A Product Market Fit Show | Startup Podcast for Founders
00:04:21 · Pablo Srugo, AJ Loiacono
[00:04:21] S1: Most founders of 10 million ARR feel like they're well beyond product market fit. Funny enough, I know some of those and some of those aren't, but they probably feel it. But you you didn't for some reason. [00:04:30] S0: Aaron Powell Well, I I think it's because we were trying to compete with three Fortune 15 companies. So healthcare is highly consolidated. CVS, Cigna, and United Healthcare, three publicly traded companies, all of which are, I'm going to say Fortune 8, Fortune 10, Fortune 14, respectively in that range. And so when you're battling with Titans, yeah, 10 million ARR is okay, but it's nowhere near the scale to one, compete with them directly, but two, attract back what I was saying before. How do you attract larger customers to start to ramp and scale? So healthcare, yeah. $10 million sounds like a huge amount of money from someone. This is my third business. So yeah, 10 million ARR is huge. In healthcare, you're nothing. [00:05:23] S1: Aaron Powell Tell me, this is good get time to segue into that. Like what exactly is Judi Health? What do you guys do? And even I know the name has changed. I don't know if what you do has changed, but curious what it was at the beginning as well.
00:05:33 · AJ Loiacono
[00:05:33] S0: So Judi Health is a health benefit manager. So anyone who works for a company and you have a benefit plan, somebody's administrating your benefits. So that's medical pharmacy and the longer tail of dental vision and ancillary benefits. But the point of it is your insurance or your benefit provider is the person that manages your account. And so this is what Judi Health provides. We started in pharmacy benefits, and the name of the company in the early days was Capital Rx. Talk about gritty. People often say, Oh, like, what was the name Capital Rx? What did it represent? I'm like, nothing. The domain name was available. Nobody had any trademark rights on Capital Rx, so it was clean. And more importantly, I wanted it because it sounded common. And people are like, what? Because in healthcare, you want to feel like you've been around forever. Right. Yeah, you don't want to have like new in your name. Yeah, it's not a high-risk area. Yeah. Yeah. You know, feel like Capital Rx, it sounds like consolidated or continental. They've been around forever. You know, like, all right, I guess we'll give them a shout, we'll give them a try. But we started as Capital Rx, and the concept was let's process these benefits, but unlike our competitors, let's not make money on drugs bed. And people are like, well, what do you mean by that? If you go back into a time machine with me into the 80s and 90s, benefits were managed by entities that didn't make money on drugs bed. They charged a flat administrative fee. So it was very sassy. But also in that moment, the entire industry realizes if I become what's called vertically integrated, I'm not just the administrator, I own the pharmacy. I own the rebate aggregation. I'll own these other assets so I could get paid multiple times on the same transaction. So not only am I making money as the administrator, I'm making money possibly on the fulfillment side of the pharmacy, but I'm also making money on what we call like GPO and rebate. And so if you could stack this, you make more money. I felt this was a horrible conflict of interest. The conflict of interest is think about it, if you're asking someone to manage your benefit plan, and the more expensive the medication, the more money they make. That doesn't sound like a recipe for good outcomes for either the patient population or the plan's cost.
00:08:17 · AJ Loiacono, Pablo Srugo
And that's exactly what was happening. Costs in the United States were exploding. I say this, I've been around the block. I've been in healthcare for 26 years. And if we went back to 2000, the year 2000, the total drug spend in the United States was like $110 billion. We fast forward to today, it's a trillion. [00:08:39] S1: It's wild that that became standard. I mean, that's like the real estate agent who only shows you the houses that they're also, you know, representing the other side of. It's like, okay, show me one of those, but you know, big, big like disclaimer, right? Because it's not clearly the conflict is is front and center.
00:08:39 · Pablo Srugo, AJ Loiacono
[00:08:39] S1: It's wild that that became standard. I mean, that's like the real estate agent who only shows you the houses that they're also, you know, representing the other side of. It's like, okay, show me one of those, but you know, big, big like disclaimer, right? Because it's not clearly the conflict is is front and center. [00:08:53] S0: Well, that was exactly it. And so we started as this scrappy company, Capital Rx, and the concept was very simple. We charge a flat fee, everyone gets the same price. Now, this is like people are gonna be like, wait, what do you mean by this? Believe it or not, drug prices are all over the place. You know, so if a traditional pharmacy benefit manager, someone we compete with, they'll have hundreds of different prices for the same drug, same day, same pharmacy for different customers. And this is what I observed over my career. So I came from pharmaceutical manufacturing. So think of it as kind of if you come from the sell side on some level, like, hey, I'm a pharmaceutical manufacturer and I manufacture this product. And then I move over to the buy side, which is the insurance, if you will, or the administrative side. You would think that these prices would be very tightly correlated. There wouldn't be a lot of variance. But what I discovered made no sense. So on the manufacturing side, we change price twice a year. You could set a clock to it, January and July. I talk about this all the time. [00:10:02] S1: And why you you change prices like each year, they just go up, sort of thing, or you change them for a specific.
00:10:02 · Pablo Srugo, AJ Loiacono
[00:10:02] S1: And why you you change prices like each year, they just go up, sort of thing, or you change them for a specific. [00:10:07] S0: So the way that manufacturing works is you normally in the United States, you escalate the price. And the reason why the defense of the pharmaceutical industry is you have a short patent life before your patent expires. And you've put maybe billions of dollars of RD. So you have a finite window before your product goes generic. So typically it's stepping up. Some of the inflation is natural. It's just general inflation of cost of goods, marketing, market access. But some of it is driven by the very system I'm describing because the people that are on what I call the buy side, the insurance, are increasing price because they're creating what I would say games around how people access medication. And these are called things like formularies. These are games around market access, and we could talk about that more. But but the really the essence of it was I came from a world in which pricing was very static. You would know in January there's a price increase of 5%, and there'll be another 5% increase in July. But now I'm looking at prices on the insurance side, and you've got 600 prices in one quarter. [00:11:26] S1: I don't want to get too into the weeds, but just a simple example of why would they charge so many different prices to different customers? Like what's what's driving that?
00:11:26 · Pablo Srugo, AJ Loiacono
[00:11:26] S1: I don't want to get too into the weeds, but just a simple example of why would they charge so many different prices to different customers? Like what's what's driving that? [00:11:34] S0: Well, this is what I realized is who loves opacity and variability, people that are seeking the highest level of profitability. And so if they were just plain administrators like we are, just charge a flat fee, you would be forcing these prices to become stable and very transparent to all of your customers. But they were doing the opposite. They were putting gag orders, they were making it impossible to get your claims data. They're creating confusion in the market, they're creating unnecessary opacity and complexity. [00:12:10] S1: It's like crazy segmentation, like hyper-segmentation. Every customer is a different book, depending on your need, your budget, your whatever, I charge you what I can, sort of thing.