Episode Details

So … let's start here. Mostly this whole episode is about the so-called "Big Three" PBMs that provide between the three of them pharmacy benefit services for 95% of insured Americans. PBM stands for pharmacy benefit manager, and the Big Three PBMs being ESI, otherwise known as Express Scripts; OptumRx, which is a part (a big profitable part) of United Health Group; and then also CVS. Yes, CVS is not just for your retail pharmacy needs; they are also a huge pharmacy benefit manager.

Now, we get to the GoodRx part of our story. If you don't know how GoodRx works, I would strongly encourage you to go back and listen to "An Expert Explains" with Dr. Ge Bai from last year (AEE13). That said, here's the super short semi-reductive version to keep us all level set here. If you already know how GoodRx works, you can skip forward about four minutes.

So, first of all, let's all understand that GoodRx's business model only exists because the pharmacy supply chain dominated by these three big PBMs that we just talked about is such a cluster. GoodRx profits from that dysfunction. So, as I said, here's the short version of how they do that. It all hinges on so-called spread pricing, and this is what I mean by that.

Patient goes into pharmacy with a prescription for generic drug X. The patient has insurance—good news! Pharmacist checks the computer and sees that this patient should be charged, I don't know, $50 for drug X. The patient's insurance carrier picks up, say, $30 of the $50 cost; and the patient is left with, say, a co-pay of $20.

Who did that little math there in the computer? The PBM (the pharmacy benefit manager) did that math. That's their thing, these PBMs. They adjudicate claims. That's what this math is called. Anybody who goes into a pharmacy with a prescription, it's the PBM on the back end who figures out how much the patient owes and how much their insurance will pay and what the patient responsibility is, etc.

Goodness, you might say. How much are the PBMs being paid to perform this useful service? Turns out, it's free. That's right … the Big Three PBMs do all this adjudication for free. No charge to plan sponsors. Isn't that nice?

Except it's actually not free if you dig into it. The PBM is certainly getting paid by means of arbitrage. They're taking a little something something out of the middle of every single transaction. Here's what that looks like in the example aforementioned. Recall the patient's insurance paid $30, and the patient themselves paid $20.

The question is, how much did that drug cost the PBM? Remember, that's commerce: Buy low, sell high, and all that. You buy something, and then you sell it for more than you bought it for.

OK, so we're talking about a generic drug here. They're cheap (usually). So, let's just say drug X costs, I don't know, $5. The PBM pays the pharmacy $5 for that generic script—and you can see how much money the PBM just made right there. The patient and their plan sponsor got charged $50, and the PBM's cost of goods was $5. Multiply that profit margin by the billions of generic prescriptions in this country that run through insurance, and you have a tidy little business model there. UHG, the parent company of OptumRx, made $24 billion in profit in 2021. Not all of that was from generic drug arbitrage (ie, taking advantage of spread pricing), but some of it was. And $24 billion is an awfully big amount when you consider whose paychecks all those pennies were lifted from.

PBM services are anything but free. PBMs are collecting massive windfalls in the so-called spread between what the patient and the plan pay and what the PBM is actually buying those drugs for.

Here's another wrinkle: When a PBM contracts with a pharmacy, part of their contractual terms is that the pharmacy's list price for drugs cannot be lower than