Mark Cuban and Amazon Are Shaking Up Generic Drugs

With the country’s largest insurers now owning those middlemen through a series of acquisitions, the way these pharmacy-benefit managers profit from the generic-drug supply chain has grown even more arcane. The lack of transparency is familiar to anyone who has filled a prescription at one pharmacy only to find out the price was much lower elsewhere. Numerous startups have emerged in recent years to help consumers seek lower generic-drug prices, from

GoodRx

to Capsule to Blink Health. Nonprofits like Civica Rx, which last year announced plans to make insulins at affordable prices, are also at work to address market distortions. 

Now, two household names are pushing into the huge market with different strategies. Last month,

Amazon.

com said it is launching a new benefit for Prime members that offers unlimited access to some generic medications for $5 a month. Like many of its healthcare moves to date, this one is fairly small and won’t immediately disrupt the industry. Yet, when put together with Amazon’s purchase of One Medical clinics last year for $3.9 billion, it makes clear that the tech juggernaut intends to build a serious healthcare vertical. How it will make money still isn’t, but Amazon has proven time and again it is willing to bleed cash on various ventures as a way to build overall engagement with Prime.

Mark Cuban

Cost Plus Drug Co., recently launched by the billionaire entrepreneur, represents a more transparent effort aimed at tackling high generic-drug prices. While companies like GoodRx spend hundreds of millions of dollars in marketing, the “Shark Tank” host is getting a dose of free media (this column included) due to his fame.

Mr. Cuban’s approach is to offer lower-priced generics by cutting out middlemen, charging what it says reflects manufacturer prices plus a consistent markup. Margins on some generic drugs can be unjustifiably high and Cuban’s approach, to just give those margins away, is certainly spooking industry behemoths.

Lots of money is at stake. Scroll over to Cost Plus and you will find the cancer drug Imatinib priced at $14.40 for 30 pills. Meanwhile, the retail price for the same product could be hundreds, even thousands, of dollars at other pharmacies, according to GoodRx data. Antonio Ciaccia, chief executive of the drug-pricing research nonprofit 46brooklyn Research, says that, while such moves may not currently be taking huge market share away from traditional pharmacies, they are alerting consumers and employers to the fact that they can get generic drugs much more cheaply.

“The question that every employer is asking right now is, `Why are Mark Cuban’s prices so low?’ ” says Mr. Ciaccia. “It’s dominating the discourse right now.”

To be sure, Cuban’s business is tiny compared with the giant middlemen. The largest pharmacy-benefit managers are

UnitedHealth Group Inc.’s

Optum Rx, Cigna’s Evernorth/Express Scripts and CVS-Aetna’s Caremark. Because these PBMs control about 80% of U.S. prescription claims, they can limit Mr. Cuban’s reach by not contracting with his pharmacy. That is why Mr. Cuban’s business is focusing on cash-paying customers for now. Mr. Cuban writes in an email that his company is engaging with many self-insured employers who want to find ways to bring down their costs. 

“This is the first time they can easily compare the price they are being charged with the price we charge,” he wrote. “And the same with clinics and others that offer healthcare services. Just showing our cost has changed how companies look at their costs.”

Another obstacle for many of the disrupters, including Amazon and Mr. Cuban, is that they are focused on mail order, which isn’t going to replace the physical pharmacy anytime soon. Cuban acknowledges that limitation, noting that employers are asking for “local pick up when mail order isn’t the best fit.” He added that his company is “developing an affiliate network of independent pharmacies to enable pick up.”

What these efforts show, says University of Southern California Schaeffer Center Senior Fellow Karen Van Nuys, is that in the future more consumers might ultimately bypass insurance companies altogether. Her research has shown that consumers tend to overpay for generic drugs when they use insurance. She says the economic rationale for insuring cheap generic drugs is weak since their use is often predictable and the expense modest, much like toothpaste.

Ultimately, says Mr. Ciaccia, employers seeking to cut costs could either force the largest PBMs to include a pharmacy like Cost Plus in their plan or instead provide discount cards so that employees can buy the priciest drugs directly from such pharmacies.  

Established players aren’t sitting still. Optum Rx said last month that it was launching a new tool aimed at making it easier to compare the direct-to-consumer price for generic drugs with insurance pricing.

Exorbitant markups won’t disappear all at once, but competition from upstarts is good news for patients.

Write to David Wainer at [email protected]