Friday, April 12, 2013

How Prescription Discount Cards Make Money? (and should you be concerned?)

We had a very interesting conversation recently that gave us a behind-the-scenes look at prescription discount cards and how they make money.  We were surprised to learn about the number of players involved and their motivations.  We were equally surprised by how much variation there is in the operational practices of the different cards.

To better understand discount drug cards, it helps to first identify all the players and learn some terminology.  There are five or sometimes six entities involved in each prescription purchase that involves a discount card. These are:

1.    Cardholder - the consumer
2.    Pharmacy - the retail outlet in which the purchase is made
3.    Pharmaceutical Company - the manufacturer of the medication
4.    Adjudicator - the organization that negotiates the discounts with the drug makers
5.    Card Marketer - the organization whose brand is on the card
6.    Card Marketer Affiliate - an organization that assists the Card Marketer in distribution

Each time a card is used there is a transaction fee applied to the purchase price.  That fee is split 3 or 4 ways (though perhaps not evenly) between the Pharmacy, the Adjudicator, the Card Marketer and their Affiliate.  This transaction fee comes at the Cardholder's expense.  However, usually the negotiated discount cost of the medication far exceeds the transaction fee so the Cardholder still wins.  For example, the retail price for a medication is $100.  The prescription discount card has negotiated a 40% discount, so the cost would be $60 but there is a $10 transaction fee.  So the Cardholder pays $70 instead of $100.  Of the $10 transaction fee, the Pharmacy might take $2, the Adjudicator $2 and the Card Marketer $6.  The Card Marketer might pay out $1 to their marketing affiliate. 

What's more is that transaction fees are not the only way the cards make money.  With each purchase there is valuable information gathered that the Card Marketers then sell to other marketing organizations.  Two types of information is gathered and sold.  Although only one of which should be of concern to the Cardholder, which is when their personal information, their name, address and the medications they've purchased is sold.  The other information gathered and sold is anonymous and in aggregate, such as 20% of persons buying a specific medication also purchased over-the-counter Vitamin C.  This information is still valuable to marketers but harmless to consumers.  It is worth noting that not all cards sell their members' personal information.

Finally, some prescription discount cards also charge annual, monthly or enrollment fees.  While these may seem minor, they may add up to as much as $100 / year.  As with selling personal information, not all cards engage in this practice.

Obviously, Card Marketers can generate a significant amount of revenue each time one of their cards is issued and even more when it is used.  This goes a long way to explaining the aggressive distribution tactics employed by those companies that issue prescription drug cards. 

On our website, we've published more detailed information about how consumers can select a drug card that maximizes their saving and protects their personal privacy