Financing and Distribution of Pharmaceuticals In the United States

The United States has a complex pharmaceutical market. Independently of the financing mechanisms, the flow of pharmaceutical warehousing products from manufacturers through distributors to retailers to patients has evolved.

The Figure illustrates the distribution and financing system. The Figure shows the distribution of physical drugs. A pill or vial of medication leaves the manufacturer and is bought by distributors. The product is shipped to the retailers where patients can access their prescription medication. The Figure financing side (right): Pharmaceutical benefit managers (PBMs) provide services to payers (e.g., insurance companies) in managing their drug benefits. The sources of funding for drug benefits can be public sources such as Medicare and Medicaid, or private sources like out-of-pocket or private health insurance. The Figure shows a complex network of financial relationships that ties together the financing and distribution components.

Adapted using a figure from the Congressional Budget Office. Services represent contractual relations between entities. Rebates are payments made by manufacturers to their pharmacy benefit managers. Chargebacks are payments made by manufacturers to distributors. Retailers are pharmacies, hospitals, and group purchasing organizations. AMP is the average manufacturer price. WAC refers to wholesale acquisition costs.

Distribution of Pharmaceutical Products

The supply chain for pharmaceuticals is a complex one. They go from manufacturers to distributors, retailers, and patients. (Blue in the Figure). Distributors are intermediaries in the supply chain, acting as intermediaries between retailers and manufacturers. Distributors purchase products from manufacturers and provide warehouse services to ship drugs to retailers. They reduce the number of transactions that would have to occur if every retail pharmacy, health care practitioner, or center had ordered products directly from manufacturers. 91% of pharmaceutical sales revenue is handled by distributors.

AmerisourceBergen and Cardinal Health account for over 85% of the US distributor market. McKesson is also a major player. These 3 companies accounted for more than 85% of the US distributor market. In 2015, their combined revenue from drug distribution was $378 billion.

The United States dispensed an estimated 4.4 billion prescriptions in 2015. 3, generic or branded generic prescriptions accounted for 89%. There are 60 000 pharmacies across the United States. Of these, 38 000 are part-of retail chains, while 22 000 are independent pharmacies. The US retail pharmacy market can be broken down into three major groups: independent pharmacies, chain pharmacies, and independent pharmacies. 89% of that volume was generated by generic or branded generic prescriptions. CVS, Walgreens, and Express Scripts are the 15 largest companies in America. In 2015, they generated more than $270 Billion in revenue through mail-order and retail pharmacies. During the same time, $48 billion was generated by independent pharmacies.

The most recent National Health and Nutrition Examination Survey (2009-12) found that 47% of US residents who were not institutionalized reported having used at least one prescription drug within the past 30 days. 10% also reported using more than 5 prescription drugs in the same period.

Finance of Pharmaceutical Products

In the Figure, gray is used to indicate which organizations are involved in funding pharmaceuticals. These include PBMs as well as public and private insurance plans.

In the 1980s, employers began adding outpatient prescription drug coverage as part of their health insurance plans. PBMs were created. Industry consolidation resulted in three PBMs–CVS Caremark Express Scripts and UnitedHealth’s Optum–controlling 73% of the PBM market.

Prescription drug insurance is included in health insurance. This includes both private and public plans. In general, prescription drug insurance includes both public and private health plans.

Medicare covers different pharmaceutical products depending on whether they were administered by a doctor. Physician-administered drugs are considered part of the medical benefit and are covered under Medicare Part B, whereas oral and self-administered medications are covered under the drug benefit, Medicare Part D. Medicare Part D has a unique model intended to leverage the private sector through PBMs to manage prescription drug spending. While Part D plans are generally open-ended (meaning that few drugs are excluded), 98% of the Part D plans have very aggressive 5-tier benefit structures. Medicare cannot negotiate with manufacturers or set prices for drugs purchased through Part D.

Medicare Parts B, and D are separate from Medicare Part A hospital coverage. Part A is funded by the Medicare payroll tax. Parts B and C are supported by general tax revenue, beneficiary premium payments, and some support from states. Parts B and C received 76% and 88% of their funding from the Medicare payroll tax in 2015.

Medicaid is a public insurance program for low-income people and persons with disabilities. It covers people with incomes below 138%, as well as those who have been granted Medicaid coverage in other states. Although pharmaceuticals are an optional benefit of Medicaid, all states offer outpatient drug coverage to their enrollees.

Many employer-based plans offer a drug benefit. Many employers and insurers offer pharmaceutical benefits through a PBM. These plans have a similar benefit structure to Medicare Part D prescription drugs plans, but they do not need to provide a catastrophic drug benefit. The majority of employer-based insurance plans (81%) offer three or more formulary levels. Prescription drug coverage is an essential benefit for individuals who have private health insurance under the Affordable Care Act. However, it can differ from plan to plan. 3 In 2015, 49% of all retail prescriptions were paid by commercial health insurance (down from 56% in 2012.

The average prescription drug payment for patients who have commercial insurance has increased from $36 to $44 in 2011, while the average payment for generic prescription drugs has remained steady at $8 since 2010. Health care costs for commercially insured people increase by $250 for every 0.25% that require a specialty pharmaceutical product with a cost of $100 000. 9

Manufacturers offer a variety of cash payments to distributors, health plans, and PBMs. These include chargebacks and rebates due to complex pricing arrangements in the industry. These complex transactions result in $115 billion or 27% of pharmaceutical sales in 2015.

The financing and distribution process of pharmaceuticals in America is complicated. It involves payers, manufacturers, distributors, and payers as well as pharmacy benefit managers and patients. Over the past decade, there has been significant consolidation in many areas of this system.