Michael Rea was working as a pharmacist at a Kansas City, Mo., Walgreens (WAG) in 2008, when an elderly customer came to him with a dire situation: The co-pays on her monthly prescription costs were making it hard for her to afford her mortgage payments. When Rea crunched the numbers, he says, he was able to save the patient $250 a month by choosing cheaper drugs and shopping at pharmacies that offered better deals.
The patient kept her house, and Rea launched Rx Savings Solutions to extend the service to others. Last month, Rea says the Olathe (Kansas)-based company won a contract to pare prescription costs for employees of the state of Kansas. Between that deal and work for other employers, Rea expects Rx Savings to serve 250,000 people in 2014—enough for the 14-employee company to be profitable this year.
Rx Savings takes advantage of pricing practices that result in prescription costs that vary widely among different pharmacies. For example, Consumer Reports published research last year showing that the cost of a month’s supply of generic Lipitor, used to lower cholesterol, varied from $17 to $150, depending on the pharmacy. “The idea of saving money isn’t novel,” says Rea, but pharmacists are generally too busy to parse pricing data for patients individually.
His company wants to automate the process. Here’s how it works: Employers pay a monthly fee (Rea won’t say how much) to let workers access the service. Employees go online to enter information about the medications they use and how much they pay. Rx Savings identifies lower-cost alternatives to the drugs patients are using—such as replacing a name brand drug with a generic—and finds pharmacies that sell certain drugs for less. The startup sends back a report outlining potential savings and lets the patient decide which recommendations to follow.
After launching the company in 2008, Rea kept his day job at Walgreens and started seeking customers for Rx Savings with online ads. It was slow going: Rea estimates he served about 50 customers during his first two years in business. In 2011, Rea says his luck turned when Mutual of Omaha asked Rx Savings to extend its service to employers with group plans. Rea hired software engineers to build an algorithm to do the price-finding work he’d been doing by hand.
He also found that the biggest beneficiaries of his service were employers who paid for their workers’ medical costs directly. For every dollar a patient saves through Rx Savings, the average self-insured employer saves more than $5, according to the company. By Rea’s math, the average employer is overspending on prescriptions by 22 percent.
Rx Savings stopped marketing to individuals and raised $1.5 million in seed investment last year to help pitch its service to companies with from 500 to 100,000 workers. That puts Rea’s company in a crowded field. Over the last three years, venture capital firms have invested $400 million in startups working to make health-care prices more transparent, according to a recent report from PricewaterhouseCoopers.
The key for those startups may be earning doctors’ trust, says Vaughn Kauffman, a partner in the health-industries practice at the consultancy, because of the bond between patients and physicians. It’s important for companies such as Rx Savings to position themselves as “an enabler of that relationship, as opposed to a replacement,” Kauffman says.
This complicates the challenge of selling such a service. Rx Savings needs to convince employers to sign up, then get workers to use the service—and to consider changing their medicines or pharmacies. That means the startup needs doctors on board to approve, say, replacing a branded drug with a generic. Rea says doctors have been receptive so far. “They want everything to go well and the price to be low,” he says. “At the end of the day, we’re not trying to replace that relationship. We just want all the information to be out there, so that there can be options.”