Why Pharmaceutical Middlemen Don’t Want to Break the Industry’s Status Quo

E-commerce takes power away from middlemen and gives it to the consumer.

With nearly 20% of retail and travel transactions taking place online, why are almost none of the $450 billion spent on prescription drugs being spent online? And more importantly, why does it matter?

It matters because when industries move into the e-commerce space, consumers gain more control.

Take purchasing an airline ticket, for example. Today, anyone can easily compare flight times and prices across all major airlines and directly purchase the ticket online that’s most convenient and affordable for them, freeing them from having to call individual airlines to ask for prices. Because of the internet, consumers can also skirt the middlemen that rack up service fees, like travel agents and the software they use, and can see all of their options themselves.

As we’ve seen in so many other industries, e-commerce brings transparency, reduced prices and gives consumers more power and control. E-commerce matters to the prescription drug industry because we desperately need these consumerization changes to happen in healthcare.

But a few things are holding this e-commerce evolution back. One is the nature of the industry: prescription drug purchasing is regulated in ways other industries aren’t. You need permission from a licensed professional to buy the product, and you need a licensed professional to dispense it. Technology can weave these regulations into a sleek, more consumer-friendly e-commerce experience (we’re doing it right now), but there are other roadblocks the industry needs to address.

Middlemen

A drug passes through several middlemen on its way from the manufacturer to the patient. Of these middlemen, the one with the most influence over out-of-pocket medication costs and accessibility is the pharmacy benefit manager (PBM). PBMs do much of their business behind closed doors. They negotiate rebates with manufacturers and decide pharmacy reimbursement rates independently of one another and unregulated by any objective, consumer-focused third party.

Keeping quiet about their reimbursements and negotiations means that the patient has no idea whether they’re getting a fair price, what other prices they could be paying or if the supposed savings are trickling down to them. This opaque pricing system allows PBMs to generate super profits, and they can be very protective of them.

This lack of transparency also makes it difficult to compare prices and switch to other pharmacies, which means PBMs can steer patients to the pharmacies that generate the greatest profits for them (e.g. pharmacies they own or have merged with) and starve the competition.

Mega-mergers & monopolies

The government has been asleep at the wheel as large healthcare corporations and middlemen have been merging and creating monopolies over the past 30 years. While mergers in other industries can often bring convenience and lower prices for consumers, case after case suggests that this isn’t always true for healthcare.

Healthcare mergers past and present have been shown to increase prices. In 2016, Quartz laid out in great detail how pharmacy and PBM mergers lead to less competition, reduced transparency and higher costs, citing CVS’s acquisition of Caremark back in 2007, and Walgreens’s recent purchase of Rite Aid and its PBMs. And more recently, Modern Healthcare showed skepticism that any benefit that resulted from the Cigna-Express Scripts deal would actually make its way to consumers (the deal was approved by the Justice Department in September 2018).

Because of lack of proper government oversight, three large PBMs now control about 80% of the market. This allows them to maintain high prices and steer patients toward the pharmacies they can make the most money from, and away from pharmacies that may offer lower prices for the same drug. With that much market sway, of course they wouldn’t want the current system to change.

Patients are ready for an e-commerce revolution in healthcare. They want an easier way to buy their medications and more control over how much they spend. Today’s patients are seeking price transparency and demanding that the prescription drug landscape deliver, for the first time, a user-friendly purchasing experience.