greenberg’s Quant-X System. For more information, click here and here.)

Feel free to contact me at herbgreenberg@substack.com. You can follow me on Twitter @herbgreenberg.