Rx Exec on a Mission to Eliminate Unnecessary Middlemen and Slash Generics Spending

It’s only fitting that DiRx CEO Satish Srinivasan’s trailblazing online mail-order pharmacy is based in New Jersey, home to several big pharmaceutical companies, where he’s disrupting the industry’s traditional distribution model for prescription medications based on reimbursement. His mission is twofold: eliminate costly middlemen who drive up Rx costs and focus on generic medicines, which account for most of the nation’s prescriptions. It comes at a time when specialty drug prices continue to soar while cell and gene therapies are generating huge claims for employer-provided group health insurance plans.

DiRx, which is pronounced “directs,” offers rock-bottom prices on 1,400 generics without any middlemen in the mix – two highly unusual differentiators. His company launched three months before a high-profile competitor, Mark Cuban’s Cost Plus Drugs, which debuted in January 2022. Unlike Cost Plus Drugs, Srinivasan doesn’t outsource any work associated with his 50-state licensed pharmacy operation, nor does he tack on pharmacy or shipping fees.

DiRx, which is focused on improving access and affordability to generic drugs, also is exploring other ways to help self-insured businesses with large groups of employees reduce costs on branded medicines. These initiatives include collaborations with fee-for-service direct primary care clinics. The following interview was edited for space and clarity. 

Please tell us about your journey to disrupt the pharmacy benefits space. How did it come about?

SRINIVASAN: I spent over 25 years in the generic pharmaceutical industry, so I know a thing or two about the real cost of these products. There are databases like IQVIA that have shown that today 65% of out-of-pocket spending for the average American consumer on prescriptions are actually spent on generics, which is counterintuitive. Many people think it’s the expensive brands that people will be spending their money on. When I looked at what the system was charging, whether it’s individual consumers or large employers and others, it was night and day.

Many people are struggling to afford their basic medications. And I realize it’s not because medications per se are expensive, though there are some exceptions. The vast majority of products are not so expensive. There are just too many middlemen involved in the distribution chain that make it very expensive. Middlemen may make way more money than even the manufacturers that have gone through so much of capital investment technology, working with the FDA and so on. I also realized by looking at data that over 40% of Americans are inadequately insured. Most people who are covered by employer-paid insurance are in high-deductible, high-copay plans. So their out-of-pocket exposure before they hit their deductible usually occurs when they get to the hospital for something major.

How does the involvement of wholesalers, pharmacy benefit managers and retailers inflate discounts and the cost of generics, as well as rebates through spread pricing or revenue-sharing arrangements?

SRINIVASAN: The problem with our health care system is that it is based on reimbursement. It’s not based on cost. Reimbursement unfortunately is based on algorithms on a formula. And for that they need a reference price from which everybody takes a rebate. Intermediaries [middlemen like PBMs] want that reference price to be as high as possible. So if it costs a manufacturer $10 to manufacture a bottle of generic medication for a month’s supply, reference price for insurance calculations could be $80. Each of them gets a hefty rebate. Somebody takes $30, somebody makes $40 along the way, and they probably give the manufacturer $12. They get $2 on every bottle.

Now here’s the $64,000 question: Why don’t more employers cut out third parties that simply add layers of cost and embrace a transparent and predictable monthly flat fee when designing their prescription drug benefits coverage?

SRINIVASAN: So that is where we come in. We have a smart pharmacy plan with a very low PMPM [per member per month] fee for a whole group. But everybody in the group has to be paid for, and along with that, we also offer a free discount card for products that are not covered in the plan or if they need same-day medication because our model is mail order. They can still go to a local pharmacy and get that at a low discounted cash price. While we are able to cover generics, which are 91% of the prescriptions dispensed in the country, we’re not able to cover branded and specialty medications because those manufacturers are the only game in town until the patent expires, and so they give only a 3% or 4% rebate to the wholesalers. So there’s not much room available for disruption to be made. It’s very difficult to source those brands directly and offer them. Employers want the full solution. They say, ‘even if I come to you for 90% of the drugs, 80% of my cost is on those very big price tag products, which you guys can’t offer any difference.” Truth be told, Mark Cuban is also facing similar hurdles.

To what extent are retail pharmacy chains complicit in driving up the cost of prescription drugs, and what role can independent pharmacists or mail order services play in helping make scripts more affordable?

SRINIVASAN: It’s probably three-fourths being the big retail chains like CVS, Walgreens and Rite Aid. All of them are focusing on the reimbursement-based rebate system for their margins, especially CVS, which also owns its own primary care center [Oak Street Health], PBM [CVS Caremark] and health insurance business [Aetna]. So who dispenses and pays is all in one bucket and every time it gets inflated because of these artificial reimbursement metrics.

Independent pharmacies do not operate on those principles because they are small mom-and-pops. They used to be a healthy business, but most of them are struggling these days to make ends meet. Why? Because of the sourcing gridlock. They are dependent on wholesalers that have smartly created buying groups over the decades by, say combining 300-500 independent pharmacies in the state of Ohio and set the price. So the same drug that they supply to Walgreens for $25, they’ll supply to these smaller guys for $60 because they are the small fry. Those costs are inherently high because they are dependent on the wholesalers and the contracts from wholesalers are predatory. A majority of the 50-state-licensed, mail-order pharmacies are owned by companies like Aetna and Cigna, with 42 of about 48 of them owned by the big names that use them as part of their programs and ensure that certain drugs have to be shipped through mail order.

What are your thoughts on exporting prescription drugs from other countries or pharmacy tourism to help lower the cost?

SRINIVASAN: I actually believe that companies like ours can negate the need for going across the border in either direction. A lot of people go to Mexico for outpatient procedures and their medications, and we’ve also heard about the Canadian mail-order pharmacies for many years. You don’t need to do that. We have an automatic 90-day refill for many common medications that will be shipped to the home equivalent to a monthly cost of just $3 a month, including free shipping. That’s lower than Mark Cuban’s and even lower than Walmart’s $4 generic program. The FDA ensures that only FDA-approved medications are sold to us stateside and that it’s safe. So if you start bypassing that process and getting drugs from wherever across the border that is a risk U.S. citizens face.

Pharmaceutical companies and PBMs are under fire with lawmakers, regulators and policymakers at both the state and federal level. What are your expectations for greater government oversight into their business practices?

SRINIVASAN: I think it’s going to be an extremely slow process. Don’t expect any overnight miracles, the reason being even the government looks at everything only in the form of rebates. Unless you speak the-higher-reference-price-minus-a-rebate language, nobody understands. I will give you an example of Medicare coverage of a pancreatic cancer drug called Abiraterone. If a Medicare covered member were to take that drug, it would be reimbursed approximately at $2,400 for a monthly dose, whereas DiRx charges just $135. Imagine how much Medicare can save if its members source prescription medications from pharmacies such as DiRx. But the government only understands the rebate language because that’s how the system has been built over decades, and so nobody is able to think clearly about the cost, and then they have to change all their systems.

Why is managing the prescription drug area so critically important, for employers, particularly given the high price tags of specialty drugs, biosimilars and cell and gene therapies that are considered “living drugs”?

SRINIVASAN: There’s no denying that it is a significant part of health insurance, and prescription drug coverage is a big part of employer spending. It’s not because the drugs are so expensive, as I said earlier. It’s the middlemen. The objective is to build a simpler, more transparent system and make it worth everybody’s while. There’s a reason why there are only three big wholesalers today in the country. Why are they focusing so much on generics if the big dollars were in brand and specialty, which provide a big top line when you get only 3% or 4% as a rebate? They make their bottom line by 91% of the volume, but supported by a big “pricing spread” between what they actually pay the manufacturer and what they get from reimbursement. For employers, it means a lot more going out of their pocket than needs to, which is why you hear terms like “cost plus, not reimbursement minus.”

Prescription medications save lives and control chronic conditions and diseases, but at a price. How do we change our thinking and embrace a more preventive or holistic medicine approach that addresses the root cause of disease or illness?

SRINIVASAN: I’ve always been a believer in the idea that prevention is better than cure. I think it all starts from even the food we consume. We need access to more healthy and nutritious stuff instead of industrial farming. We have to go back to more natural food sources in how they were grown or raised. I believe that even many of our medications, every once in a while you read articles that people have resolved those just through natural products. But the pharmaceutical industry would say, ‘show me the clinical trials,’ and somebody may not have the means to afford millions of dollars in research to show that. So people have to be more watchful about how they can manage their health. It starts with what we put into the body and maintaining a healthy lifestyle.