Introduction to Guests and Host
00:00:06
Speaker
Welcome all to another episode of Crossroads by Elantra. We have the pleasure of hosting A.J. Loia Kono, CEO of CapitalRx, a provider of the back-end infrastructure required for the processing of pharmacy claims in the US. I will be joining today's podcast by our very own fintech expert, Pia Rickers. A.J. Pia, welcome to our podcast.
A.J.'s Career Journey in Pharma
00:00:27
Speaker
AJ, let's start with a quick bayou on you first. You've been in the pharma supply chain management industry for over 20 years now. Initially, you were in the consulting side, if I'm not mistaken. Then you took turns initially as the CEO of Truvaris and now, of course, of Capital RX. Both are providers of software solution, the BBM industry. Can you tell us how you first broke into the industry? By accident, I think most people, at least I never had visibility exactly what I wanted to do when, you know,
00:00:56
Speaker
grow up. Very humble roots. I started in pharmaceutical manufacturing on the plant side. I used to help convert old supply chain systems, MRP to MRP2 to ERP platforms like Oracle and SAP.
Flaws in U.S. Healthcare System
00:01:09
Speaker
I did that for almost eight years of my life. Hard to believe, time flies. But I had a first grade education in supply chain logistics, drug pricing, and software implementations that
00:01:19
Speaker
Still works for me to this day to drop on those experiences but then i moved over to the opposite end of the supply chain working with insurance payers employer groups pvms i need to know what a pvm was even though i was technically in pharmaceutical manufacturing pharma the broader umbrella,
00:01:41
Speaker
But i didn't know what a pbm was this pharmacy benefit manager that it ministry its benefits on behalf of typically self insured payers or forms the back end infrastructure to process prescription claims for carriers and regional health.
00:01:59
Speaker
And it was during that time I discovered all the flaws in the US healthcare system. It was a bit outrageous to me. I had never seen an industry with the amount of opacity and complexity, as well as the self-interest driving these decisions solely for benefit for the people that are administrating, not the patient
Drug Pricing Opacity and Reimbursement Complexities
00:02:23
Speaker
in plan. I often joke care is in the name of healthcare, but
00:02:27
Speaker
oftentimes executives and companies ignore that part of the responsibility. What do you feel are the main reasons why we have the convoluted reimbursement system we have now whereby three major firms, Caremark, Express Scripts and OptumRx, let's name them, control roughly 80% of the market. Yeah. I mean, I always say if you have the perfect market and what am I describing with pharmacy benefit administration is
00:02:53
Speaker
you have an inelastic demand curve. So it doesn't matter if we're in a recession or boom times, patient utilization holds rock steady, does not budge. It's like no other industry. It's not energy services. It's not real estate. You can always count on it. The second thing is list price.
00:03:11
Speaker
goes up every year. So the perceived price of drugs, and I use the word perceived because we're going to talk about something in a bit called net cost, which is more of reality. But the list price inflates on every drug every year. And this is problematic. And so
00:03:29
Speaker
When you have a situation where list price inflates in elastic demand curve, so you have this compounding of inflation, you have the perfect market. So you don't innovate as someone who administrates benefits. You consolidate, you buy more and more and more of it, which is what we saw in the 21st century, which gave birth to the companies that you just mentioned. And so when you have this consolidation, you asked me the question of what caused this overly complex system?
00:03:58
Speaker
One of the examples I give is in my industry, when you're dealing with benefits, you have all of these odd terms to describe drugs like this is a single source generic, this is a multi source brand, this is a brand, this is a generic, this is a
00:04:13
Speaker
specialty drug, this is limited supply, this is DAW handling. And all of these combinations can move things from different lists and reclassify the drug to different pricing schedules. And if you come from manufacturing, we're very simplistic people, we have two forms of classification. It's binary, it's you're either patent protected or not patent protected. And everything has a drug code that tells you exactly what you're dealing with. And that has a unit cost, very specific economics and pricing.
00:04:42
Speaker
But when you get to the insurance side of this industry, nothing makes sense. Basic microeconomics laws don't apply anymore. This overly complex system, I often tell people how should drum pricing work in the United States. Go into a pharmacy, but don't go to the pharmacy at the register. Don't go to the pharmacist in the back.
Self-Interest and Pharmacy Benefit Management
00:05:03
Speaker
Go to the over the counter section and reach for a bottle of tylenol or advil or eyedrops and something magical happens in the US healthcare system it doesn't matter if you're insured or uninsured. Doesn't matter if you work for the biggest employer or the smallest is the same price.
00:05:19
Speaker
If someone walks in an hour after you in the same store, go figure, it's still the same price. The price won't change until real market forces, supply, demand are going to change or have that seller change the price. What's so crazy in the pharmacy benefit system, the first time I started working with insurance claims or working with prescription benefit claims,
00:05:43
Speaker
It looks like drug prices change every hour of every day in every pharmacy for every drug. This is a total lot. I just want everyone to think about what I'm saying here is everybody in the country is being lied to about the price of drugs. And so if we have to point to one factor that explains the discrepancies between the OTC and prescription drugs markets, it would be the presence of PBMs in the equation? Well, I was going to say, I don't want to make everyone out to be a bad actor.
00:06:11
Speaker
What I do want to point out is self-interest is the culprit here. And so if someone says, hey, I can make more money if at my sole discretion, I can just randomly change the price of a drug. Why is the variability happening? It's because what I call casino economics, which is you're playing probability and chance.
00:06:33
Speaker
So if I have a 94% chance when someone comes into a pharmacy that because the American public is so uninformed and this is such an opaque and overly complex system, I have a 94% chance you're going to take any price I put in front of you.
00:06:49
Speaker
Let's try out some different prices. You start to be creating thresholds of acceptance. The only way to find if it sticks is to test it, right? These are some of the largest companies in the world. You're very sophisticated in your economics and your approach to the market.
00:07:07
Speaker
but it has nothing to do with the real price of the drug. I always feel sorry for the pharmacist and full disclosure, I was the son of an independent pharmacist. They buy their inventory for a price and it's sitting on their shelf. There's a fair price that they're willing to sell it for.
00:07:23
Speaker
But their price never comes up in this equation. Because again, the way pharmacy contracts are written in the United States when you start to deal with PBMs and insurance carriers is, again, sole discretion. So let's use an example. Let's just say a pharmacist buys a drug for $20 on a 30-day supply.
00:07:41
Speaker
Maybe I'd love to sell that for 30, 35 bucks. Someone walks in with insurance, suddenly the person in charge is the carrier of the PBM and they go, $50. Now, the pharmacist is like, that's amazing. They sold that for $50. I should be getting 35 back. This will be great. We both make money.
00:08:02
Speaker
So the first thing that usually happens is they bought the drug for 20. They're expecting 35 ish because they see the pharmacy charging the patient 50 bucks. They get reimbursed 18. So they're already underwater on the transaction. Then next month they're going to get a bill and the PBM will play a game called clawback.
00:08:23
Speaker
You know what? We did some math. Turns out we gave you way too much money. So we're going to claw back more money. And that per script is an extra $1.50.
00:08:33
Speaker
So now this poor pharmacist is even out of pocket, even more money, which is what we call pharmacy deserts, where small independents can't compete anymore. They have no leverage or pushback against very large entities. In addition, smaller operations are less efficient, but there's no reason why someone should be punishing them in this process. And the economics are so backwards.
00:08:57
Speaker
And they don't reflect real supply and demand. And that's what always bothered me. It was an efficient market. Buyers and sellers freely communicating on price. There's no communication. There's no efficiency. And it's a one-way system punishing everything downstream.
Capital RX's Approach to Pharmacy Economics
00:09:14
Speaker
Out of these clauses work, are they included in some sort of contracts?
00:09:19
Speaker
Yeah, they're in the retail pharmacy agreements. This is between the PBM, the carriers, and the actual pharmacies. We, capital RX, don't use clawbacks. We don't make money on drug spend. Our job is to be a great administrator, which coincidentally, this is where the industry began. It was, let me administrate your benefit on a flat fee.
00:09:42
Speaker
The inherent conflict of interest that crept into this model was in the 21st century when you suddenly have this notion of spread pricing where the PBMs came up with an idea and they said, there's no more administrative fee. I'm just going to keep a little bit of money from drug manufacturers.
00:10:01
Speaker
When you start to make money on drug spend, you have an inherent conflict of interest because the more expensive the drug, the more money you make. So the clawback clauses were really aimed at getting rid of the flat administrative fee. So when you have a contract, you say, if I ever believe I paid you the pharmacy more money than you should receive at any time, I can claw back the amount that I believe I am owed.
00:10:28
Speaker
There's no counterweight because if someone goes, I completely disagree, and they're like, oh well, I can kick you out of network. In the US healthcare system, being kicked out of network could be the death knell for that pharmacy.
00:10:44
Speaker
So let's discuss another topic around drug economics, not so much about the pricing, but the concept of waste. We estimate the cost of waste in the US healthcare system to be roughly a trillion dollars. Are you witnessing firsthand a lot of excess spending on drugs? And how do you capital RX solve for it? The first answer is yes. There's so much waste in healthcare and drug spend is no different than any other segment of healthcare.
00:11:12
Speaker
Capital RX doesn't make money on drug spin. Why is this important? Well, if I have a choice as a clinical pharmacist and we're going through your protocol of approval and there's a $10,000 drug and a $5,000 drug, but they have the same efficacy, same access, et cetera, the $5,000 drug is less expensive. Let's use it. Or if there's a generic for 500 or $100, let's use that.
00:11:40
Speaker
But if you make money on drug spend, you have spread pricing. You suddenly gravitate, unfortunately, towards the bigger price tag. And so the first thing you want to do is what I call alignment.
00:11:55
Speaker
We get a flat fee per script per member per month i don't care what it is but i don't want anyone to say you benefited from that decision i think that's a horrible place to be in health care so that that's the first part but then when you go further down what are these wasteful moments well the first thing is you could pick wasteful drugs wasteful drugs come.
00:12:18
Speaker
in a couple different forms. I'm going to give you two examples. The first one is let's just take specialty drugs. And so if I have a $100,000 a year drug, and it has a 50% rebate, and in the same therapeutic category, I have an $80,000 drug, again, 50% rebate. Which drug should you choose if you're looking for lower price or lower net cost? The second drug.
00:12:46
Speaker
Which drug do most people pick the hundred thousand dollar drug and why is that well because they're making more money the more expensive the drug the second thing is when someone is doing an evaluation consultants and brokers. It appears as if the hundred thousand dollar drug saves you more money because you're getting a bigger rebate per script.
00:13:09
Speaker
This is truly mind-boggling. Unfortunately, there are people out there that maintain drugs that have very low therapeutic value and they're overpriced and there are generic equivalents available. Let's do a more broad category example like metformin. Metformin's been around forever. The generic of regular metformin is five to 15 bucks a month depending upon your dose.
00:13:35
Speaker
But manufacturers continue to print new and improved versions of metformin. So they can have an osmotic formulation, longer acting formulation. These are $600 plus when I can get it for five bucks. That's just pure waste. Who would pick the $600 drug? Well, the person once again who makes money on drug spend. Back to alignment. If I make money on drug spending, I am your administrator.
00:14:05
Speaker
You're certainly tempted.
Innovation in PBM Technology: Judy Platform
00:14:07
Speaker
So maybe let's spend a bit of time on your core offering and the role it plays. Maybe you can walk us through what a typical PBM workflow looks like and how your flagship product, Judy, is able to streamline it. I always say PDMs are administrators. They're managers. It's in the name. PDMs were created because there are hundreds of administrative tasks to sponsor a benefit.
00:14:29
Speaker
What are these administrative tasks? There's things like eligibility. Who's in the benefit? Who's out of the benefit? What's my out-of-pocket? What's my copay? You have formulary decisions. What's preferred, non-preferred? You have billing and reimbursement. All of these things a PBM must do. This is what a PBM is tasked to do first and foremost, administrate the plan on behalf of the fiduciary or the sponsor of the plan.
00:14:57
Speaker
They keep tabs. Exactly. What we saw was the industry stopped evolving from a technology side. The vast majority of systems that process and administrate workflows for claim administration in the United States are 20, 30 years old. They're vulnerable.
00:15:15
Speaker
In addition, it can't evolve with new trends in healthcare, which is why oftentimes healthcare providers seem reluctant to adopt any good idea because they don't have the infrastructure to meet those demands or ideas. For us as an organization, not only if we're going to compete with titans in healthcare, we have to do it cheaper, better, faster.
00:15:38
Speaker
And so for us we built our judy platform judy is short for adjudication she's the brains of our organization and every single workflow in our organization runs on judy my competitors have a very thin narrow layer of electronic claim processing and then
00:15:54
Speaker
They have all these bolt-on activities, and they scale with people. We took a very different approach. It was my background in supply chain software, working with my co-founder, Ryan, who's my CTO, to say, we need to think about this as the journey from MRP, old supply chain systems, to ERP. And the ERP platform is really contemplating more work streams layering in optimization and automation, reducing costs, creating efficiency.
00:16:20
Speaker
And this is core to everything you're doing. Remember, we do not make money on drug spend, so we're operating on a much narrower margin. You need to heavily rely upon technology. And this program, Judy, became absolutely critical to our growth and our success in the industry. So if I can step in again, thanks for welcoming me on your podcast.
00:16:44
Speaker
Coming at it from a FinTech perspective, the first question that comes to mind when I hear you describe your platform is that there are so many different players in the healthcare industry in the US. I think about it in terms of different infrastructures, some of which are very antiquated and should maybe be upgraded someday or code in different languages. But my question is, how come there hasn't been in this massive industry, more of a kind of a unified approach to building a tech infrastructure that enables everyone to communicate with each other, process transactions centrally, et cetera?
00:17:14
Speaker
The reason why I think are two sides to the same coin. The first one is everybody's making so much money. Nobody's focused on this in healthcare. Let's just take pharmacy. When I started in the pharmaceutical industry in 2000, it was $120 billion top line domestic spend in the United States. This past year, we went over $600 billion.
00:17:39
Speaker
drugs can't stay branded forever. There's a reason why we have a limited patent protection workflow in the United States. They've never really had competition. If everyone has the same model, everyone's doing everything the same way.
00:17:54
Speaker
Do I really need to do something differently? The example I give that you might appreciate coming from FinTech is I remember when my poor aunt passed away and she left me 100 shares of Duquesne Power and Light. It was like 20 bucks a share and it was $2,000. So I marched down. I was in college at the time. I went down to the local Merrill Lynch.
00:18:15
Speaker
And I said, hey, I actually had stock certificates. And I was like, hey, I'd like to sell this. And they're like, no problem. And I'm expecting two grand. And I get this check from Merrill Lynch for $1,700. And I was like, huh. And they're like, well, we keep 10% of the trade. And then there's some transaction fees. And here's your check. And I bought a car with it. So I was pretty excited at the time. But think about this. 10% of the value of the trade sounds criminal.
00:18:43
Speaker
And then turn of the century, you have literally a Ameritrade E-Trade. I'll do this for $59.95, $29.95. Charles Schwab and Fidelity discount brokers get into the game, and they'll do it for $19.95 and $9.95. And then Robinhood emerges, and I'll do it for a buck. And now it's zero in my Chase account. And I'm like, what happened there?
00:19:05
Speaker
I mean, there was an entire industry. Think about this. There was this thing called a stockbroker and he made money buying and selling stock, not institutional trades. I mean, mom and pop trades gone.
Healthcare Financial Inefficiencies
00:19:18
Speaker
This is claim processing on many ways where this notion of charging 20, 30, $40 for every $100 script should be going in the opposite direction. We're going to see this same transition. You can't have a market the size of claim administration or drug spend, whatever you want to call it, where you have so much self-interest and so much inefficiency.
00:19:42
Speaker
Competitors like us are going to emerge and drive costs down. You're also seeing regulatory interest and legislative oversight play a role in this where people are like, there's a lot of people complaining about drug spend. Maybe we should take a role in looking at this as well. Let me switch gears a little bit and think about it again from my FinTech perspective. From a money floor transaction perspective, what infrastructure do you use to move money around?
00:20:10
Speaker
And how does that work and what role do you play in terms of facilitating these money movements. You're going to get a kick out of this because I always say the financial industry is usually 10 years ahead of everybody else because there's so much money.
00:20:23
Speaker
Well, you're going to make me laugh there because I don't think they are always ahead. The first thing that blew my mind when I started to look at these workflows is, yeah, we process a claim and you basically are saying, who's the patient? Were they eligible? Who's involved? The MPI of the physician or nurse practitioner and these hundred fields of information. You process a claim, no money moves. Well, you'd be like, well, it's going to move tomorrow, right?
00:20:48
Speaker
The next day, the next week? What you very quickly understand is the healthcare system adopted antiquated systems and never moved off them. If I'm a manufacturer and I sell it to wholesalers and they sell it to pharmacies, they're like, hey, I'd love to get paid in six months.
00:21:07
Speaker
Wholesaler might be like, hey, I'd love to get paid quarterly. Pharmacy might be like, hey, I'd like to get paid every two weeks. You have insurance where you're typically billing every two weeks. Payment, you typically want 24 to 48 hours. The biggest part of healthcare is assembling all the information to validate these transactions, especially if they're government transactions such as Medicare and Medicaid.
00:21:36
Speaker
We should compress the supply chain. Everyone should be paid. There should be no lag in this.
Reimagining Healthcare Payments
00:21:41
Speaker
This will take lots of time to improve, but the first thing that we recognize is it starts with improving and modernizing that first part of the journey. The transaction, the collection of data, the validation of the different parties, as well as the rule sets that govern healthcare to have a high level of integrity to then release payments and transactions.
00:22:05
Speaker
It's not like you should dust off that pattern and platform or maybe keep on building what you're doing with Capital Racks and add that piece to the puzzle. It looks like payment itself is not a problem here. What really baffles me is that I would imagine that businesses and the business of getting paid, pay their supplier. So basically imagine cashflow and it seems to me that there's a little bit of inertia here and that nobody seems to care about how long it takes. But why is that?
00:22:30
Speaker
It doesn't seem that technology is really the issue here. I understand that someone may be happy to hold onto the money longer, but it's a two-sided model, right? There really shouldn't be one party that gets paid much faster than the other in a B2B relationship. Or am I missing something?
00:22:45
Speaker
It's definitely a little bit of technology because the systems are so old, they're very difficult to use more modern security protocols, open API architecture to link into things faster, a lot of customized software and build out because when these systems were written, they were never designed to contemplate this type of ecosystem that exists today. You are correct, which is why are people hanging on to the money a little bit more?
00:23:14
Speaker
I was taught the buy side of any transaction controls the transaction. You've got the money, tell everyone to jump through my hoop. Healthcare does not follow this rule. The sell side tells everybody what to do and they line up like penguins crossing the Arctic Circle and just follow each other in the Emperor's March. I don't think payers understand the control they have.
00:23:43
Speaker
So you do have the opportunity to change this paradigm, but oftentimes it's educating people that have unfortunately for 20 years been programmed to just believe they have to take what they're given. I used to have a sign in my old office that said he or she that is closest to the payer wins. It's fascinating.
00:24:05
Speaker
Fascinating discussion from a FinTech perspective. I'll put my healthcare tech back on and I would love to hear you on what I think could be a game changer in the clinical data side, especially as it pertains to pharmacy claims and medical procedure claims operating in two separate networks for the most part. Why is that that they have yet to come together under one unified platform? Similarly to the discussion you just had with PI on the potential combination of claims and payment processing in one single network.
00:24:34
Speaker
There's a lot of different reasons why these workflows of administration and payment for pharmacy, medical and other services kind of splintered and went down their own path.
00:24:47
Speaker
So you could think of it as pharmacy uses its own system, if you will, its own codes. We use NCPDPD.0, and this became the transaction standard in the pharmacy business. And then medical has its own set of codes, be it ICD-10, in which you basically transmit an actual claim sequence of eligibility and then information about billing and reimbursement.
00:25:15
Speaker
Because of this splinter you started to see people that specialize in pharmacy and people that specialize in medical also pharmacy was like an offshoot that many people viewed as less expensive than even dental at one point.
00:25:32
Speaker
Go back to the 1970s, the average cost per script in the United States was four bucks. Nowadays, the average cost per script is 120 to 130. When pharmacy started to expand, it became more and more important. And that's why we're talking about it as well. Why isn't it unified in this claim flow? This concept of unified claim processing, we invest very heavily in it. It's part of our mission, which is if there's inefficiency in claim administration,
00:26:00
Speaker
Let's modernize it, unify it. A separate system is kind of tracking me as a patient on the medical side and a separate thing is tracking me on the prescription side. Could that create service or safety issues?
00:26:15
Speaker
The answer is heck yeah. When a pharmacy benefit side gets the script, nine times out of 10, it looks like it's a new start. It's a new patient. So this poor patient has to go through the approval process all over again. The other thing is safety. We talk about drug to drug interactions, certain combinations you shouldn't take together. On the medical side, someone has prescribed you medication.
00:26:38
Speaker
And then I move over to the pharmacy benefit side. There's no way of seeing what those drugs are, what therapies they're on. If you have a unified system where a claim is a claim, a patient is a patient, what you're gonna be able to do is create efficiencies, create better service, create better safety workflows. A critical part of the future is kind of bringing back healthcare to a core platform. It's gonna take a while.
00:27:06
Speaker
but I think it's one of the most important projects for, I think, healthcare in the United States.
00:27:14
Speaker
There will be one drawback. You'll have to come up with a new name.
Conclusion and Strategic Options
00:27:18
Speaker
AJ, it's your pleasure speaking with you today. Thank you so much for taking the time. I look forward to talking to you soon. Thanks again for tuning into another episode of Crossroads by Elantro, an initiative that strives at bringing together our team of sectoral experts and health care leaders to discuss innovative technologies and themes that are reshaping our industry.
00:27:38
Speaker
If you're seeking to explore your strategic options, our team is uniquely positioned to assist you. Our sectorial expertise and global network is simply unparalleled in the mid-market. To learn more, please feel free to visit our website or contact one of our team members directly.