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Disruptor or distraction? What you need to know about cash-pay pharmacies.

By Regina LohrChloe Bakst

March 3, 2023

    Cash-pay pharmacies have received a lot of media attention lately as more patients—both with and without insurance — use them. One reason why cash-pay pharmacies have grown in number and popularity is that insured patients have found cash-pay pharmacies may offer lower prices for common, generic medications than their in-network pharmacy copay.

    While this may help some patients pay less at the pharmacy counter, ultimately, cash-pay pharmacies are not the silver bullet solution to our current pharmacy system. These pharmacies typically only address the 20% of drug spending related to generic medications, and they may also introduce more care fragmentation into a system where patients would benefit from more coordination.

    The business model of cash-pay pharmacies

    Cash-pay pharmacies lower generic drug costs by minimizing the mark-ups charged by several pharmacy supply chain players. When a prescription drug moves from manufacturer to patient, manufacturers, wholesalers, and pharmacies all mark up the price of the drug to cover their expenses and add some extra profit for their bottom line.

    In addition, when a pharmacy benefit manager (PBM) is involved, they may also mark up the cost by charging the patient (or the patient's health plan) more than what they reimbursed the pharmacy for the medication.

    By circumventing the insurance system, cash-pay pharmacies typically have a simpler pricing model. Many use a cash-plus pricing system, meaning that they sell medications for the price they pay to acquire the drug, plus a standard pharmacy dispensing fee. This often results in a price that's actually lower than the patient's copay via their pharmacy benefit at a traditional pharmacy.

    A focus on generics limits cash-pay pharmacies' impact

    However, cash-pay pharmacies do little to address rising patient costs for brand and specialty medications. Cash-pay pharmacies don't typically dispense more expensive branded and specialty medications. Considering that 60% of Medicare Part D's spending in 2019 was attributed to 250 top-selling, brand name drugs with one manufacturer and no generic or biosimilar competitors, this greatly limits the ability of cash-pay pharmacies to impact overall drug spend.

    Some cash-pay pharmacies have said they will explore providing discounts for branded drugs, as well, but the model is unproven in this area. To cover brand drugs, cash-pay pharmacies would need to negotiate with drug manufacturers — one of the main functions of PBMs.

    Negotiating with manufacturers is not a simple task. Cash-pay pharmacies lack the scale of the largest PBMs, which means they have less negotiating power to drive down prices. They also don't have the same tools as PBMs to drive the steepest discounts, such as formulary placement or utilization management strategies. The sheer number of manufacturers would also make negotiations difficult for a small or even mid-size cash-pay pharmacy.

    Manufacturers may be willing to give discounts to make their drug competitive at the cash-pay pharmacy as an alternative to negotiating the steep discounts needed to get on formulary with a PBM.  However, such discounts might undercut their negotiating strategy with PBMs, which in turn could push manufacturers away from working with cash-pay pharmacies.

    The value of cash-pay pharmacies may be limited for patients spending the most on drugs

    Cash-pay pharmacies — especially mail order cash-pay pharmacies — may also exacerbate challenges with care fragmentation for patients with many prescriptions.  Since cash pharmacies typically only dispense a limited list of medications, patients taking multiple prescriptions may still have to use other pharmacies for prescriptions for brand or specialty drugs.

    Considering that the average Medicare Part D beneficiary had 54 prescriptions in 2018, it's safe to assume they would benefit from having one pharmacy that can sync up refills and look across all their medications to make sure there aren't contraindications for new drugs, rather than dividing their prescriptions between cash-pay and traditional pharmacies.

    Patients with multiple prescriptions may also find some financial benefit from running all their medications through their insurance so they hit their deductible sooner — even if they could get a better price on some prescriptions at the cash-pay pharmacy.

    However, that's a complex and confusing calculation, and it will be up to individual patients to decide what makes the most financial sense based on their unique situations.

    What to watch: Cash-pay pharmacies challenge PBMs and others to prove their value

    Ultimately, the biggest value that cash-pay pharmacies may provide in addressing the drug cost challenges is shining a light onto how the pharmacy system works — or doesn't work — for patients.

    This is already leading to short-term changes across the pharmacy benefit space.  As employers and patients see third-party, out-of-network pharmacies offering better deals than what is "negotiated" through their health insurance plans, employers have begun demanding inclusion of cash-pay pharmacies in their plans. PBMs have been responding with their own cash-pay offerings or partnerships.

    The long-term impact is hazier. Here are three questions we're watching to help us understand whether cash-pay pharmacies will lead to any longer-term solutions in the pharmacy system.

    1. Will plans implement additional value-based benefit designs to reduce barriers for patients to access important, often generic, medications needed to maintain good health? Medicare has already signaled steps in this direction with their proposed payment model designed to cap the out-of-pocket expenses for certain generic medications under Medicare Part D.
    2. Will cash-pay pharmacies lead to improved medication adherence and better outcomes for vulnerable populations, or will the potential for care fragmentation actually lead to more challenges in the long term?
    3. How will PBMs make up for any revenue loss around generic medications? Historically, PBMs have been adept at finding ways to maintain overall revenue growth while responding to employer demands for lowering costs in certain areas. We'll be watching to see whether broader changes lead to a simpler or more complex pharmacy system as a whole.

    Tackling the myth that larger drug copays lower cost of care

    imageGiven rising list prices and increasing rates of drug consumption, many health plan leaders and employers are seeking ways to lower drug costs for their plans. Some stakeholders theorize that increasing patient cost-sharing for medications will lower drug costs, thus lowering overall healthcare costs. The reality is more complex. More patient financial responsibility has been shown to decrease medication utilization, which in many cases increases medical costs down the line.

    In this mythbuster, we walk through three reasons why the myth that higher copays for medications lowers total cost of care is wrong — and provide next steps for stakeholders to shape the future of drug benefit design.

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