Arguably no segment of the healthcare industry is more susceptible to disruption than the market for prescription drugs, as Alex Oshmyansky, MD, PhD, made clear Wednesday morning during the closing session of HFMA’s Annual Conference.
Oshmyansky spoke about his personal efforts to disrupt the pharmaceutical market in his role as co-founder and CEO of Mark Cuban Cost Plus Drug Company. The notion took hold about 10 years ago, when he was a resident in training to be a radiologist.
A pulmonologist colleague told Oshmyansky that two patients recently had died because they needed a drug that was long off patent yet cost $10,000 per month. The patients succumbed to their disease while waiting to be approved for financial assistance from a nonprofit.
When the industrywide problem only seemed to become exacerbated in ensuing years, Oshmyansky decided to take the initiative in search of an alternative model.
A new blueprint
After working out the seed funding and ultimately partnering with the billionaire businessman Mark Cuban, Oshmyansky developed what he refers to as a “parallel supply chain for the pharmaceutical industry,” anchored by a manufacturing facility in Dallas. The company launched in January 2022 and quickly began making a name for itself.
The manufacturing facility primarily focuses on drugs that are in short supply, and it is “built from the ground up to be able to pivot from making one product type to another very rapidly, in principle within four hours,” Oshmyansky said.
But Cuban and Oshmyansky realized they would need to do more because cheaper drugs wouldn’t be enticing for wholesalers and pharmacy chains to stock or pharmaceutical benefit managers (PBMs) to include in formularies. They decided to build out an entire infrastructure for getting drugs to the market. The company now is a registered wholesaler in all 50 states.
Oshmyansky knows the model goes against a core principle of running a new business, namely that it is advisable to focus on doing one thing well.
“Unfortunately, we don’t have that luxury,” he said. “If we really want to get the product all the way to the patient at the price that it should cost, we have to own the whole thing. Otherwise, a bad actor in between can block us.”
The company’s wholesaling arm primarily has done business through a direct-to-consumer, mail-order pharmacy, along with partnerships with external vendors. Upcoming initiatives include building a retail network of pharmacies and offering products as a benefit to self-insured employers and regional health plans.
By August, he said, the plan is to open up sales to acute care hospitals.
Oshmyansky also said the company is negotiating agreements to allow for same-day delivery to consumers in major metropolitan areas.
A new approach to wholesaling
Three wholesalers control 90% of the pharmaceutical market either directly or through source programs, Oshmyansky said. Those companies have the clout to negotiate favorable prices from drug companies while avoiding supply-and-demand pressure to pass along savings to purchasers.
Margin for the wholesalers is derived from the wholesale acquisition cost (WAC), which Oshmyansky said is eight to nine times the actual cost of a generic drug. Wholesaler fees typically are around 10% or 15% of WAC, almost doubling the purchase price for a pharmacy or hospital.
Then again, “At least the wholesalers provide a service,” he said.
That’s not the case, he implied, with the leading target of the company’s efforts at disintermediation.
“Pharmacy benefit managers are, in our view, significantly more problematic,” he said.
Improving a skewed model
Looking at the big picture, Oshmyansky noted the U.S. spends 2.5 times more on pharmaceuticals per capita than comparable nations.
“One of two things has happened, in my mind,” he said. “Our negotiators are terrible at it, or they’re not aligned to get the best prices.”
He added, “Every industry has its middlemen that take a little bit too much of the pie, but in this industry, it’s just nuts. The status quo can’t hold.”
PBMs start off with “an absurdly high sticker price for the drug, to negotiate off of,” Oshmyansky said, referring to the average wholesale price (AWP). “We consider this the worst thing in pharma pricing.”
PBMs then amass profits by keeping a percentage of the discount. They also charge purchasers more than the payment to manufacturers and pocket the difference, a practice known as spread pricing.
In the case of one chemotherapy drug, patients report having to pay between $2,000 and $3,200 for a one-month supply. Meanwhile, Cuban’s company lists the drug for $30 per month.
As policymakers looked to crack down on PBM practices, large PBMs responded by promising not to use spread pricing and to pass along all rebate savings. But that pledge doesn’t apply to PBM subsidiaries known as rebate aggregators.
The aggregators “are domiciled largely abroad, where they can never be audited,” Oshmyansky said.
What’s more, the fees PBMs charge drug companies have been rising significantly. “Essentially, we see this as just another way of hiding rebate dollars,” Oshmyansky said.
Specialty drugs are a particular source of economic inefficiency, he said. They make up less than 1% of claims yet comprise about half of all drug spending. One issue is the vastly inflated prices PBMs offer to the pharmacies they own.
Overhauling the status quo
Because PBMs seem able to evade efforts by policymakers to reform their business practices, Oshmyansky said, Cuban’s company is “trying to be good-faith competition.” A recent analysis by a consultancy found the company carries about 20% of all specialty drugs. The plan is to soon include biosimilars as well.
The strategy also includes an emphasis on transparency.
Online, “You can see exactly what we purchased the drugs for, exactly what our margin is and exactly what the cost will be that’s passed on,” he said, adding that the company creates overall savings of 50% to 60% in drug spend.
“We have a shocking percentage of the national market for certain products,” he said. “I think it’s providers just telling other providers, patients just telling other patients” about this new option, he said.
Oshmyansky said he wouldn’t mind if the entire system ever improves to the point where Cuban’s company itself is disintermediated.
“I liked being a radiologist,” he said. “I’m more than happy to go back to doing that.”
Start the countdown
Marc Scher, FHFMA, CPA, HFMA’s Chair-Elect and a partner with KPMG, closed out Annual Conference after Oshmyansky’s presentation with a reminder that next year’s event is slated for June 23-26 in Las Vegas.