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Medication pricing: So this is how it works


This is the second part in a series on medication pricing.

In my last column, I looked at the tremendous variation in prices among pharmacies for two psychotropic medications, aripiprazole and modafinil. The cash price variation could be as much as 45 times more from one pharmacy to the next, which I found to be both outrageous and incomprehensible.

To learn more about pharmaceutical pricing, I contacted Doug Hirsch, the cofounder of GoodRx, a firm based in Santa Monica, Calif., that offers deep discounts on some medications. The company sends discount cards to physicians’ offices – call me if you need some, I have many boxes of GoodRx cards – and has a website ( and an app. It advertises that it is about transparency, and if you’ve ever tried the company’s site or app, the service it offers is remarkable and simple to use.

Woman preparing to take pain killer meds at nighttime tab1962/Thinkstock
You plug in the medication you’re interested in, include the dose and quantity you’d like, and add your ZIP code, then a list of pharmacies with the GoodRx discounted prices is generated for easy comparison shopping. It tells you how far each pharmacy is from your current location and provides the discount codes; the phone, fax, and hours of operation for the pharmacy; and a link to a map with driving directions. And if driving to multiple pharmacies to get the best price on multiple medications seems too difficult, in what is just short of miraculous technology, the app allows people to enter in all their medications and shows the comparative prices for the bundle. In short, GoodRx is to medication pricing what Trivago is to hotel rates. The technology is impressive, and it’s worth noting that the founders of GoodRx previously worked in top positions at Facebook.

I approached Mr. Hirsch with two simple questions. The company offers “up to 90% discount” on the cash price of medications through its app, website, or discount card – all of which can be gotten for free. I wanted to know 1) Who pays for this difference in the medication cost, and 2) How does the company, with 95 employees, make any money? Mr. Hirsch was gracious enough (and patient enough!) to spend the next hour walking me through the steps of medication pricing. It was a lively conversation, so let me share with you what I have learned.

Medications are made by a pharmaceutical company or, for generics, there may be many manufacturers. The medications are sent to a pharmaceutical distributor, such as McKesson, and it, in turn, sells and delivers the products to pharmacy chains, as well as to smaller, independent pharmacies. The pharmacies pay an acquisition cost for medications then set a price for these medications that are considerably – or even astronomically – higher than the acquisition price. This is the cash retail price, or in medicine, what is called the Usual & Customary (U&C) cost of the medication. The price may be neither usual, customary, nor reasonable, and it’s not the price the pharmacy expects to recoup on sales.

Every major insurance company contracts with a pharmacy benefits manager (for example, Caremark, Express Scripts, and Optum) to negotiate the cost of medications with each major pharmacy chain. Physicians are familiar with PBMs, who intercede by requiring preauthorization procedures for certain medications or by instituting stepwise, fail-first, requirements before they will allow pharmacy benefits toward the purchase of medications. When the PBMs negotiate with the pharmacies, they will negotiate for a discount off the pharmacy’s U&C charge for medication, perhaps a discount as much as 75% or 80%. Mr. Hirsch noted, “The discount is not negotiated on a per-medication basis but as an across-the-board average, so for one medication, the insurance price may be 2% discount from the U&C cost, and on another medicine it may be 95%. There is a dramatic variation, more than you’d ever expect.”

GoodRx gathers prices from many places, including partnerships with a number of PBMs. In addition to providing discounted prices for insured customers, the PBMs also include in their negotiations a slightly less-discounted price for cash-paying patients who present with a GoodRx card or coupon. You might be surprised to learn that discounted prices can often be less than the typical patient copay. For patients with a high deductible, for medications that are not covered at all, or for times when the copay is higher than the cost of the medication, it will often be less expensive for patients to use a GoodRx discount instead of their insurance. And whether patients uses either their insurance or a GoodRx discount, part of the cost of the prescription includes an administrative fee that goes to the PBM. When GoodRx cards are used, the PBM pays GoodRx part of that fee. I hope you are still with me, because this is the part of the conversation where I started telling Mr. Hirsch that I was getting a headache.

I went back to the enormous cost discrepancy that I had discovered a couple of years ago with Provigil (modafinil). Thirty pills cost just under $35 at Costco, while all other pharmacies were charging close to $1,000. Mr. Hirsch explained, “From what I’ve been told, Costco bases their prices on their acquisition costs and then raises them a certain percent. It’s one way to provide a fair price, but that doesn’t mean they always have the lowest price. They are also the only major pharmacy that lists their drug prices on their website.”

I wanted to know what was in it for the PBMs. Why would Express Scripts be motivated to negotiate a discount in price for cash-paying customers outside of the insurance networks, and how did partnering with GoodRx benefit them? The answer, in part, lies with the fact that the website and app allow patients to comparison shop and go to pharmacies with lower prices. If patients use their insurance, the insurance company is paying less; if they don’t use their insurance because they learned the cash cost is less, then the cost burden has shifted from the insurance company entirely to the patient.

What’s in it for the pharmacies? Why would they be willing to accept less money from a patient bearing a discount card? Mr. Hirsch explained, “Pharmacies want to honor their contracts with PBMs, and the U&C prices are set high to enable negotiation so that they still make some profit. Most people couldn’t afford to pay the high U&C, but they can’t lower them for individual cash-pay customers because that would violate their agreements with PBMs, and Medicare and Medicaid, which is a felony. With the GoodRx price, they still make a profit, and people in drugstores buy other items as well.

Dr. Dinah Miller
Dr. Dinah Miller
“I can’t emphasize enough that the pharmacies are very happy to work with us,” Mr. Hirsch went on to say. “They get more patients, and in certain areas, a prescription that costs over $15 may never be picked up. Many pharmacies are frustrated; they want a fair price where they can make a profit, and every year, 200 million prescription orders are left at pharmacies, and the medicines are never picked up. Nonadherence to medication comes at an enormous cost in this country – roughly $300 billion in medical expenses. I started this company because I was trying to figure out a problem with my own medication. We want medications to be affordable.”

GoodRx has 95 employees, and I was still left wondering how they generate income. Mr. Hirsch pinned it down to three sources: the portion of the administration fees the PBMs pay GoodRx, a small amount of advertising, and finally, GoodRx provides technology for the PBMs and charges for this service.

“We started asking how we could gather prices in this bizarre marketplace and address the pricing inefficiencies,” Mr. Hirsch said, “and now I get emails every day expressing gratitude.”

Dr. Miller is coauthor with Annette Hanson, MD, of “Committed: The Battle Over Involuntary Psychiatric Care” (Baltimore: Johns Hopkins University Press, 2016).

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