APIs And Fixing Drug Discounting’s $8 Billion-A-Year Problem

Call it healthcare’s $8.5 billion problem.

That’s how much is lost by U.S. drug manufacturers amid a cumbersome pricing and discounting system that is anything but transparent.

As Jeremy Docken, CEO and founder of Kalderos, told Karen Webster, that waste is due in part due to the fact that there is so much money changing hands — $166 billion in drug discounts alone — across patients, providers, payers and programs.

And, as Docken noted, online platforms, aided by advanced technologies and real-time analysis, can ensure compliance.

Through Kalderos Pay (in beta), Kalderos said it offers a drug discount management solution that can spot pricing errors and ensure the right discounts are paid when drugs are dispensed.

The company said earlier this month that it raised $28 million in Series B funding to boost its point-of-sale (POS) solution, grow its platform and support a range of drug discounts.

At present, the company supports compliance efforts across several healthcare programs, including Medicaid and the Medicaid Drug Rebate Program (MDRP), in addition to Medicare Part D and the 340B Drug Pricing Program (340B Program).

To get a sense of just how massive the inefficiencies truly are, Docken said the $166 billion in discounted transactions annually flows through different types of infrastructure across manufacturers and providers — that are simply not designed to make sure they work together in a compliant manner.

Against that backdrop, he said, “when we talk about drug discounts, the problem that we are trying to solve is something that we are calling secondary healthcare financial transactions.”

While most of us can understand primary healthcare transactions — where wholesalers sell drugs to pharmacies and a change of title occurs — the secondary healthcare sphere involves the billions of dollars in drug discounts that flow from payers to pharmacies.

The infrastructure is indeed robust for the reimbursement and purchasing of drugs in the pharmaceutical market.

But move beyond that primary market and here’s where the friction lies, according to Docken: “We’re running a healthcare system on drug discounts. Payers get billions of dollars in drug discounts. Providers get billions of dollars in drug discounts. Patients get billions of dollars in drug discounts. And there was never infrastructure designed to keep track of all of that.”

The timing of the data of when a discount should be eligible simply does not correspond with when the title changes (i.e. the drug is sold to different parties), he told Webster. In one example of inefficiencies, the Government Accountability Office said earlier this year that weaknesses in the 340B program may allow some hospitals to get discounts for which they would not be eligible.

The Timing of it All

It’s become difficult to keep track of the waste.

All too often, he said, finding out that transactions qualified for discounts happens after the fact, and often the discounts that extend to several players depends on a chain reaction (party A must get a discount, for example, before party B does).

The previously and traditionally existing mechanism — the wholesaler chargeback — has proven inefficient.

“The healthcare industry has been trying to do this for 30 years, and we continue to struggle,” said Docken. “Using the infrastructure built for the primary transactions when the challenges necessary for making certain that these secondary transactions, like discount programs, work compliantly is just so big and so important. It needs its own infrastructure. So that’s what we’re creating.”

The company’s platform allows manufacturers, providers and payers to work collaboratively to craft risk sharing agreements. It initially focused on 340B, although it has branched out from there.

Providers and payers, said Docken, both need to have holistic insight into the same transactions, how they reconcile and who gets the discount.

“There is a moment in time when we think about reimbursement and the change in title when one is supposed to value the transaction,” he said, even taking into account delays that can be part and parcel of the secondary, discount market.

Want to talk about delays? Consider the fact that under the Medicaid program, states can find that transactions from years ago — decades even — can be eligible for rebates that must be accounted for and applied. That means someone who got paid back in 1991 may have to return at least part of a discount.

Call it the ultimate view of value-based pricing.

A successful drug discount management tool — a clearinghouse model — he said, “has to create space for a never-ending cycle to constantly re-evaluate information as it becomes known and create the forum [for the parties].”

Kalderos applies machine learning (ML) to the interactions and all the labeled datasets to separate “good” transactions from “bad.” He also pulls separate workstreams together to get holistic views of all the stakeholders.

He said the platform also has a payments layer that can facilitate payments once the rebates have been tracked.

Kalderos, he said, is integrated at the POS, where the key piece of information under a 340B program is a dispensing record. Through its provider companion tool, Request, Kalderos halts payment until the right discount is paid on transactions.

“Nearly all of the discount transactions really need to look at that dispensing level interaction, either between a healthcare provider giving the drug to a patient or a patient going into a pharmacy or especially pharmacy mail order,” Docken said.

That data is collected through application programming interfaces (APIs) that integrate with pharmacies’ software.

The model, he said, is flexible.

“We can do it for other drug discount programs, and we can do it for medical devices,” he said. “There are a lot of other interactions in healthcare where there are problems and you need to have a data exchange.”

Who Gets Hurt

The issue extends beyond the $8 billion in waste and the roughly $100 million Kalderos has estimated it has helped recover since launch in 2016.

Asked by Webster who gets hurt the most by inefficient drug pricing — the states, the federal government, the drug firms — Docken was quick to respond, saying ultimately society is hurt by inefficient drug pricing because so much capital flows to drug makers to develop new offerings. That’s spotlighted a bit by the current pandemic, where we’re effectively waiting for drug companies to develop a vaccine to save us from COVID-19. Beyond such a large public health threat lie many opportunities for pharmas to develop new indications that target far less widespread maladies.

“We want capital to flow to develop these drugs and make a fair return when they can before the drug goes generic,” said Docken.

And those drugs often come to market at what is termed the “penny price” in the discount market — in which a party can pay pennies on a $1,400 therapy (but the discount is a hypothetical $1,399.80), which means a significant portion of the pharma industry’s production is effectively given away.

“When you have duplicate discounts, we get to the point where manufacturers end up paying people to use their drugs,” he said.

That translates into higher drug prices to cover the waste.

“I’d say ‘frustrated’ is the state of the industry right now with this problem,” he told Webster.