Billionaire business owner Mark Cuban is on a mission to “disrupt” the pharmaceutical industry and sell low-cost prescription drugs directly to Americans. His start-up, the Mark Cuban Cost Plus Drug Company, offers heavily discounted prices on hundreds of generic prescription drugs.
Some of the potential savings are staggering. A generic leukemia drug called Imatinib currently sells for $2,502 for 30 100mg tablets. The Cuban company sells the exact same drug for just $17.10. In an industry notorious for keeping its pricing models in the dark, the Cuban pharmaceutical company is completely transparent. That $17.10 is exactly 15% more than the manufacturing cost of imatinib ($12) plus a $3 pharmacy fee.
At first glance, Cuban’s new online pharmacy couldn’t have come at a better time. Americans pay 244% more for prescription drugs than any other developed country, according to a 2021 study by RAND. And 7% of American adults – about 18 million people – said they could no longer afford to pay for one or more of their prescriptions in a September 2021 West Health and Gallup survey.
But while the Texas billionaire should be applauded for trying to make lifesaving drugs more affordable, one startup alone won’t solve the US prescription drug price crisis, health industry reformers say. Ultimately, Congress needs to rewrite the decades-old rules that allow drug companies to essentially name their prices and reap billions in profits.
Generics aren’t the problem, brand name drugs are.
Currently, the new Cuban company offers reduced prices only on generic drugs. In America, pharmaceutical companies obtain patents for new drugs as well as exclusive rights. This means that the pharmaceutical company has the exclusive right to sell the drug for 12 to 16 years at whatever price it wants (a legal monopoly, basically).
When the exclusivity period is over, other drug manufacturers can start making and selling generic versions of the same drug. If many companies make generic versions, the price of the drug will drop quickly. If fewer companies are stepping in, perhaps because the drug is treating a rare condition, then even the generic version could still be expensive.
The good news is that four out of five drugs prescribed in the United States are generic. And while Americans pay 84% more for generic drugs than other Organization for Economic Co-operation and Development (OECD) countries like Australia, France, Germany, Japan, Spain and the UK, generics aren’t what break people’s budgets. The culprit is brand name drugs.
David Mitchell has an incurable type of blood cancer called multiple myeloma. He is currently taking four non-generic cancer drugs that cost $935,000 a year.
“One of the drugs I take sells for about $1,000 a capsule, but it costs the pharmaceutical company less than a dollar to make,” says Mitchell. “That’s the kind of profit margins drug companies manage.”
Mitchell is the founder of Patients for Affordable Drugs Now, an advocacy group calling on lawmakers to limit the exclusivity rights enjoyed by brand-name drug makers, among other major reforms that would lower drug prices.
Even though brand name drugs make up only 16% of all prescription drugs in the United States, they are responsible for 88% of total prescription drug spending, according to RAND. And while Americans pay only slightly more than other countries for generic drugs, they pay 344% more for the same brand name drugs.
Brand-name drugs are at the root of the prescription drug price crisis, says Mitchell, and unfortunately that central problem is not being solved by the new Cuban company, which sells only generics.
Let the government negotiate lower prices
Why do other developed countries pay almost four times less for the same brand name drugs? Because their governments are allowed to negotiate lower prices directly with drug companies, Mitchell says, but not in America.
When Congress drafted the current Medicare legislation in 1983, drug companies successfully lobbied for the inclusion of what is called a “non-interference clause.” This clause prohibits the Secretary of the Department of Health and Human Services (HHS) from “interfering” in negotiations between drug manufacturers and drug plan sponsors.
In practice, the non-interference clause means that the US government, which is the largest purchaser of prescription drugs through Medicare, cannot use its collective buying power to negotiate lower prices. Instead, that bargaining power is given to private companies called Pharmacy Benefit Managers, or PBMs.
The problem is that PBMs are driven by profit. They’re supposed to negotiate lower prices for health insurance companies, big employers, and even Medicare beneficiaries, but they make money by pocketing a percentage of the drug cost. Critics like Mitchell say PBMs therefore have an incentive to keep drug prices high.
“The prescription drug system we have now is designed to benefit the people who make money off of it at the expense of the people it’s supposed to serve,” Mitchell said.
One of the reasons the new Cuban company can offer such low prices is that it is registered as a PBM, which means it can negotiate its own deals with drug manufacturers. Since Cuban is already very rich, he is not in it for the money. Instead of marking up the drugs to make a big profit, he tops up just enough to cover his costs and keep the business running. He calls it a “public benefit corporation”. By this measure, all other PBMs should be called “benefit companies”.
Role of Congress in Prescription Drug Prices
The Build Back Better Act, which passed the House of Representatives in November 2021, includes several provisions that would reduce prescription drug prices for millions of Americans. He is now awaiting a vote in the Senate.
For starters, the legislation gives the government the power to negotiate prices with drug manufacturers for some very expensive drugs. The list of tradable drugs will be no more than 10 in 2025 and will grow slowly from there, but it’s a step in the right direction.
The law, if passed by the Senate, would also cap out-of-pocket expenses for prescription drugs at $2,000 per year. It may seem like a lot, but Mitchell currently pays $26,000 a year out of pocket for his cancer drugs. Again, a big step in the right direction.
But something the proposed legislation doesn’t touch are those exclusivity rights that give drug companies the ability to name their price for more than a decade. The pharmaceutical industry says it needs this legal monopoly to recoup the high cost of research and development.
In other words, if people like Mitchell want life-prolonging drugs for incurable cancers, then the drug companies should be compensated for their hard work and innovation.
There is logic to the pharmaceutical industry’s argument, but Mitchell says they omit some important details. For starters, most truly “innovative” scientific work is taxpayer-funded through National Institutes of Health (NIH) grants to research universities. When a pharmaceutical company spots a promising (i.e., profitable) innovation, it buys the patent for a bargain and makes it its own.
Beyond that, there is the question of fair compensation. Yes, pharmaceutical companies should be allowed to make money by providing a cure, a vaccine or a life-saving treatment, but how much money? Brand-name pharmaceutical companies could lose $1 trillion in sales and still be America’s most profitable industry, according to an analysis by West Health.
“I take this whole notion of incentivizing innovation very seriously,” says Mitchell. “I need new drugs or I’ll die sooner than I hope. But we’re a long way, even with proposed legislation in Congress, from doing anything that would stifle innovation.”