Transitioning to Value Instead of Volume in the Drug Market?

Image credit: phys.org

In response to some of my recent posts on pharmacy benefit managers (PBMs), as well as my overall interest lately in understanding the drug market better, someone asked what a value-based PBM would look like. Interesting question!

When analyzing healthcare from a “value versus volume” perspective, realizing exactly what we mean by that is an important starting point.

Consider what we mean when we say that healthcare providers are “rewarded for volume.” This is usually interpreted to mean healthcare providers are paid in a fee-for-service way–they deliver a service, they get paid. Which means they make more money when they deliver more services, so the incentive is to deliver as many services as possible.

And when we say that providers are “rewarded for value,” this is usually referring to some form of capitation, which means they get paid per head (that’s where the capit part of capitation comes from). In other words, providers would, for example, get paid a monthly fee for every patient whose care they are responsible for. Which means they make more money when they deliver fewer services (which, theoretically, happens when they are doing the right things to prevent their patients from getting sick).

These two methods of reimbursement are seen as “good” and “bad.” Capitation and its variations have good incentives (to prevent illness) and fee for service has bad incentives.

But they’re not opposites, like two sides of a coin or something. They are actually two different ends of a single spectrum. That spectrum is the “breadth of products/services sold as a single unit” spectrum. (I should come up with a better name for it.)

At one end of the spectrum, you have people buying very narrowly defined things. Like if a hospital really did send you a bill for every single nursing task and bandage and bag of saline and tablet of acetaminophen you received while you were there. This is the essence of fee for service–buying narrowly defined things. A doctor visit here, a procedure there.

The other end of the spectrum is buying very broadly defined things. Like paying a healthcare organization an annual fee for covering every single healthcare need that you could possibly have during that year, all inclusive. Every surgery and cancer treatment and emergency department visit etc. would be included.

I’ve written about all this before (way back in 2013!), but the way to figure out where on the spectrum the service should sit (i.e., how broadly defined the product/service should be) is to think about it from the patient’s perspective to see what “job” they want done that it’s fulfilling for them.

The easy example is if someone needs a hip replacement, let’s say they’ve tried all the conservative measures and now their job is simply to get their hip replaced and then recover/rehab from that. So why would they pay separately for the surgeon’s time, the OR time, the anesthesiologist’s time, the medications administered, the hardware used, the physical therapy appointments, the pre-op and post-op appointments, etc., when they could just pay a single lump sum to get their job fulfilled?

When we buy a plane ticket, we don’t pay a separate bill for the airplane depreciation, the fuel, the pilot’s time, the flight attendant’s time, the snack, etc., right? No, we just pay for the single plane ticket that includes all the products and services that go into getting us from point A to point B.

Using that principle of identifying the job to be done and then defining the service as broadly as is necessary to allow the patient to pay a single price for getting that job fulfilled will allow anyone to determine where on the “breadth of products/services sold as a single unit” spectrum anything in the world should sit.

So what about the drug market?

Much of the time, we know pretty well how long we’ll be on a medication. If it’s an asthma med, such as an inhaled corticosteroid, usually the patient will be on it for years or decades, so just knowing how much it costs per month is probably the right breadth of services.

Or, if it’s not a chronic medication, such as a cure for hepatitis C, figuring out the total cost of your direct-acting antiviral regimen is pretty easy if you at least know how much each pill will cost you and how many days (weeks) your treatment course will last.

My point is that the drug market, even though you’re typically buying either a short course of pills or a monthly allotment of them, is already “value based” because the breadth of products is attuned to the job you have for the medication (“keep my asthma at bay for 1 month,” or, “cure my hepatitis C”).

How do PBMs fit into all this?

Well, they’re middlemen. As far as I can tell, even though they’re the ones making the formularies, they aren’t really doing anything to actively shift the breadth of products sold one way or another, which is good because it already seems to be sitting on the spectrum in a good place.

Is there a role for including medications in capitated arrangements so that patients’ diabetes and hypertension and heart failure meds are all included in their annual or monthly fee? I guess that’s possible–it would encourage providers to choose cheaper meds, and it would decrease financially motivated medication nonadherence. So maybe PBMs would be involved in coordinating those efforts.

Ultimately, the big improvements that will change the drug market aren’t so much going to come from optimizations in the volume versus value space, but rather they will come from increasing competition and value-sensitive decisions. And maybe from limiting the degree to which PBMs distort the market? But I’m still figuring that one out.

Why Does GoodRx Exist, and How Does It Work

Stacks of GoodRx cards sent to me at my place of employment

Last week, I wrote about pharmacy benefit managers (PBMs), which are the companies that insurers contract with to help them create and manage their drug formularies. These PBMs also have significant power in the market as the ones who, to a fair extent, influence which prescriptions patients get because they control the patient’s copay for each medicine, so they take advantage of that by getting kickbacks from manufacturers to make those manufacturers’ drugs cheaper for patients.

And now PBMs come into play again this week as we look at GoodRx. The most useful source I found when reading about GoodRx is right on the company’s website, an FAQ for pharmacy staff. Also, this review of their public filings was very helpful.

First, what is GoodRx? It’s a company that offers a free prescription card that patients can use to get discounts on their medications, and you can check what the discounted price will be at pharmacies in your area. (They’ve since branched out now into subscription programs and telehealth, but I’ll focus on their original line of business here.) GoodRx prescription discount cards don’t work in addition to insurance; rather, you either buy the medication through your insurance plan or you pay without insurance and use a GoodRx card to get a better price.

I have no financial interest in GoodRx, but it seems like a no-brainer for anyone who is about to buy a medication through insurance to ask how much their copay will be and then pull up the GoodRx app right then and there to see if any local pharmacies can offer the med cheaper through GoodRx (and, according to a couple journalists who tried that, they got a cheaper price through GoodRx about 40% of the time for the most commonly prescribed medications). Just remember though that the money spent on medications when using GoodRx does not count toward your deductible.

It makes sense that there would be a website/app that lists the prices of medications at multiple pharmacies so patients can price shop, but what’s with these discount card prices being lower than the cash prices?

Pharmacies, in their contracts with PBMs, will not get paid more than their list price. So, to avoid missing out on money that PBMs would be perfectly willing to pay them, they make sure to set their list price (i.e., cash price) higher than what any contracted price with a PBM will be. So you should expect cash prices to always be higher than the price you’ll get by going through your insurer, although I’m sure this rule is broken sometimes. Because it’s American healthcare.

On the GoodRx website/app, the prices shown are not cash prices though. They’re the actual prices that pharmacies have contracted with PBMs. These prices vary significantly from pharmacy-PBM contract to pharmacy-PBM contract, mostly because of the complexity and sheer number of different medications that they are negotiating over, which means they cannot possibly negotiate over every individual medication, so instead they negotiate over groups of medications. This means some medications in that group will end up being cheaper than they would otherwise be, and others in that group will end up being more expensive.

This is summed up nicely in a quote by GoodRx co-founder, Doug Hirsch: “We said, let’s see if we can gather all these prices and see if we can exploit the variation in these contracts.”

But this means pharmacies are stuck selling medications to tons of people at prices that they accidentally undervalued in a negotiation with a single PBM. Sure, short of adding a gag clause to their contract, they can’t stop the PBM from sharing that price with GoodRx, but why in the world would pharmacies ever agree to let tons of other patients not even covered by that PBM walk out with a medicine for that same undervalued price?

They actually don’t have a choice. PBMs require in their contracts with pharmacies to accept the GoodRx discount card price. GoodRx does try to make pharmacies feel better about it by saying that “once patients are in the pharmacy, they are also more likely to purchase non-prescription items at the store.” Ok great, so the medication turns into a forced loss leader.

There’s one more big piece to this puzzle. Why would PBMs go along with GoodRx in the first place? Think about it from their perspective. They are angering pharmacies by forcing acceptance of GoodRx as part of their contracts, and they are the ones sharing all their contracted prices with GoodRx and then left looking bad after patients find out their PBM didn’t get the best negotiated price on a large minority of medications. In short, what’s in it for the PBMs?

Money. I suspect the PBM is getting a cut of every transaction that uses GoodRx because the PBM is the one adjudicating the claim. They’re also giving a cut of it to GoodRx as a reward for bringing them the extra claim.

PBMs and GoodRx both seem to win, as do patients if they’re finding lower prices. So if GoodRx is actually decreasing prescription spending, where is the money coming from? There’s only one party left. Pharmacies must be the ones taking the loss. I wonder if that loss-leader argument actually makes pharmacies more than they are losing on this whole venture. My suspicion is that it’s hard to prove one way or the other, but I doubt it.