Kroger pharmacies will begin changing its hours to be open from 9 a. to 7 p. m., Monday through Friday, beginning on the 8th of April. The pharmacy will be open from 11 a. to 5 p. on Sunday, in addition to being open from 9 a. to 5 p. on Saturday.
Did Kroger quit GoodRx?
A few of weeks ago, GoodRx shocked its investors with the unfortunate news that a large supermarket chain had stopped recognizing its discount card for an indeterminate number of prescriptions. This news came as a surprise to GoodRx because the business had previously accepted the card. It is likely that the unknown chain is Kroger, which is the sixth-largest drugstore chain in the United States, as I will explain below. In addition to this, GoodRx has reported that Kroger is responsible for an unanticipated one-quarter of its business regarding prescriptions.
The current scenario with GoodRx brings to light important questions regarding the intricate network of connections and rivalries that underpins the discount card model of today. In the next section, I will discuss the economics of the discount card company in order to provide context for the future of discount cards.
As I will demonstrate, discount cards are really simply a different kind of spread pricing. As a result of the growth in the market for patient-paid prescriptions, disagreements over the proper distribution of spreads will put strain on the relationships between pharmacies and PBMs and push change in the business model for discount cards.
When elephants fight, the grass is the one that gets torn out of the ground. This is a well-known African saying. Will investors continue to back GoodRx, or will they go elsewhere for better opportunities? Continue reading and tell me what you think at the end.
READ ME The following is the pertinent content from GoodRx’s earnings release for the 2022:Q1 quarter:
Letter to Shareholders from GoodRx Regarding Q1 2022
Transcript of the GoodRx Earnings Call (from 5/9/22)
As usual, I urge you to investigate the matter on your own by reading the original source material.
You might find it helpful to look back over some of my older posts that discuss GoodRx and the business model that it uses:
How GoodRx Makes Money Off of Our Inefficient Pharmaceutical Pricing System
The Way in Which the Swift Development of GoodRx Causes Disagreement Between PBMs and Payers
Why GoodRx, and not Amazon, Might Be the Real Pharmacy Benefit Manager Disruptor
In Section 4.
of the DCI’s 2022 Economic Report on U. Pharmacies and Pharmacy Benefit Managers, I position GoodRx into the larger framework of patient-paid medications. TUSK TO TUSK In a letter to its shareholders, GoodRx provided the following explanation for the unexpectedly positive results of its financial operations: “In addition, we recognized that a grocery chain had taken actions late in the first quarter of 2022 that impacted acceptance of discounted pricing for a subset of drugs from PBMs, who are our customers, and whose pricing we promote on our platform.” During the company’s earnings call, GoodRx revealed that the chain was responsible for “almost one-quarter of its prescription transaction revenue,” despite making up less than 5% of the pharmacies in its retail network.
This corresponds to around $38 million in sales for GoodRx during the first quarter, or over $150 million yearly. The corporation estimated that the impact on their finances would be around $30 million for the second quarter, but they would not make any projections beyond that point.
This was a revelation that took me by surprise. I am one of a large number of people who was unaware that GoodRx had grown so reliant on a single chain of pharmacies. Since the news of the downgrade was announced, the already low stock price of the firm has stayed lower than $9.
Its share price reached an all-time high of approximately $57 in the beginning of 2021. Ouch. Kroger is the grocery store chain that, according to analysts working for Wall Street, is the only one that will no longer accept the GoodRx discount card for any or all prescriptions.
This uncomfortable truth has been proven by many posts made by customers on Twitter. (For an illustration of this, check here and here.) We estimate that Kroger is responsible for just 3% of the overall income generated by the sale of prescription drugs in the United States.
This suggests that GoodRx over-indexed a single chain significantly more than necessary. As you can read in the transcript of the earnings call, the management team at GoodRx did their best to spin this situation in a positive light.
They made the correct observation that the disagreement is not between Kroger and GoodRx; rather, it is between Kroger and at least one of the PBMs that manages the retail discounts offered by GoodRx. Because of this, the GoodRx team drew a parallel between their situation and the conflict between Walgreens and Express Scripts in 2012.
(They did not specifically name these two businesses, but it can be inferred from the surrounding information.) Take a trip down memory lane with the help of the wayback machine at Drug Channels and read these two articles from ten years ago: Walgreens is Losing Its Battle with Express Scripts and Walgreen Cuts a Deal with Express Scripts.
The commentary provided by GoodRx was puzzling and difficult for me to understand. Here is my analysis of what is actually taking place. DISCOUNT CARDS = SPREAD PRICING Third-party payers are able to compensate a PBM for plan administration and other services through the use of spread pricing.
- Spread pricing is a method of compensating a pharmacy benefit manager (PBM) by allowing the PBM to keep the differences, also known as spreads, between (a) the amount a PBM charges the payer and (b) the amount the PBM pays the pharmacy that is dispensing the prescription to a patient;
This method is used by payers to provide PBMs with financial incentives. According to our estimates, the importance of spread pricing to the overall profitability of large PBMs has significantly decreased. (For more information, please refer to Section 11.2.3.
- of our 2022 pharmacy/PBM report.) However, a significant number of individuals are unaware that spread pricing is the primary means by which PBMs profit from discount cards;
- As a consequence of this, the dispute between Kroger and PBM is really a fight over how this spread gets split;
The following graphic provides an illustration of the flow of products and money that occurs when a patient pays the entire cost of their prescription for a generic medicine using a discount card rather than making use of any third-party insurance. These movements have been taken out of the figure since generic medicine makers do not offer rebates to PBMs or payers. [Click here to make it bigger] Compared to the traditional scenario that is depicted in our well-known follow-the-dollar graphic, this one has a few key distinctions, including the following:
When a discount card is used, the patient is the one responsible for making payment. There is no money coming from a third party for the prescription. The pharmacy will get the full amount owed for the prescription once the patient has paid for it out of their own money. (See below for further information on this topic.) The contractual and financial flows that occur between PBMs and third-party payers have been omitted from the figure that can be found above.
When a patient uses a discount card program, the Pharmacy Benefit Manager (PBM) will collect a per-prescription fee from the pharmacy.
The patient’s payment for the prescription is subtracted by the fee associated with the discount card to arrive at the pharmacy’s net reimbursement. As a result, this fee constitutes an increase over the total amount of net reimbursement that the pharmacy receives.
Patients, much like many other types of payers, are typically unaware that a PBM is the one responsible for collecting this fee.
The PBM does not keep track of the full spread of the discount card. A portion of this fee is split between the pharmacy benefit manager (PBM) and the discount card vendor who referred the patient to the pharmacy.
The PBM will pay the discount card vendor either a percentage of the fee it charges or a predetermined amount for each prescription. According to GoodRx’s reports, the company earns approximately 15% of the total retail cost of the patient’s prescriptions, regardless of the form.
Please refer to my commentary in this post from the month of August last year.
Assuming that PBMs do not incur losses on prescriptions paid for with discount cards, total discount card spreads are (on average) higher than 15% of the total retail consumer cost. The following are some rough estimates of the economics of prescriptions sold by GoodRx, PBM, and Kroger:
The total revenue generated from customers using GoodRx at Kroger pharmacies amounts to $1 billion ($150 million multiplied by 15 percent).
The income generated from transactions at Kroger by GoodRx is $150 million
PBM transaction revenue from GoodRx at Kroger is equal to $50 million (this is assuming that discount card spread accounts for 25% of overall income).
Kroger’s prescription business brought in a net revenue of $800 million, which is equivalent to $1 billion less the discount card spread of $200 million.
Wow. If you can get away with it, you can make a lot of money. BEATEN TO DEATH BY FOOT? The data shown above is becoming increasingly important for comprehending the factors that will shape the future of discount cards. Here are three trends that you should keep an eye on: 1) The number of prescriptions that are paid for by the patient is rising.
Let’s say that PBMs maintain the remaining 25% of the discount card spread and GoodRx keeps the remaining 75% of the spread. Patients are increasingly responsible for paying for their own prescription prices through the use of deductibles and coinsurance.
As a direct consequence of this, an increasing proportion of prescriptions get no payment from a third party since individuals pay the whole cost themselves. In addition to this, the price structure for generic prescription drugs is so flawed that more than 70 percent of customers who utilized GoodRx already had private or government-sponsored health insurance.
According to estimates provided by GoodRx, more than half of the prescriptions that were filled using the company’s discount card were completed at a lower cost than the typical copay required by commercial insurance for the 100 most often purchased pharmaceuticals.
In 2021, we believe that patient-paid medications accounted for around 9 percent of all prescriptions that were not altered. More over half of these patient-paid medication transactions involved the use of discount cards. [Click here to make it bigger] Because a PBM decides whether or not a claim is valid, patient-paid medications that involve the use of a discount card are not counted as cash-pay transactions.
Therefore, they cause a consumerization of retail prescriptions; nevertheless, this does not always result in a consumerization of the pharmacy and PBM companies. 2) Pharmacies will fight back against the narrowing profit margins offered by discount cards.
When a patient uses a discount card, the pharmacy is required to pay a charge for the privilege of dispensing medication to the patient, even if the patient may have been willing to pay the same amount for the prescription straight to the drugstore anyway.
However, due to the peculiar nature of our medicine distribution system, it is impossible for pharmacies to provide customers with cheap cash costs that are comparable to those offered by discount cards.
In part because discount card suppliers are seeking ever-higher payment rates, PBMs have been attempting to widen these disparities. As a direct result of this, the profit margins that pharmacies make on discount card prescriptions are shrinking. This adds another another profit pressure to the already extensive list of disadvantages that retail pharmacy must contend with.
- It will be difficult for pharmacies to recoup these margins after these changes;
- There is an excessive number of retail pharmacy stores across the majority of the United States;
- 3) PBMs will take action in response to the threat posed by discount cards;
I have long held the belief that discount cards have the potential to be the ultimate game-changer that affects the economics of pharmacy benefit managers (PBMs), the decisions made by plan sponsors, and the whole generic market. The processing of claims for generic medications makes for about 90 percent of a PBM’s total workload.
People are being incentivized to go around their own insurance plans in order to access the network prices of another PBM—or even their own plan’s PBM disguised as a discount card. This is happening because discount cards are becoming more prevalent.
PBMs have reaped the benefits of the fast expansion of discount cards. I believe that they are now aware of the risks that this increase poses to the value of the benefit management services that they provide. Maintain vigilance with regard to the following tactics:
PBMs are making an effort to raise the spreads on discount cards and/or keep a larger proportion of these spreads for themselves.
To this point, discount card companies have been able to maintain their profit margins by cooperating with more nimble and hungry PBMs that are interested in expanding their business. As an illustration, GoodRx’s portion of the income generated by its three major PBMs has been steadily decreasing, going from 61% in 2018 to 34% in 2021.
What’s Up Kroger Pharmacy?
This would imply that the corporation is expanding its presence in the market in order to keep up with the competition.
PBMs are making efforts to incorporate a “discount card” pricing structure into commercial benefit programs. Express Scripts and Prime Therapeutics have both indicated that they would be implementing these schemes.
PBMs have the ability to hide behind discount cards in order to undermine the network prices that are given to their own customers, as I discussed in a recent post. The conditions under which a member’s out-of-pocket expense under a PBM-managed benefit plan might be higher than their cost utilizing a discount card program handled by the same PBM are still difficult for me to comprehend.
I recently hosted a video webinar titled “PBM Industry Update: Trends, Controversies, and Outlook,” in which I discussed how patient-paid medications have the potential to shake up the PBM industry.
Let’s see if GoodRx has the intelligence to avoid being trampled grass in this competition.