Last month, Mark Cuban, the billionaire serial entrepreneur and star of NBC’s Shark Tank, announced the launch of an online pharmacy with a mission to drive down the cost of generic drugs. Generic drug prices often greatly exceed manufacturing costs, though competition is generally uninhibited by patents. But because insurance plans typically have very low copays for preferred generic drugs, Cuban’s new firm may struggle to make a significant impact on the marketplace, even if it substantially undercuts existing providers on price.

Until recent decades, prescription drugs were a modest, low-variance expense, often not covered by insurance. As recently as 1980, 72 percent of drug spending was paid for out-of-pocket. But as drug-development costs have escalated rapidly and the expense of courses of treatment regularly now amounts to tens of thousands of dollars, insurance coverage has increasingly been broadened to cover prescription drugs. In 2006, Medicare’s Part D prescription drug benefit went into operation; by 2019, less than 15 percent of drug spending was paid for out of pocket.

The rise of third-party purchasing for prescription drugs has fueled more investment in developing new drugs—a process that improves the value of health care overall. However, it may have also increased the prices of older drugs, a consequence that confers no such benefit.

Generic drugs account for 90 percent of prescriptions in the United States. Prices for drugs fall rapidly after the expiry of patents. Whereas a one-month prescription of Lipitor, the blockbuster drug used to treat high cholesterol, typically cost $165 in 2011, generic versions now go for $8 in grocery stores.

Yet, while pharmaceutical prices are supposed to decline following the expiry of market exclusivity protections, how much they actually fall depends on the intensity of competition that arises. Drugs for rare conditions offer the prospect of patient populations too small to lure competitors into undercutting incumbents aggressively on price. A single manufacturer may therefore in practice retain a monopoly over supply, even when competition is legally allowed. This was notoriously exploited by hedge-fund manager Martin Shkreli, who engaged in a concerted strategy of acquiring old neglected drugs and hiking their prices by as much as 5,000 percent.

Sensing an opportunity to do well by doing good, the Dallas-based entrepreneur has launched the Mark Cuban CostPlus Drug Company. The firm notes that generic drugs can cost pennies to make but are often sold for far more. Its CEO, Alex Oshmyansky, argues that prices for generic drugs are inflated by pharmacy benefit managers (such as Express Scripts or Optum), who negotiate the purchase of drugs on behalf of insurers and often fail to pass rebates and discounts to patients.

Cuban’s company is pledging to sell a growing range of generic drugs online at cost plus 15 percent, plus a $3 fee for pharmacists, plus $5 shipping. The MCCPDC website promises enormous discounts relative to “retail prices.” It offers a 30-pill supply of the leukemia drug Imatinib (best known under the brand-name Gleevec) for $17 rather than for a “retail price” of $2,500. In reality, the drug is already typically available at a discounted price of $40 to those paying out of pocket. MCCPDC’s $3.90 price for 30 20-milligram capsules of Fluoxetine (Prozac) is much lower than the $23 “retail price” it cites—but little different from the $4.00 at which Walmart already sells it.

Nonetheless, Cuban’s firm in general offers substantial savings. So, to ask a question typical of Shark Tank: “Why hasn’t anyone else done this yet?” If drugs were still purchased predominantly by individuals paying out of pocket, those price differences would be enough to win substantial market share. Yet, over 90 percent of Americans now have health-insurance coverage that pays for prescription drugs. The median standard copay in 2022 for preferred generic drugs covered by Medicare Part D is zero dollars. Copays for generics are often similarly negligible for Medicaid and many private insurance plans.

The market for Cuban’s drug company is therefore likely to be limited to the uninsured and those with skimpy insurance coverage. This may still be sufficient to allow it to trim prices a bit for popular drugs where volumes and economies of scale are high. But the firm may struggle to do so for rare diseases, where the problem of high generic drug costs is currently most substantial.

Photos: Amanda Edwards/WireImage (left) / BackyardProduction/iStock (right)


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