Saturday, January 21, 2023

Costco Wholesale: What Is Its Pharmacy Strategy? It's Complicated.

In recent years, there seems to be two general paths to success in the retail pharmacy business unless you're a national giant like CVS, Walgreens or Rite Aid (the giant pharmacy chains have more store locations than ALL of the independent pharmacies combined; after them, the size falls rather precipitously except for one particular retail giant: Walmart Stores, Inc.). However, there is yet another retail player in this conversation which is the subject of today's post: Costco Wholesale Corp. Costco reportedly operates more than 550 pharmacies in the U.S. (according to the company's most recent SEC filing, 582 as of November 20, 2022, all located in its warehouse stores). More on Costco's Pharmacy business in just a second…

The two different business strategies for success in the retail pharmacy business are: 

  1. Either to go entirely into the insurance company route whereby all of the pharmacy's sales are claims paid for by insurance company PBM's or by Medicare. But in the insurance/PBM/Medicare strategy, the pharmacy effectively cedes its entire control of its business strategy (and profit margins) to third-party PBM's becoming just a dispensary of prescription drugs, hence it requires very high insurance claim volumes to make any money, or

  2. Go the cash-only route, whereby no insurance is accepted. I'll get to the cash-only business strategy shortly

In fact, independent pharmacies justifiably complain about opaque PBM business practices, random PBM "audits" and especially PBM Direct and Indirect Remuneration ("DIR") fees which are payment "adjustments" which PBM's make after the point-of-sale, whereby the PBM's effectively change the cost of Medicare Part D-covered drugs for Part D insurance plan sponsors after the drugs have already been sold. DIR Fees enable the PBM's to "clawback" money when an insurance company PBM assigns overly-expensive copays to a drug, often at prices that may be significantly higher than the actual value of and the pharmacy's acquisition costs for certain drugs. DIR fees are a very questionable and shady business practice which are no doubt something the U.S. Federal Trade Commission needs to examine in its formal study of the PBM industry.

"Clawbacks" occur when the pharmacy submits a payment claim for a prescription drug, and the pharmacy is directed by the PBM to collect a specific dollar amount for the patient's copay. The pharmacy has no control over the amount the PBM tells them they must charge a customer. The amount will likely be excessive and unrelated to the pharmacy's acquisition cost of the drug, yet due to pharmacy contracts with PBM's, the PBM later claws the excess payments back from the independent pharmacy and keeps the money for itself, often many months after the prescription drug sales took place, and independent pharmacies are powerless due to the contracts they've signed with the PBM's.

The Second (Alternative) Retail Pharmacy Business Strategy 

The second (alternative) retail pharmacy business strategy is for a retail pharmacy is still relatively new, but is to sell prescriptions at low cash prices by skipping the messy and marginally-profitable (and occasionally money-losing, thereby necessitating sufficient claims volume to offset reimbursements which are lower than the acquisition cost of certain drugs) insurance claims process (facilitated by PBM's), effectively becoming a cash-only pharmacy business that doesn't accept anyone's insurance. Some independent pharmacies attempt to do both, but they aren't always successful doing both. The reason is because they're unable to focus on both strategies, and may ultimately be forced to choose one business strategy or the other to keep their businesses going. 




 

Anyway, as noted, Costco Wholesale (you know, the giant warehouse club) remains in the pharmacy business, and is a retailer whom I have been trying to figure out its pharmacy strategy: Costco is a unique and interesting hybrid between the two successful retail pharmacy strategies: it sells generics at prices which are often (but not always) cheaper than customers can get using their insurance, yet it also accepts insurance. 

 




 


It seems Costco is doing that combination strategy reasonably well for the estimated 94% of all Rx fills which are for generics. In other words, consumers often find it cheaper to just pay cash for some generic drugs than they will by using their insurance cards at Costco. In fact, we are seeing more and more consumers willing to bypass their own insurance for generic drugs because PBM price arbitrage is so messed up and disconnected from reality.

That said, Costco Pharmacy is not always the low-price leader for a fair number of generic drugs, which is somewhat peculiar in my assessment. The Costco cash-pay Rx strategy is similar to what the Mark Cuban Cost Plus Drug Company startup does, except that Costco Pharmacy also happens to accept insurance. That makes Costco a bit odd in the retail pharmacy space. Costco is not strictly a cash-only pharmacy as Mark Cuban Cost Plus Drug Company is (right now), although Costco is more than happy to sell generics to consumers at lower prices by having them bypass their insurance and just pay cash instead. As best as I can tell, Costco Pharmacy is simply one of the biggest pharmacies which is happy to tell customers whether they can save patients money by bypassing their own insurance. Many smaller, independent pharmacies do the same; Costco is just much bigger and is doing the same thing.

Pay-to-Play Membership Fee? Maybe Not at Costco Pharmacy.

Other players in the cash-only pharmacy space, such as Blueberry Pharmacy or ScriptCo Pharmacy, appear to charge membership fees to patients who live out-of-state (they are based in Pennsylvania and Texas, respectively). Membership fees aim to cover shipping costs for those pharmacies (which is odd, because under Federal tax law, shipping is considered a tax-deductible business expense, although it may require more fastidious accounting in order to deduct the expense). 

Others, like Ohio-based Freedom Pharmacy, does not charge membership fees, but I don't believe it conducts business with patrons outside of Ohio. (Recall that Freedom pharmacy was featured in a fascinating NBC News clip about "Buying from Pharmacies Without Insurance to Save" - I believe the segment is archived on YouTube at https://youtu.be/o8B4e0inbCU if you wish to see it; it was one of the more informative news segments I've seen on the topic). But Costco is a membership warehouse "club" which charges annual membership fees. Costco's membership fees are a major source of revenue for the company. Costco's membership renewal rates in the U.S. and Canada have remained at roughly 90%. But, a unique wrinkle is that in many U.S. states, a pharmacy must do business with anyone who walks into the pharmacy with a valid prescription; hence membership fees for pharmacies are not typically allowed under many state pharmacy licensing laws.

According to Costco, its pharmacy locations may technically be open to non-members, and that is true where it's required under state law. However, in practice, that means in most U.S. states where Costco actually conducts business. Therefore, in most places, Costco pharmacies are required under state laws to be open to anyone and everyone even without a paid Costco membership. If in doubt, ask your Costco pharmacist. You might consider asking something like: "My friend lives out-of-state, and she tells me that some Costco Pharmacy patrons where she lives are not required to have Costco memberships. Is that also true in THIS state?"

Costco describes its Costco Member Prescription Program (CMPP) https://www.costco.com/cmpp as a "value-added benefit" of a paid Costco membership. I question whether it's really a "value-added" benefit, because if you do not even have to be a paid Costco member or even join CMPP to continue buying prescriptions at the Costco Pharmacy and pay-cash for the prescriptions (sometimes at prices lower than using insurance, and occasionally sold in quantities which are larger than ordinary pharmacies will sell them), then it's not really a "value-add" in my opinion. Still, Costco Pharmacy encourages cash-payments for prescriptions, although technically, it also accepts insurance (at least some insurance plans).

One big downside is that Costco's pharmacies are often buried deep inside its huge warehouse stores (which makes sense to Costco) and some people mistakenly believe that prohibits them from entering Costco without having a Costco membership card (it doesn't if you're going to the Costco pharmacy in most states). However, Costco itself is the very definition of a big box retailer. In my mind, being a big box store is the antithesis of convenience; it's a hassle dealing with parking and getting into and out of most Costco locations quickly.

I patronized my local Costco Pharmacy for my first Covid booster shot a few years ago since I was readily able to get an appointment there (I chose to get the Moderna booster, and Costco was one of the few pharmacies around me which carried the Moderna Covid booster shots at the time) there, and it was a pleasant enough experience. Still, getting a parking space at my local Costco was (and still is) a pain in the neck.

Honestly, I don't especially enjoy going to my local Costco unless it's during an off-peak hour (like on a Wednesday morning, which I was known to do occasionally when everyone was still working from home). Otherwise I spend hours waiting in line to check-out. I could actually walk to my local Costco since it's literally down the street from me, but I usually drive because if I buy anything, I also need to get my purchases home and carrying a huge package of paper towels home means I'd be rendered unable to carry anything else. Still, parking at my local Costco is a time-consuming ordeal, hence getting into the store, parking my car in the multi-level garage and going to the pharmacy checkout can literally take me an entire afternoon. That means Costco Pharmacies really aren't convenient, so quick visits to regularly refill scripts at Costco Pharmacy are simply not possible. That is unless I can buy the script in bulk (which, as it turns out, Costco actually encourages, although it's mostly for generic maintenance medications, and I use few of those).

On the upside, as noted, Costco as a retailer seems much more willing than most other pharmacies to sell much larger-sized prescription refills (consistent with the warehouse club model) which can save people money, so I could theoretically buy a 180-day or potentially even a 360-day prescription refill at Costco, and the pharmacist wouldn't find the request unusual (unless it was for a controlled substance), and on generic drugs, that may have potential to deliver very meaningful cost-savings if the customers are willing and able to pay a higher price up-front (some may not be; it really depends on how much the script actually costs).

According to USC research, Costco offers better prices than CVS or Walgreens about half the time (see https://news.usc.edu/188285/costco-medicare-savings-generic-drug-prices-usc-study/ for details). Costco also operates an active mail-order pharmacy business for customer convenience (the price costs $2 more for mail order vs. in-store fulfillment, and for a smaller 30-day supply, the extra cost for mail order offsets the benefit. But the $2 fee for shipping to order by mail may be worth it for a 90-day, 180-day or 360-day supply since the Costco Pharmacy prices are frequently better than rivals like CVS or Walgreens offer on different prescription drugs, especially on generics, biosimilars and/or "authorized generics".

My readers may recall that the FDA defines an "authorized generic" as exactly the same product as an approved branded drug, but is marketed without the brand-name on the label (it is sold with the generic drug name on the label). Manufacturers historically made "authorized generics" to try and retain market share and destroy the market for generics-makers once generic products hit the market, but lately they have been using them as a method to circumvent rebate-driven price inflation due to the role PBM's play in the system on heavily-rebated drug classes like insulin. In fact, readers may recall I blogged that the FDA has been forced to expand the number of digits in the NDC numbering system because of rapid growth in "authorized generics" which I covered at https://blog.sstrumello.com/2022/08/fda-moves-to-expand-ndc-numbering-to.html).

For me, I use very few maintenance drugs aside from insulin (and test strips, CGM sensors and all the other diabetes stuff). I take a single statin drug for preventative purposes, and I shopped around when my own insurance company Aetna (and its PBM unit CVS Caremark) wanted to charge me $33.85 for a 90-day supply, so I circumvented my own insurance to buy that particular medication. Initially, I went with United Healthcare's Optum Store, used an OptumPerks coupon and bought a 90-day supply for just $15, saving myself 56% on that drug by simply bypassing my own insurance. Then, a year later, Optum unexpectedly raised its prices on the statin by 40% from $15 for a 90-day supply to $21 for the same quantity, so I shopped around again for a better deal. As it turned out, Costco's price on that generic drug was $20.99 for a 90-day supply, which was only one cent cheaper than Optum's new, higher price was, so it wasn't even worth switching from Optum Store.

However, I still managed to find a better deal than both Costco and Optum were offering. I selected Mark Cuban Cost Plus Drug Company, which saved me 68% off the original price CVS/Caremark had intended to charge me, which happened to be even more than the 56% I saved with my first decision to bypass my insurance. Ultimately, I ended up buying the generic statin for a fully-loaded price of $10.70 for a 90-day supply from the Mark Cuban Cost Plus Drug Company. The fact that I did NOT get a better deal on a generic statin at Costco Pharmacy was a disappointment, and raised some questions in my mind about what Costco's pharmacy strategy really was?

In theory, I could potentially have bought that particular generic statin at Costco by using a PBM-powered coupon from the PBM startup known as CapitalRx, and if I'd used the company's free CRxAdvantage Savings https://capitalrxadvantage.com/ coupon, and doing so would yield a price at Costco Pharmacy of $8.62 (compared to the $10.70 I paid) for a 90-day supply of the statin. CapitalRx uses a NADAC price+ pricing model making it unique compared to virtually all other PBM's. NADAC is the acronym for "National Average Drug Acquisition Cost", which is the approximate invoice price pharmacies actually pay for medications. NADAC is an estimate of the national average drug invoice price paid by independent and some retail chain pharmacies which is calculated by the Centers for Medicare and Medicaid Services ("CMS"). 

But NADAC prices aren't perfect. The NADAC price excludes "specialty" and mail order pharmacies (the biggest being Express Scripts' Mail Order Pharmacy which is owned by the insurer Cigna), and NADAC does not always reflect all rebates, price concessions, or off-invoice discounts. Still, CMS randomly surveys retail pharmacies to determine NADAC. Out of approximately 67,000 U.S. pharmacies, CMS selects 2,500 (mostly independent) pharmacies per month and approximately 450–600 pharmacies voluntarily respond with actual drug price data. Recall that I had considered using Costco Pharmacy along with its CRxAdvantage coupon to buy a generic statin, but I ultimately chose to use Mark Cuban Cost Plus Drug Company instead.

The reason I made the decision to skip the Coscto/CRxAdvantage was because I felt pretty burned by using two PBM-powered coupons in the past, both of which saved me money, but only temporarily, followed by arbitrary price increases later. My household had a similar experience with a second PBM which offered a discount on a different generic which my spouse uses of a stunning 82% which then later stopped selling prescriptions directly-to-consumers.

Hence, I felt that the price transparency provided by the Mark Cuban Cost Plus Drug Company with a known 15% margin was worth maybe spending marginally more (after all, I was still saving a lot compared to my previous supplier CVS Caremark/Aetna offered) and knowing I won't be compelled to find a completely brand new supplier a year from now. Fundamentally, I don't want to change suppliers all the time; it's a hassle. However, I was really disappointed that Costco's prices were not lower on my generic statin drug; they really should have been.

Those experiences raised a question for me about whether Costco Pharmacy was really such a great deal on generic drugs? 

After all, my personal experience with rosuvastatin calcium 10 mg tablets and my spouse's eplerenone 50 mg tablets proved: not always.

 

My finding is that the cash price savings at Costco Pharmacy may be good on some drugs (often on selected generic medications, apparently just not on ALL generics); but as my experience proved, its prices were also significantly higher on other generics. But Costco Pharmacy sometimes also has lower prices on selected branded medicines (and perhaps more importantly, on medical devices too; for example, Costco's cash prices on CGM sensors including both Dexcom sensors and Abbott Freestyle Libre sensors, are among the lowest anywhere), just not on ALL branded or generic drugs. In fact, Costco Pharmacy's prices were only lowest on a finite selection of generic drugs, and none of which I or my spouse used.

My spouse uses several generic hypertension drugs (some of which are extremely cheap using insurance), but as noted, on another generic, we discovered it was significantly less costly to simply bypass our own insurance and buy at least one of them (for cash) instead. I have written that we discovered it was 82% cheaper to buy a 90-day supply of one called eplerenone 50 mg tablets (a generic of the brand-name drug called Inspra) by bypassing insurance and paying cash, buying it from Express Scripts Cash-Pay Mail Order Pharmacy by InsideRx; we saved a lot of money by doing that. In fact, the drug was so much cheaper bypassing insurance that we continued doing so even after satisfying the annual deductible.

But then, in November 2022, Express Scripts by InsideRx mailed us an odd letter (see my blog post on that at https://blog.sstrumello.com/2022/11/cigna-express-scripts-by-insiderx.html for more) announcing its intention to discontinue its cash-pay pharmacy by InsideRx, hence we were forced to find an alternative supplier at the start of the year.

As noted, I felt burned by not one but by TWO different big PBM's (United Healthcare's Optum on the statin, and Cigna's Express Scripts on the eplerenone), and on both, the alternative source where we found the lowest prices on those two prescriptions was at Mark Cuban's Cost Plus Drug Company, which simply offered us a better deal (one was not quite as cheap as Express Scripts by InsideRx was, but its price was a mere $2 more, yet still significantly cheaper than Aetna/Caremark intended to charge us; or any other PBM-powered coupons), but Costco Pharmacy did not save us for either generic drug.

Which raised the question in my mind: what, exactly, is Costco Pharmacy's business strategy? Is it as a cash-pay pharmacy, an insurance company fulfillment pharmacy, or something else? 

My conclusion seemed to be that Costco Pharmacy is a unique hybrid model which may or may not save you money, so just beware of that.

A Number of Major Retailers Have Exited the Retail Pharmacy Business

Another reason I ask about Costco's Pharmacy strategy is because a fair number of big retailers including giants such as Target Corp. have simply sold their retail pharmacy businesses (for example, Target sold its pharmacy business to CVS in 2015) and/or have simply exited the pharmacy business completely. Another example: in early 2021, the big New Jersey-based supermarket chain known as Shop Rite (which is incorporated as Wakefern Food Corp.) with stores in New Jersey (where it's the dominant supermarket chain), New York, Connecticut, Pennsylvania, and Delaware announced the closure of 62 of its in-store pharmacies, and the company then sold its prescription files to CVS (just as Target had done a few years earlier).

Evidently, it is challenging to operate a retail pharmacy … profitably, due in no small part to doing business with PBM's (of which, CVS Caremark happens to be one of the biggest). Still, even giant CVS (whose Caremark PBM unit is the nation's largest PBM by numbers of claims processed) announced in November 2021 that it, too, was closing 900 store locations (it appears the company had vastly over-expanded, including the Target acquisition, and it needed to downsize its sprawling retail pharmacy operation as many locations were literally next door to one another). Apparently, the prescription files were worth more to CVS Caremark than the retail store locations the company acquired. More recently, drugstore giant Rite Aid also announced it was closing 145 "unprofitable" stores as it looked to significantly reduce its costs as it moved into the next fiscal year.

That makes Costco somewhat unique among bricks-and-mortar retailers in that it has retained ownership of its own pharmacy business while many others have left the pharmacy business, hence Costco's pharmacy business must be sufficiently profitable for the company to retain it. I can think of a few unique reasons Costco has remained in pharmacy while others have been forced to leave the pharmacy business.

Costco's Joint PBM Ownership of Navitus

Co-ownership of the PBM Navitus means that Costco's contracts with other PBM's are as as good as a retailer's PBM contract can possibly be, which helps Costco's pharmacy strategy

It's relevant to acknowledge here that Costco is unique relative to other retailers in that Costco happens to be a co-owner of a Pharmacy Benefit Manager ("PBM") of its own, which gives the company some unique advantages that retail rivals like Target or Shop Rite simply did not have. In 2020, Costco purchased a 35% ownership stake in a smaller PBM known as Navitus Health Solutions, LLC, which was at the time owned exclusively by SSM Health, a hospital chain that operates in five states.

Navitus itself is a smaller-sized PBM which reportedly serves 6.2 million covered lives, and of that, about 2.5 million of those are considered "commercial lives" (meaning they're covered by commercial healthcare insurance plans, as opposed to Medicare or Medicaid plans). By definition, that makes Navitus smaller in comparison to giant PBM's like CVS Caremark, Cigna's Express Scripts or United Healthcare's OptumRx.

While owning a PBM in-house doesn't provide Costco the ability to buy prescription drugs at lower prices (Navitus is not a drug wholesaler), and Costco has a drug wholesaler contract with AmerisourceBergen or McKesson for branded pharmaceuticals, though Costco directly negotiates pricing deals on other prescriptions (such as generics) internally. Still, co-owning a PBM enables Costco to better control its contracting terms it has with other PBM's. That's because Costco can leverage Navitus' knowledge of contracting in the PBM business. Navitus knows better than anyone (it's a PBM, after all) the loopholes PBM's write into their contracts and the ambiguity used in contract language which can be exploited by PBM's to enrich themselves at their retail partners' expense.

As a result, Costco likely has superior PBM contracts with Express Scripts, Caremark and/or OptumRx, and because it jointly owns Navitus, and it's able to use that relationship in order to avoid some of the pitfalls in negotiating its own PBM contracts which other retailers might accidentally assume in their own PBM contracting. Costco's PBM contracts can be written to benefit Costco as a retailer (at least to the extent possible), and co-owning Navitus enables it to avoid some of those very thorny issues.

Rival Walmart also retains its pharmacy business due to its sheer size, although Walmart has similarly struggled price-wise to deliver on its now-abandoned corporate slogan "Always Low Prices'' in the pharmacy space. Walmart does offer patrons a list of generic medicines for $4 for a 30-day supply. Walmart also recently extended its long-time relationship with the drug wholesaler McKesson to acquire prescription drugs (McKesson owns/operates a coupon-generating website/app known as ScriptHero, which is powered internally by CoverMyMeds as well as via SingleCare which funds coupon discounts from pharmacy margins, not PBM's). Even Amazon Pharmacy (a rebranded version of the old PillPack Pharmacy) routinely fails to always offer the lowest prescription prices; Amazon relies on Cigna's Express Scripts InsideRx for most of its drug discounts, but anyone can use InsideRx and get the exact same prices from other pharmacies. In fact, Costco Pharmacy occasionally beats Walmart's and Amazon's prices on SOME (just not all) drugs.

Let's Ignore the Term "Specialty Pharmacy" for Now Because It's a Bogus Term Made-Up by the PBM Industry Anyway

Through its co-ownership of Navitus, Costco also co-owns a "Specialty Pharmacy" known as Lumicera, although that doesn't really help Costco's retail Pharmacy as best as I can discern. For the time being, let's just ignore Navitus' Lumicera (which is 35% owned by Costco) as a "specialty pharmacy" because the term "specialty pharmacy" designation is a distinction completely made-up by the PBM industry. As Pembroke Consulting's President Adam J. Fein has acknowledged, the term "specialty pharmacy" reflects a pharmacy's BUSINESS DECISION, rather than any regulatory reality. Adam Fein says that any pharmacy can designate itself a "specialty pharmacy" if its business focus is primarily self-administered pharmaceuticals which must be carefully stored with particular temperature controls and those drugs also happen to be covered under a patient's insurance pharmacy benefit.

Opaque Business Practices are Endemic in Prescription Drugs; All of Those Practices May Not Necessarily Be on the Up-and-Up

New academic research suggests that PBM contracts negotiated behind closed doors on drug pricing and with retail pharmacies may be used to facilitate illegal, anti-competitive behavior; a formal FTC study of PBM business practices now underway may ultimately lead to litigation against PBM's by the U.S. Department of Justice. Watch this space!

The convoluted U.S. drug distribution system means that shopping for the best prescription drug prices is a major ongoing challenge for patients. U.S. Rx drug prices frequently increase even with the market having multiple generic suppliers which should theoretically reduce prices, which defies economics. The reason Rx drug prices fail to fall in spite of increased competition is due opaque PBM business practices predicated upon withholding information from key stakeholders within the system, rendering those stakeholders unable to make informed decisions which directly impact what they're expected to pay. That opacity needs to change.

However, PBM pricing "arbitrage" and widespread use of "spread pricing" on inexpensive generic drugs means that patients can increasingly find better deals by simply skipping their own insurance company's PBM (bypassing their insurance company's pharmacy benefit completely and paying cash instead). That is happening more and more frequently according to researchers at University of Southern California.

Still, for anyone who leads a busy life, bypassing insurance to buy prescriptions remains a challenge because most patients have other things they should be doing. It's also a particular challenge for those who are older and technologically-challenged, because finding the lowest prices on prescription drugs often requires internet/computer/mobile app skills (with access to those things), and particularly for patients whose illnesses interferes with their ability to shop around for, and patronize, different local pharmacies which might offer better prices on the drugs they require — hence, they may simply be unable to shop around and they pay more as result.

Costco's Pharmacy: A Limited Piece Of A Larger Overall Business

Costco's pharmacy appears to be a comparatively small part of the company's overall business, being a segment of one of the seven subcategories of Costco's ancillary business, and that subcategory collectively constitutes about 20% of Costco's overall revenues. Hence, pharmacy is a limited part of the company's overall revenue stream. But pharmacy is still there, while rivals like Target have exited and sold their pharmacy businesses and moved on. Costco's ownership of a PBM appears to help the company in contracting with other PBM's and also with drug wholesalers (for the drugs Costco uses a wholesaler to acquire; Costco's buyers do negotiate directly with certain branded pharmaceutical companies). Even though Walmart is a significantly larger retailer than Costco, you are only likely to find roughly 3,700 product SKU's in Costco, compared to 150,000 product SKU's in Walmart or 80,000 product SKU's in Target. Analysts believe that Costco achieves similar procurement strength to Walmart by concentrating its assortment of merchandise (including Costco's pharmacy business). In other words, Costco can buy merchandise at prices comparable to bigger rivals like Walmart (including in its pharmacy business) which helps the company's bottom line.

Costco's pharmacy strategy also relies heavily on its Costco Health Solutions https://costcohealthsolutions.com/ offering, which aims to provide pharmacy benefits to small businesses via Costco's own pharmacies (recall that Costco operates about 582 pharmacies in the U.S., all located inside its warehouse stores), and also a selection of third-party pharmacies in its own retail pharmacy network consisting of approximately 64,000 independent pharmacies located across the country. Costco Health Solutions and its PBM offering appears to target smaller employers who are more likely to rely upon Costco as a wholesale supplier (think of small businesses like restaurants which may buy items in bulk at Costco and either re-sell them, or use the supplies attained from Costco in the operation of their businesses, such as restaurants' which buy food, paper goods and take-out packaging from Costco).

Costco Health Solutions claims that it rejects the common industry practice of back-end rebate profit-taking (as well as so-called "spread pricing") widely deployed by rivals including Cigna's Express Scripts, United Healthcare's OptumRx and CVS Health's/Aetna's Caremark PBM business, and it says that Costco Health Solutions is one of just a few PBM's that contractually guarantees that 100% of all earned pharmaceutical manufacturer-derived rebates, income and discounts will be returned completely to the healthcare plan sponsors.

These features make doing business with Costco attractive to small businesses. There is, however, no guarantee that healthcare plan sponsors will share the benefit of drug discounts with patients who actually make purchases of rebated drugs. Insulin ranks among the most heavily-rebated categories of drugs, yet patients are struggling to afford it. The same is true in countless prescription drug categories. Remember the EpiPen pricing crisis? It never really went away. Today, too many plan sponsors rely on those Rx rebate dollars to offset their own insurance premiums (effectively becoming reverse insurance, whereby the sick subsidize the healthy) rather than sharing those with patients. The healthcare industry refers to that as a "misaligned incentive" but for patients impacted, those "misaligned incentives" have become a crisis, hence constituent complaints to Congress continue to grow louder.

Costco Pharmacy Offers Generics, "Authorized Generics" and Branded Drugs

Costco Pharmacy also actively promotes "authorized generics" (which FDA defines as exactly the same product as exactly the same product as an approved branded drug, but is marketed without the brand-name on the label; it's sold under the generic drug name instead). Costco Pharmacy says that it has partnered with Greenstone (a Pfizer Company) "to provide Costco members competitive pricing on high-quality "authorized generics" (AG's). Costco has also partnered with Prasco and Patriot Pharmaceuticals to bring a wider selection of high-quality "authorized generics" to Costco pharmacies (see https://www.costco.com/authorized-generics.htmll for more).

Still, Costco remains fairly selective on exactly which "authorized generic" it promotes. For example, Costco promotes Pfizer's Greenstone products, but it does not promote "authorized generic" unbranded insulins sold by Lilly's ImClone Systems business unit, Novo Nordisk's, Inc's subsidiary known as Novo Nordisk Pharma, Inc., or Sanofi's Winthrop US business unit, yet those unbranded insulins can easily sell for about 75% off the branded varieties of the same drugs when patients pay cash (although getting them at those lower prices likely requires the patient uses coupons). However, patients say that they've purchased the unbranded "authorized generic" insulins like Lilly Insulin Lispro Injection U-100 at Costco Pharmacy.

That said, on July 13, 2022, the the PBM Navitus which Costco co-owns (along with SSM Health) announced a partnership (see https://www.businesswire.com/news/home/20220713005349/en/Navitus-Health-Solutions-Joins-CivicaScriptTM-to-Further-Availability-of-Lower-Cost-Generic-Medications for the press release) with CivicaScript, which is the consumer-facing operating unit of the Lehi, Utah-based startup nonprofit drug company known as Civica, Inc. that it plans to initially develop and manufacture about six to ten medicines for which "there is currently insufficient market competition to drive down prices".

Recall that  on March 3, 2022, CivicaScript announced a plan (see the press release at https://www.businesswire.com/news/home/20220303005321/en/Civica-to-Manufacture-and-Distribute-Affordable-Insulin for details) to sell biosimilars of insulin glargine, insulin aspart and insulin lispro for a cash price of $30/vial or $55 for a box of 5 insulin pens once they're FDA approved and hit the market (forecast to happen in 2024 according to Civica). And, so Civica's insulin biosimilars appear very likely to be sold at Costco Pharmacies due to the company's co-ownership of the PBM Navitus.

Conclusion: Costco Pharmacy Manages Hybrid Cash/Insurance Payments for Rx Drugs Better Than Most Other Big Pharmacy Chains. Still, Costco Won't ALWAYS Be the Low-Price Leader Because of How the U.S. Prescription Drug Market Functions.

Costco Pharmacy's cash prices for many prescriptions may be low enough for people to simply bypass their insurance and pay out-of-pocket, which Costco welcomes, similar to how Mark Cuban Cost Plus Drug Co. or a number of other rapidly-growing, cash-only pharmacies which are popping up nationwide operate because their cash prices may be potentially even cheaper than by using insurance. However, many of those cash-only prescription drug outlets do not accept insurance, and Costco does.

Costco's niche is that it actually encourages cash-payers, yet it can also accept insurance if it has to. Costco doesn't ALWAYS have the lowest cash prices, such as on the two drugs I aimed to pay cash for (I bought them at Mark Cuban Cost Plus Drug Co. because it beat Costco's prices by a wide margin, just remember: Mark Cuban Cost Plus Drug Co. doesn't accept insurance). Costco Pharmacy's hybrid payment model, in my assessment, means that it can and will take most any form of payment (including insurance), which may save money and hassles for families which have multiple scripts to fill regularly. For me, Costco Pharmacy is not the most convenient option. And, as my experience proves, Costco won't always succeed at offering the lowest prescription drug cash prices, but its hybrid payment model may make things easier for those patients trying to have it both ways.

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  1. My readers may appreciate my recent experience. Google Blogger's not-so-intellgent Artificial Intellgence ("AI") has repeatedly flagged this post for review. Apparently, Blogger's AI seems to believe that the post violates its "guidelines" (maybe it thinks I am using the blog post to sell drugs, which I assuredly AM NOT). While I submitted this post for manual review, and upon manual review, a person at Google Blogger determined the post meets community standards, when I discovered a typo, I corrected it, and again, the post again triggered Blogger's AI that the post may be violation its nebulous guidelines. Rather try to fight (or fix) it, just beware that one of my typos toward the end of this post says "Express Scripts 'bu\y' InsideRx" rather than "By" InsideRx. I trust my readers will be able to discern what I meant by that, rather than me correcting it and risk Google's AI flagging my post a third time. Weird.

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