A VC wanted to bet on a company to upend the $360 billion drug industry. He couldn’t find one, so he just built his own.

There are often five companies involved in handling a single prescription.

Hollis Johnson/Business Insider

  • WithMe Health, a startup looking to take on the middlemen in the$360 billion U.S. prescription drugindustry just raised $20 million from Oak HC/FT.
  • The company is meant to be a replacement forpharmacy benefit managers, the middlemen responsible for negotiating discounts to the list price of medications on behalf of employers and health plans.
  • WithMe is in talks with one employer, which spends about $300 million on medications a year, for its initial contract.

WithMe Health, a startup that’s trying to upend some of the middlemen that are part of the$360 billiondrug industry, just raised $20 million.

The funding comes from venture capital firm Oak HC/FT, where its founder and interim CEO, Chris Price is a partner. It’s meant to be a “turnkey replacement” forpharmacy benefit managers, the middlemen responsible for negotiating discounts to the list price of medications on behalf of health plans and employers.

Price said Oak had been looking to make an investment in a new PBM, but hadn’t come across one. Instead, Oak decided to start a replacement of its own.

“We ended up deciding that we should build it,” Price told Business Insider. Price had been at a number of PBMs over the years, seeing the cycle of them getting bought up into bigger businesses.

The company will face stiff competition from entrenched rivals, and it isn’t the first to try to disrupt the industry. Express Scripts (now part of Cigna), CVS Caremark and UnitedHealth Group’s OptumRx together make up about 90% of the PBM market.

One of the ways PBMs negotiate lower drug prices with manufacturers is by using their size to get a better deal. That automatically puts new companies like WithMe at a disadvantage.

Price said he was worried that drug manufacturers wouldn’t even meet with him, but so he’s had a good response.

“They’re willing to change and drive evolution of this,” Price said.

WithMe plans to start by working with self-insured employers. For many Americans, their employers are the ones picking up the tab for the healthcare. Morethan half of the non-elderlypopulation is covered by an employer-sponsored plan, and almost 80%of large companies are self-insured. As healthcare costs go up, employers are tthe pressure,and some are starting to get fed up.While WithMe doesn’t yet have any clients, the hope is that companies will turn to it as they seek to shape up how they provide healthcare.

Read more:A failed deal with Boeing taught a $23 billion health system 5 key lessons about how to work with big companies to shake uphealthcare

What WithMe plans to do differently

For a single prescription drug,there are often five companies involved, from development all the way to your medicine cabinet. These companies are responsible for everything from making the drug and setting its price to distribution to your local pharmacy, negotiating how much you’re expected to pay for it, and covering the rest of the cost. Each company makes a profit along the way.

A big criticism of the current way that PBMs do business is that often, as drug prices increase, so do those profits. PBMs say their goal is to lower the overall cost of medications.

The rise of high-deductible health plans is also adding to the scrutiny of PBMs. That’s because at the pharmacy counter, individuals on those plans can be on the hook for the full list price of drugs, which can cost hundreds of dollars.

That amount doesn’t factor in a key payment that acts as a discount to the list price drugmakers set, known as a rebate. Those rebates, worth more than$100 billion a year, are a big way that PBMs generate their profits.

Where WithMe plans to be different is that it won’t make money off of rebates or dispensing fees. Instead, it’ll get paid a fixed fee for each of its members each month, and allow employers to go through and keep tabs on the transactions that get processed to make sure they’re not taking any additional money. It’ll also factor in over-the-counter medications and medications administered in the hospital.

To start, Price said WithMe is in talks with a Fortune 100 employer, ideally to start working with them in 2019. Price said the employer spends about $300 million a year on medications.

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