Daily Briefing

Why 'cash' pharmacies are booming—and what it means for health care

As prescription drug prices continue to rise, more "cash" pharmacies, which sell generic medications outside of insurance, are opening around the United States—saving some customers hundreds of dollars on their prescriptions, Adiel Kaplan, Kenzi Abou-Sabe, and Vicky Nguyen report for NBC News.

Our take: 10 health policy topics—including drug pricing reform—to watch in 2022

The struggle over high prescription drug costs

The costs of prescription drugs, which are somewhat controlled by pharmacy benefit managers (PBMs) who negotiate prices for insurance companies, have been on the rise for more than ten years now, and many patients have struggled to afford their medications.

Currently, the Federal Trade Commission has opened an inquiry into the PBM sector, particularly how vertical integration in the industry impacts access and pricing within the prescription drug market.

"An over-consolidated PBM industry is squeezing out the resources pharmacists need to provide a high level of care and access for patients," said Ilisa Bernstein, interim CEO of the American Pharmacist Association.

However, the PBM industry has argued that it helps reduce costs for patients, as well as insurers. PBM industry leaders say that the high cost of prescription drugs is largely due to pharmaceutical manufacturers.

"Our job is to drive down costs on behalf of the consumer and those paying the bill for health insurance," said JC Scott, president of the Pharmaceutical Care Management Association. "Without us, there's nothing standing between the consumer and the … drivers of high drug costs. I'm confident that once the FTC digs in and understands that, they'll reach that same conclusion."

Legislators at both the state and federal levels have introduced bills to rein in the costs of prescription drugs, but progress has so far been slow. Notably, the Inflation Reduction Act, which recently became law, includes several provisions to reduce prescription drug costs, though they are largely limited to Medicare beneficiaries.

Cash pharmacies offer some patients cheaper medications

To reduce the costs of some prescription drugs, some companies are establishing "cash" or "self-pay" pharmacies, which offer generic medications at wholesale prices, plus a small markup. By going outside of the insurance system, cash pharmacies are able to avoid potential fees and rules that increase a medication's cost.

For example, the Mark Cuban Cost Plus Drug Company (MCCPDC) is an online pharmacy that offers significant discounts on generic medications. As of June, MCCPDC offered over 700 generic medications, including those for cancer, diabetes, and gastrointestinal and heart conditions, and the pharmacy said it is "continuously working to add new drugs as quickly as possible."

According to a study published in the Annals of Internal Medicine, Medicare could have saved billions of dollars if it had purchased generic drugs through MCCPDC instead of going through the existing generic pharmaceutical distribution and reimbursement system. Overall, the researchers found that Medicare could have saved $3.6 billion on 90-day supplies of 77 out of 89 different generic medication in 2020 if it had purchased them through MCCPDC instead of Medicare Part D plans.

Local pharmacists have also opened their own small cash pharmacies to help patients save money on prescription drugs. For example, Nate Hux, a pharmacist in Pickerington, Ohio, recently opened Freedom Pharmacy, a cash pharmacy next to his regular pharmacy that accepts insurance.

According to Hux, having two separate pharmacies has allowed him to advise patients about the best place to fill their prescriptions. For drugs without generic alternatives, the insurance pharmacy would most likely be the better choice, but for other drugs, including those that have recently gone generic, the all-cash Freedom Pharmacy would likely have better deals.

"Generic Viagra and generic Cialis, those types of things, are way more expensive inside the system than just doing self-pay pharmacy," Hux. "Those would be $1,000 for a 30-day supply, maybe. And here [at Freedom], they're about $15 for a 30-day supply."

"For about 25% of people, it makes more sense to fill at Freedom," Hux added. "If I didn't own both I wouldn't know. … As I'm processing claims, one of the best things that I can see is which world is best for my patient. Is it the insurance world? Or is it the noninsurance world?"

According to Avalere Health, 91% of prescriptions in the United States are currently filled through insurance. However, cash pharmacies are beginning to grow in numbers, and many pharmacists say that they believe the savings offered and the ability to shop around for different drugs will successfully draw in customers.

"Right now, we have a system that is completely predicated upon artificially inflated drug prices," said Antonio Ciaccia, president of 3 Axis Advisors. "What cash pharmacies offer is the opposite — the antithesis. It's a return to retail fundamentals."

At Freedom Pharmacy, "sometimes it's less cost, sometimes maybe a little bit more. But at least they have a choice. They know exactly what the price is upfront," Hux said. "When consumers have choices, it's good for everyone." (Kaplan et al., NBC News, 8/19)

Advisory Board's take

Our take: Cash pay pharmacies are a symptom of the complex web of prescription drug pricing—not the solution

By Gina Lohr and Chloe Bakst

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 patients pay less at the pharmacy counter, ultimately, cash pay pharmacies are not the silver bullet solution to our current prescription drug pricing system, but rather merely a symptom of the problem.

Cash pay pharmacies lower generic drug costs by minimizing the mark-ups charged by several pharmacy supply chain players

Cash pay pharmacies minimize the mark-up for the cost of generic drugs across the complex pharmacy supply chain. 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 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. Sometimes a patient's copay alone covers more than what the PBM pays the pharmacy, and the pharmacy must return the excess copay funds to the PBM.

Cash pay pharmacies have a different, and often simpler, business model. For example, MCCPDC sells generic drugs for cash pay with a $3 pharmacy dispensing fee, $5 shipping fee, and a set 15% mark up across all drugs. This often results in a price that's actually lower than the pharmacy benefit copay at a patient's local pharmacy. However, turning to cash pay pharmacies to address the rising costs for patients does little to resolve the upstream mark-ups that will continue to impact brand and specialty medications. 

Cash pay pharmacies don't—and likely won't—cover more expensive branded and specialty medications

60% of Medicare Part D's spending in 2019 can be attributed to 250 top-selling, brand name drugs with one manufacturer and no generic or biosimilar competitors.

Cash pay pharmacies may begin to explore whether they can provide similar discounts for branded drugs, but we think it's unlikely that the model would work as well in this area. To cover brand drugs, they 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.

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

In 2019, the average number of prescriptions per Medicare Part D beneficiary was 54 per year. Patients may find value in 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 benefit from running all their medications through their insurance—even if they could get a better price on some at the cash pay pharmacy—so they hit their deductible sooner. 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.

Cash pay pharmacies challenge PBMs to prove their value

The prescription drug supply chain is complex and confusing. Cash pay pharmacies are shining a new light onto how this system works—or doesn't work—for patients. Insured patients are already paying their insurance premiums in exchange for appropriate coverage of their health care costs. When third-party, out-of-network pharmacies offer patients a better deal, patients may begin to question the value of having pharmacy benefit coverage at all.

Cash pay pharmacies may help patients better afford their medications in the short term. In the longer term, they may prompt PBMs to compete for patients and evaluate their strategies with a lens for patient impact. Ultimately, cash pay pharmacies' value proposition—low prices and improved user experience—depend on the status quo of the prescription drug pricing remaining mysterious and costly for patients.


Health policy topics to watch in 2022

The legislative, regulatory, and judicial outlook for health policy in 2022


The Biden administration's first year in office was unsurprisingly dominated by the Covid-19 pandemic. While Democrats in Congress were able to pass part one of President Biden’s infrastructure package, other health care priorities were largely sidelined. As we look to 2022, there are 10 key health care topics that are ripe for congressional or regulatory action. If and how Congress and the Biden administration move on those actions will have strategic implications for industry executives across the health care ecosystem.







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