In research that should be essential reading for anyone involved in attempts to reduce US drug prices, it has been found that more than 40% of the money spent by consumers on pharmaceuticals goes to intermediaries.
Pharmacy benefit managers (PBMs), insurers, pharmacies and wholesalers are taking their share of the 41%, according to a study published on the website Health Affairs on Tuesday.
“Efforts to control drug costs should focus on the rents enjoyed by all players in the distribution system”
Support for the study, entitled Follow The Money: The Flow Of Funds In The Pharmaceutical Distribution System, was provided by the Schaeffer Center for Health Policy and Economics at the University of Southern California and by US biotech Amgen (Nasdaq: AMGN) through a contract with Precision Health Economics, a health care consultancy.
The study noted that, although the average wholesale or ‘list’ price set by manufacturers for branded drugs prior to discounts has increased by 10% or more annually since 2012, rises the have attracted criticism from the public and politicians, in fact these prices rarely represent what manufacturers are paid for drugs, as they are routinely discounted and rebates paid to various parties in the distribution system.
“Net prices – which include all discounts and rebates – have also risen, albeit more slowly – 2.8% in 2015,” the study authors write. “Yet even the net price that manufacturers receive does not fully represent what patients pay, with the difference being allocated among other stakeholders in the drug distribution chain.
“Contracts among these players govern the exchange of goods (drugs) or services (such as logistics or claims administration) for various fees, discounts, rebates, and chargebacks.”
While such arrangements are typically privately negotiated and undisclosed, making it difficult to determine how large these payments are and how they are distributed, the study authors were able to look at financial information provided to the US Securities and Exchange Commission (SEC) and other agencies by publicly-traded companies to gain an understanding of how funds flow through the pharmaceutical distribution system.
Intermediaties profit from generics
This allowed the authors to come to a conclusion that in a hypothetical scenario in which $100 is spent on prescription drugs acquired at a retail pharmacy using commercial insurance, using estimates of gross and net margins as a fraction of net revenues from companies’ 2015 SEC filings, roughly $58 goes to the manufacturer.
Of that $58, around $17 is spent on drug production and the remaining $41 is spent on other expenditures such as marketing and R&D, or kept as net profit.
Total net profit on a $100 expenditure was found to average $23, of which $15 goes to manufacturers and the remaining $8 goes to intermediaries including $3 to insurers, $3 to pharmacies, and $2 to PBMs.
Further findings showed that manufacturers make three times as much from branded drugs as they do from generics, though the intermediaries make much more from generic expenditures.
“PBMs make four times as much on generic drugs compared to brands, while wholesalers make 11 times as much, and pharmacies almost 12 times as much, $32 compared to $3,” the authors state.
“Greater transparency” in each sector needed
They conclude by highlighting the figure that more than $1 of every $5 spent on prescription drugs goes towards profits in the pharmaceutical distribution system, and add that their results are consistent with profit-making behavior by all sectors.
“Greater scrutiny of their pricing policies and more competition throughout the distribution system is warranted. The question of what drives high intermediary profits on generic products is especially interesting,” the authors write.
“Any policy effort to control drug prices through regulation or other means would benefit from greater transparency and granularity in reporting of each sector’s financials, which is required to fully understand the dynamics in specific market segments,”
“In this regard, recent initiatives by several pharmaceutical manufacturers to provide more price transparency are welcome. In any case, efforts to control drug costs should focus on the rents enjoyed by all players in the distribution system.”