How technologies are shaping up the pharmacy industry to achieve better outcomes for patients
I have been suffering chronic digestive issues for the last few years. And in the year of 2020, when work-from-home situation started providing me with more flexibility in taking care of my own health, I underwent a few diagnostic procedures with hopes to bottom out the root cause.
In dealing with the frequent hospital and pharmacy visits, I found myself deeply puzzled with and saddened by the complexity of the healthcare system in the US. That journey alone could be turned into a long blog post, but as part of the positivity from this “enlightenment” journey, what I learned about the ePharmacy landscape might be more worthwhile to share.
COVID-19 catalyzed the growth of Digital Health, and I previously wrote a trio on the market dynamics of Telehealth. If you’re interested in learning more about that, you can find my blog post in this link. Here, I’ll be discussing another ginormous rising market — ePharmacy.
Background
Estimated by IBIS World, the US Pharmacy & Drug Store market size is $338.2 billion in 2021. Aritzton’s study indicated that in 2020, the US Online Pharmacy market was valued at $52 billion, and is expected to reach $146 billion in 2026 at a 19% CAGR.
The US pharmacy market is dominated by a few players, with a high revenue concentration from the top 4 players: CVS at 24.8%, Walgreens at 19.1%, Cigna / Express Scripts 10.7%, and UnitedHealth / Optum (6.9%). Together, the four of them make up 60%+ of the total market share in 2020.
Pharmacy is a highly regulated industry. In order to become a pharmacist, one must have a doctorate degree, Pharm D (typically a four-year program), pass the national exam, and meet the additional state-level requirements. Each state regulates the operations of its pharmacies — whether you’re a physical pharmacy, a mail order pharmacy, or a web-based pharmacy, you need to be properly licensed by your state before you can legally operate in that state.
Even if a pharmacy is not physically located in a state, it may be subject to that state’s regulations as soon as a resident of the state places an order.
The pharmacy value chain involves multiple stakeholders with intricate relationships among them all. When you take your prescription by your doctor to a pharmacy, the out-of-pocket amount you pay is a fraction of the total price set by the pharmacy benefit manager (PBM), who negotiated with the drug manufacturers and pharmacies on behalf of your health insurance plan. That fraction you pay is usually the copayment / coinsurance dictated by your health insurance plan. And the balance is paid by your PBM to the pharmacy.
From the pharmacy’s point of view, they purchase drugs from a wholesaler, who purchases in bulk from the manufacturer. As part of the agreement between the manufacturer and the PBM, the manufacturer also pays the PBM a rebate, which is usually structured a percentage of the drug price.
Below you can find an illustrative process published on the Commonwealth Fund organization.
Since each health plan is different and each pharmacy negotiates with different PBMs on the same drug, there are many permutations of the out-of-pocket amount a patient would bear. What’s also likely is that the patient may even pay less for a drug by its cash price (without insurance) than the amount after factoring the insurance. Pharmacies weren’t allowed to tell patients what the cash price is whether or not that could be cheaper until 2018 when the “gag order” was finally banned.
Rise of Tech Startups Tackling the Pain Points
The pharmacy industry has undergone significant transformation in the last decade, thanks to new technologies. Many startups have worked tirelessly to address the pain points faced by pharmacists and patients. Below is a summary of trends I have observed in the recent years, each with a couple startups as examples. Before diving in, I will clarify that I will cover companies whose main business focus circles around prescription drugs (as opposed to supplements, telehealth services, diagnostic testing, etc.)
1. Offline to online, full-service virtual pharmacies
Two largest pharmacies in the US — CVS and Walgreens — both waive delivery charges for home delivery of prescriptions amidst the pandemic. CVS offers free-of-charge 1–2 day delivery or same-day delivery with Shipt; Walgreen offers 1–2 day delivery for free or same-day delivery at a charge dependent on the location. However, a few companies started offering free delivery of prescriptions long before the pandemic started, with shorter delivery time and at lower price points:
Capsule offers free 2-hour delivery of prescriptions directly to patients. It works with physicians who prescribe from Capsule, and Capsule delivers the prescription to patients’ door. Through its app, patients can ask questions of their pharmacist and get help navigating their insurance. Patients can also send in their prescriptions and get their meds transferred from the existing pharmacy they use to Capsule.
Alto is a full-service pharmacy like Capsule that can fill nearly all medications, with a focus on certain therapeutic areas like fertility and HIV. It uses couriers to deliver medications from its brick-and-mortar locations free of charge within the same day. It also helps patients identify the best price by showing them savings through coupons and assistance programs. It also offers online pharmacists for help.
In addition to these two, East Coast-based Medly and West Coast-focused NowRx also operate as full-service virtual pharmacies. There is again PillPack (acquired by Amazon) which targets patients who take multiple medications for whom the company can pre-package the drugs in bundles and deliver to door monthly.
2. Identify the savings and pick the best price
As mentioned above, the price tag of a generic drug would vary drastically depending on the manufacturer, the pharmacy, and the health plan. For two drugs under different brands with same active ingredients, one could cost thousands out-of-pocket, while the other could be free of charge to patients. Patients often have to spend hours calling their insurance carrier and local pharmacies to find out their out-of-pocket responsibility, if they’re fortunate enough to get a hold of them to begin with. That lack of transparency spurred the emergence of companies as follows:
GoodRx gathers prices and discounts to help patients find the lowest cost pharmacy for their prescriptions. Patients clip off the coupons and use at the location. Patients can also talk to their doctors for a flat rate to get prescription ($19 for members, $49 for non-members). What’s also worth noting is that the company has been consistent profitable since 2016, a rarity in healthcare. They make money from advertisements on their website and fees from PBMs and pharmacies.
SingleCare shows prices and discounts to patients for both generic and brand drugs, and the patients can use their coupons at their local pharmacies. However, SingleCare doesn’t work with insurance companies, that said, the patients will have to choose one or the other at the pharmacy, but it’s not uncommon for the cash amount to be cheaper than copay.
A few others in this space include ScriptSave WellRx, which also includes pet prescriptions, and RxSaver. Both of them do not work with insurance currently.
3. Prescription delivery as a service
Prescription delivery has been around for quite a while — according to a survey conducted by National Community Pharmacists Association (NCPA) in 2017, 72% of the local community pharmacies offer home / work-site delivery service. Prescriptions are mostly delivered by mail (USPS, FedEx, UPS) or courier service (Shipt, Instacart), and some pharmacies are even exploring delivery services via drones.
While virtual pharmacies like Capsule and Alto operate their own delivery fleets, some pharmacies or health brands let a 3rd party handle the logistics. Some of the companies mentioned below provide not only the delivery service alone, but also integrate their software with their customers’ existing work flow software and help them with inventory management, drug picking, and delivery tracking.
Truepill is an API-powered platform that handles the logistics for health brands (Hims, Nurx), manufacturers, and health plans to distribute the prescription to patients. It is licensed in all 50 states in the US and the UK, and at their physical warehouses, they pick, bottle, label the prescriptions before shipping them directly to door.
ScriptDrop works with health systems, telemedicine companies and pharmacies as a third-party solution to connect them with drivers and couriers, and bring medications to patients’ door. In March, they announced partnership with Uber to offer delivery service in 37 states.
Rx Delivered Now (RxDN) is a newly founded company that offers a technology platform for local pharmacies to manage their prescription delivery and additionally, operates a fleet of drivers and couriers to help pharmacies with last-mile delivery.
4. Solutions for independent pharmacies
As discussed above, the four largest pharmacy chains make up 60%+ of the US market, of which, CVS and Walgreens take up 40%+. It’s been increasingly difficult for independent pharmacies to compete against the dominant players. They have less price negotiation power and can rarely dictate terms with PBMs. Operating at a razor thin margin or even at loss, many independent pharmacies had to shut down the business. The number of independent pharmacies has been dwindling over the last decade.
When it comes to picking up the prescriptions, patients still favor local pharmacies for their friendliness, convenience, and speed of checking out / filling the prescriptions. A few companies are working on empowering the local independent pharmacies to continue to deliver care:
NimbleRx uses 3rd party couriers to help independent pharmacies deliver medications to patients under 1hr. The company got its start with a model more like Capsule, Alto, and Medly, operating its own pharmacies and offering delivery. In 2018, the startup decided to change its approach, and has started working with independent pharmacies to help them deliver drugs to patients. The startup charges customers and the pharmacies a fee to use the service for each transaction. It works with third-party delivery services, such as FedEx and local courier services. Nimble projects to cover 85% of the country by end of summer 2021.
Troy Medicare is a Medicare Advantage plan that wraps around independent pharmacies, starting in North Carolina. Its single tier plan has $0 premium, and offers $0 for generic drugs and transparent pricing of all prescriptions. The company aims to empower the local independent pharmacy community and give the senior population a better health plan with affordable and transparent care.
5. DTC telehealth prescription companies
We’ve seen a plethora of DTC telehealth prescription companies emerge in the recent years. Take Hims & Hers as an example — the telemedicine company which got its start with ED labelless prescription delivery reached $149M in revenue for the full year of 2020, taking it less than 3 years to be publicly listed.
The business model has fared exceptionally well for a couple reasons. These companies usually offer prescriptions treating the “taboo health conditions” which patients don’t feel comfortable discussing face-to-face with a physician and even less so picking up the medication at a pharmacy. For some of the prescriptions like birth control pills, patients don’t even need to talk synchronously with a physician, but rather just complete a health questionnaire. As some companies expand the scope beyond their original focus areas such as birth control and erectile dysfunction, they are covering treatment plans for easy-to-diagnose and easy-to-prescribe conditions with relatively low complication risks — think hair loss and acne vs. hypothyroidism and hypertension. Additionally, the prescriptions are mostly generic drugs with a range of options for each health condition. Patients are able to experiment and decide whichever works best for them, factoring in the costs as well. In order for the business model to work, the offerings will also have to happen on a recurring basis — think anti-depressants vs. flu medicine.
Roman and Hims were both founded in 2017, starting with telehealth prescriptions treating erectile dysfunction. Now they (parent companies Ro and Hims & Hers) have developed into full-fledged telehealth prescription services offering both men and women’s health prescriptions ranging from sexual health to mental health to skin health, etc. Neither of the companies works with insurance, charging a flat rate for the doctor visit (varying by health concerns) and a flat rate for the prescription depending on the brand.
For women’s health, there is a variety of companies, including Rory (Roman’s counterpart) and Hers (Hims’ counterpart), Nurx, Pill Club (100+ birth control brands), SimpleHealth, TherapeuticsMD, etc.
6. Data-driven technologies drive better health outcomes
The US healthcare spending has been a prolonged hot topic — $3.8 trillion in 2019 averaging $11,582 per person, accounting for 17.7% of the total GDP. That put us at the top of the list on a per capita basis, ~40% more than Switzerland, the second on the list. So, how do we find ways to reduce overall healthcare spend? One of the areas some companies have been working on is medication adherence. According to a review by Annals of Internal Medicine, 20–30% of the medications for chronic diseases are never filled, and half are not taken as instructed. Medication non-adherence is estimated to cost the US between $100 and $290 billion annually. Leveraging data-driven technologies, companies are able to gain insights into how effectively medications work for different health conditions, what complications could non-adherence lead to, and which patients are likely to not follow prescription instructions. The companies below identify those gaps, and offer intervention to optimize health outcomes:
ZipDrug (acquired by Ingenio) partners with Medicare Advantage plans from which it gathers data insights so as to identify and engage patients with the lowest adherence and / or highest potential savings. It then matches the patients with the preferred pharmacies who deliver the lowest cost prescriptions to patients’ door. The The New Jersey-based company operates in 24 states and works with more than 200 independent pharmacies. The pharmacies handle the dispensing of the drugs and the delivery, which isn’t necessarily same-day. ZipDrug in turn is paid by the health plans it works with on a per-member, per-month basis.
Arine delivers a medication management solution which improves health outcomes for patients and drives cost savings for health plans. The company’s “virtual pharmacist” constantly aggregates and analyzes clinical and behavioral data and provides guidance for patients on their recovery journey by recommending the cost-effective medications and sending timely reminders.
7. Taking on the middleman — PBM
A PBM makes money on prescription drugs primarily through differential pricing agreements and withholding the difference between billed cost and pharmacy reimbursements. Because of this business model, a PBM’s incentive is to sell more medications from which they can profit most, which misaligns with patients’ interest — to save money on the most effective medications and discontinue when recovered.
The US PBM market is dominated by three players — CVS, Cigna’s Express Scripts, and UnitedHealth’s OptumRx, which have a strong foothold together with their overweighing market shares in pharmacy and health insurance. However, a few newer players have risen to take on these middlemen:
WithMe provides a medical guidance service to employers which can pair with / replace the existing PBM. By leveraging its data-driven technology, it can help patients find the right medications and guiding them around the side effects to ultimately achieve the best health outcome, and can also help employers save on healthcare spend.
Capital Rx is a different kind of PBM which sets transparent prices for all its customers by basing on the National Average Drug Acquisition Cost pricing developed by the federal government. Rather than making money from spreads and rebates like traditional PBMs do, the company charges a flat rate of $0.99 per transaction.
