The rising price of drugs and the complexity of the healthcare system have brought about the advent of online subscription generic drug services offering to cut out the middlemen. Now it’s time to see whether that’s economically viable.
Celebrity billionaire Mark Cuban founded perhaps the most visible of these services, Cost Plus Drugs, in January. Patients can receive certain prescription generic drugs in the mail from a list of 800 medicines the company gets straight from the manufacturer, skipping several steps that usually take place before consumers pick them up at a traditional pharmacy counter.
The problem they’re addressing isn’t minor.
About half of U.S. adults say they have had difficulty affording health care costs in the last year, according to the Kaiser Family Foundation. And a quarter of adults say they or a family member have resorted to forgoing prescriptions, cutting pills or skipping doses due to cost. More of these are households with lower incomes, Black and Hispanic adults, and women.
Even insurance doesn’t always help — about a third of adults worry about affording their monthly health insurance premium. And 41% of adults report having debt due to medical or dental bills, KFF found.
During the COVID-19 pandemic in particular, 82% of patients experienced delays receiving medications due to in-person restrictions, cost, insurance, miscommunication and poor transportation, according to a 2021 survey from CoverMyMeds.
Patients clearly need a better way to access medicine. So, what is the disruptive model that could break through the barriers to affordability without sacrificing the innovative and life-saving medicines available in the U.S.?
Services like Cuban’s and its predecessor, DiRx, could fit the bill. DiRx, founded by CEO Satish Srinivasan, a former generics sales and marketing executive, is much the same as Cost Plus Drugs, but got its start a little earlier and with a few key differences.
One similarity is that both of the services do not accept health insurance.
“DiRx is a model to directly bring people their prescriptions at the lowest cost,” Srinivasan says. “By direct, we mean eliminating many of the layers of the supply chain in between — typically, when a manufacturer produces a prescription drug, it goes through three layers before it can get to the hands of the patients.”
From the manufacturer, a drug often goes to a big drug wholesaler, and then a pharmacy benefit manager and then the pharmacy where a patient picks it up, Srinivasan says.
“The actual cost of the product, especially in the case of generics, is very inexpensive,” Srinivasan says. “But each of these layers add cost — everybody’s here to do a certain function and make a profit.”
Through insurance, many patients can afford the cost of generic drugs, and although the HHS announced this week that the number of uninsured people in the U.S. reached an all-time low of 8% in early 2022, that number is still a sizable portion of the country. Many are also underinsured and have coverage that doesn’t meet their full expense of a claim.
Srinivasan says that two-thirds of the out-of-pocket prescription costs paid by the average American consumer is spent on generics. And because they’re considered inexpensive alternatives to branded medications, they often aren’t very well covered within the deductible.
DiRx, which has been around since Sept. 2021, offers a prescription service for 1,400 generic medicines and no pharmacy or shipping fees. But why are we just seeing this type of business model in action now?
“It’s just the way the industry has evolved, where there were a lot of M&A events happening on the distribution side to a place where all pharmacies big or small only purchase from the drug wholesaler,” Srinivasan says. “The advantage DiRx has is the founders, me included, are from the generic industry, so we know exactly how the contracts work — we know the pain points and how we could address those, and the consumer sees the pressures on the market and they think it’s about time somebody does something.”
These companies aren’t without a profit. Although DiRx is private and does not disclose financial information, Srinivasan explains that because they’re able to acquire medicines “for pennies a pill,” a $5-per-month subscription service even with free shipping can bring the company into the black.
“Even if you look at insurance companies, for example, the uninsured and underinsured are not covered by them — we’re not taking customers away from anybody, but we are taking customers who today are not even taking the meds because of the access and affordability issue.”
DiRx CEO and founder
And in the next 12 months, DiRx plans to plug into self-insured employer groups to connect with many customers at once at a low cost of acquisition, Srinivasan says.
But the current model has pitted large insurance deductibles and copays against the sheer cost of conducting the retail pharmacy business, squeezing the consumer as those companies try to stay afloat.
“One needs to understand the economics, where you can do an ultimate disruptive model and you can help save money,” Srinivasan says. “Having been in the generic industry and understanding the real cost of the product, it gave me that insight to say, hey, that’s the way I could short-circuit some of these significant costs.”
The subscription service provided by DiRx and Cost Plus Drugs sounds good on paper, but whether it can change the course of rising out-of-pocket drug costs and bloated supply chains is yet to be seen.
Some of the expert criticisms of the services are that they do not include all of the drugs a person might need. Insulin, for example, is not offered, and branded drugs that are the most expensive also don’t make the list. Those require health insurance for most people to afford — for those with insurance, anything they pay these services might not count against their deductible, meaning they’re paying twice.
In short, the service may work for some people who need a series of generic drugs and nothing outside of that, but it falls short of solving the problem of the inflated and complex healthcare system in the U.S.
Srinivasan sees DiRx as relieving some of the pressure of the system without being a solution for every patient.
“I think everybody feels the pressure, and they see that as something that some sections of society definitely need,” Srinivasan says. “You know, even if you look at insurance companies, for example, the uninsured and underinsured are not covered by them — we’re not taking customers away from anybody, but we are taking customers who today are not even taking the meds because of the access and affordability issue.”
And those customers are coming from a confounding system that these services might be able to simplify by cutting out a few steps.
“It’s a very complex and confusing for people, right from going to the doctor’s office to going to the pharmacy,” Srinivasan says. “They’re asking, ‘How much do I pay? What’s the copay? Will I get a bill later? I thought I had insurance. Why am I paying so much?'”
What DiRx and Cost Plus Drugs could offer some people is some transparency in their healthcare, Srinivasan says.
“Most people don’t understand what they’re paying for and what may come up later — and we are trying to eliminate all that and give them good visibility right up to a whole year’s worth of spending.”