The Federal Trade Commission took aim at the prescription drug middlemen known as pharmacy benefit managers last week, announcing an inquiry into the opaque system of rebates, claw backs and other financial wizardry that determines how much patients end up paying at the pharmacy counter. The timing couldn’t be better for AJ Loiacono, the cofounder and CEO of Capital Rx, who has spent the past five years building price transparency and claims processing software for this moment.
“The buy and the sell side of a transaction in prescription drugs is not allowed to speak to each other contractually at the point of sale,” says Loiacono, 51, on account of the agreements in place between insurers, pharmacy benefit managers and pharmacies. This means two customers who walk into a pharmacy asking for the same drug could walk out paying drastically different prices at the register. “It’s not because drug prices don’t exist, it’s because we’ve created a system that rewards bad behavior,” he adds.
So Loiacono, and his cofounders, chief operating officer Joseph Alexander, and chief technology officer Ryan Kelly, took inspiration from the world’s most famous financial clearinghouse – the New York Stock Exchange – to develop a model for prescription drugs where all customers are offered the same price.
On Monday, New York-based Capital Rx announced it has raised $106 million in Series C funding led by B Capital Group, which brings the company’s total funding to $175 million since launching in 2017. General Catalyst, Transformation Capital and Edison Partners also participated in the round. The company declined to disclose its post-money valuation.
While US inflation is hitting all-time highs and economists argue over whether the country is teetering on the brink of a recession, the patient’s need for prescription drugs doesn’t wax and wane with economic indicators. Nationwide spending on prescription drugs went from $30 billion in 1980 to $335 billion in 2018, according to a Congressional Budget Office analysis released this year. The average person’s spend increased more than seven times in the same period from $140 to $1,073 per year. As employers get squeezed by inflation, Capital Rx and its investors are betting that they are going to want to reassess how much they’re spending on health benefits and prescription drugs to get rid of the black boxes and drive efficiency.
“If you have a company that’s truly committed to doing the right thing, doing it better and has a novel advanced technology stack that helps make humans in these businesses more efficient, you can actually start saving true money and creating value for all of the stakeholders,” says Robert Mittendorff, general partner at B Capital who is joining the company’s board. “We are funding AJ to transform the PBM industry,” he adds.
ÇCapital Rx’s clearinghouse is based on the publicly available database maintained by the Centers for Medicare and Medicaid Services known as the National Average Drug Acquisition Cost. Updated weekly, it offers a snapshot of how much a basket of pharmacies across the country are paying manufacturers and wholesalers to purchase drugs. Any pharmacy that contracts with Capital Rx agrees to charge customers the NADAC price or lower. “The whole point is that full savings goes to the patient,” says Loiacono. “We can’t claw it back. We can’t artificially manipulate it. But we had to build the system to manage this.”
That cloud-based enterprise software system is known as JUDI, which is short for adjudication, and it handles functions like claims processing, prior authorization and billing. Capital Rx has two lines of business. The first is to sell its services as a pharmacy benefits manager to employers, municipalities and unions. The second is to sell its software to other insurers to take care of all the back-end administration functions.
Capital Rx has more than 150 customers that represent 1.2 million people. The company charges a flat administrative fee, either per prescription filled or per member per month, depending on the customer contract, along with flat clinical fees for services like prior authorization, which are outlined at the bottom of its invoices. This model, in contrast to an opaque system of rebates and claw backs, has been working pretty well. The company says it recorded $429 million in gross revenue in 2021 and estimates $814 million in revenue in 2022 based on the annual contracts already in effect for this year (the sell cycle is generally one year before the plan goes live).
“We’ve been saying this day is coming that you can’t continue to charge absurd amounts of money based upon a black box,” says Loiacano. “We’re here to change the way claims are priced and change the industry forever.”