Mark Cuban’s Cost Plus Pharmacy is capitalism at its finest

This piece is cross-posted from my Medium account. Check it out for more posts like these.

As a non-American, I’ve always been baffled by how staggering medication prices are. In 2022, US prices across all drugs was nearly 2.8 times higher than in other OECD countries. For brand drugs, the difference is more than 3.2 times. For specific brand drugs, the cost is even higher: for insulin, the gross price is more than nine times higher than in 33 high-income comparison countries.

Enter Mark Cuban’s Cost Plus Pharmacy. It was founded in January 2022 by Dr. Alex Oshmyansky and its namesake billionaire entrepreneur Mark Cuban, to pursue the goal that “every American should have access to safe, affordable medicines.”

Its pitch is simple: we’ll buy drugs from pharma companies, and sell them at a 15% markup, a $5 pharmacy service fee and $5 shipping fee. That’s it. No more hidden fees, deductibles, and pesky pharmacy benefit managers (PBMs).

So far, it’s achieved a fair bit of success. Its portfolio now boasts 2,500 medications, and it’s aggressively expanding the portfolio. It has 2 million members, and sells through roughly 4,000 retail pharmacies.

This bypasses the massive pharmaceutical-industrial complex. Other industries have a pretty linear and clear supply chain from the manufacturer, to the wholesaler, to the retailer, to the consumer. On the other hand, the pharmaceutical industry is notoriously complex.

Here’s a simplified overview:

Pharma company A develops and manufactures the medicine
Pharma company A sells the medicine to wholesalers
Wholesaler B sell the drugs to pharmacy C
Pharmacy C sells the drugs to consumers. Consumers pay copay,
Pharmacy C sends out an insurance claim to the insurance company, who pays the rest of the medicine

That’s a simplified example. But then we factor in pharmaceutical benefit managers (PBMs). PBMs play a significant role in the healthcare and pharmaceutical industry by acting as intermediaries between insurers, pharmaceutical companies, and pharmacies. Their primary function is to manage prescription drug benefits on behalf of health insurance plans, employers, and government programs like Medicaid and Medicare.

They negotiate with drug manufacturers to secure lower drug prices for their clients, by leveraging the purchasing power of the large groups they represent.

The incentive they give to the drug manufacturers for rebates is moving them up on a formulary. Formularies are lists of preferred drugs covered by a specific insurance plan. They typically categorise drugs into different tiers based on their cost and efficacy. The drugs in each tier have different copayment or coinsurance amounts. When pharma companies pay higher rebates, PBMs will move their drug to a better tier, where patients will have to pay a lower copay for the drugs. This is good for the pharma company, since patients will pick the most affordable drug, and their drug will be a more affordable option.

In theory, by negotiating rebates and discounts from drug manufacturers, PBMs help to keep prescription drug costs down for patients and insurance providers. But in reality, they will pocket a portion of the rebate, and only pass a portion on to the insurers.

Also, the rebate system creates bad incentives throughout the system. Because of rebates, pharma companies are forced to raise the list price of their drugs to protect their sales and profits. As a result, companies sell drugs at a higher list price, but that higher list price is offset by higher rebates. Effectively, companies sell drugs at the same price while artificially offering more rebates. This benefits the entire supply chain: both PBMs and insurers get to pocket a larger pie due to the higher rebates.

The only loser is consumers, who have to face rising list prices of drugs while at the same time, the rebates that are supposed to offset this are taken up by PBMs and insurers.

In a 2019 congressional hearing, then-Merck CEO Kenneth Frazier testified that “if you bring a product to the market with a low list price in this system, you get punished financially and you get no uptake because everyone in the supply chain makes money as a result of a higher list price.”

Take the average list price of Humalog, a type of insulin. From 2014 to 2018, its list price increased by more than 50% from $391 to $594. At the same time, Eli Lilly reported that the price it was receiving for each sale of Humalog decreased from $147 to $135. Where did the rest go? To the PBMs and insurers.

PBMs are also notoriously opaque in their pricing and rebate negotiations, leading to higher drug costs for patients and insurance providers. In recent years, there has been growing scrutiny of PBMs by lawmakers and regulators, leading to calls for increased transparency and regulation of their practices. Despite these challenges, PBMs don’t seem to be going anywhere soon, and remain an integral part of the pharmaceutical supply chain.

In the face of all this, the Mark Cuban Cost Plus Pharmacy’s efforts are extremely admirable. And they’ve been working. Its website lists the retail prices of a whole range of medication, and compared to the prices that it charges. And the savings are extraordinary. Here are just a few of the drugs it offers:

The numbers speak for themselves. For the Epzicom generic, cutting the retail price from $1096.10 to $38.30 is a 96.5% discount.

However, it’s also facing numerous issues. For one, the drugs that it has included so far are mostly generics. And since generic drugs have some semblance of competition between pharma companies, they’re not the drugs with the most egregious prices. That title goes to brand-name drugs with little to no competition.

Manufacturers are less willing to work with Cost Plus to provide these specialised brand drugs. This is because of the massive leverage that pharmacy benefit managers hold over the industry. As Mark Cuban has stated, manufacturers are unwilling to work with Cost Plus due to fears that this will compromise their relationship with pharmacy benefit managers.

To solve this, Cost Plus is taking steps to launch its own PBM. This new PBM won’t distort prices or negotiate for any rebates, but is simply there to coordinate prices for Cost Plus. It’s already worked with smaller PBMs (see here and here) that also shirk the extortionate price-gouging tactics of the rest of the industry. This is to expand Cost Plus’ reach to customers, and also give it more bargaining power to convince manufacturers to onboard their drugs with Cost Plus.

Also, Cost Plus is planning to become an all-in-one pharma supplier, with manufacturing, wholesale distribution, and pharmacy services. In March, it launched a 22,000 square foot pharmaceutical facility in Dallas to manufacture its own drugs. The new facility will emphasise on prescription drugs that are currently on the FDA’s list of drugs facing shortages.

Cost Plus still faces numerous challenges along the way. And it’ll be a heavy challenge to go up against Big Pharma. But it looks promising so far. Already, it’s forced CVSHealth and Cigna, the providers of the two largest PBMs in the US, to implement new pricing models (though, unsurprisingly, they don’t seem to be much less extortionate than previous plans).

No doubt, Cost Plus is extremely admirable. More importantly, it seems to set a precedent for “good” capitalism. Capitalism is often associated with extreme greed and extortionism. This has been how many so-called “capitalists” have been presenting themselves. But the truth is, it doesn’t have to be that way. Under the proper functioning of a market economy, prices should eventually converge to a reasonable market equilibrium. And Cost Plus is helping to do that, and making a healthy profit in the process: throughout much of 2022, the business reportedly grew at about 10% each week (an annualised rate of 14,200%!). Somewhat ironically, by combating the excessive greed in the pharmaceutical industry, CostPlus founders will be able to make bank.