Supply chain is gobbling up more of pharmaceutical expenditures in the US

When Mylan’s CEO, Heather Bresch, was being raked over the coals last fall over the pricing of the company’s EpiPen product, one of her justifications for raising the price of the drug from around $100 in the late 2000s, to over $600 in 2016, was that more of the sale price was being retained by pharmacy benefit managers (PBMs) and other entities between the manufacturer and the patient. That defense didn’t win over public criticism of the company (which had other problems with its pricing policies as well), but it did bring to light the dynamics of pharmaceutical distribution and its financial flows.

Now, PhRMA, the industry trade association, has commissioned a report (from Berkeley Group, a Washington consulting outfit) that attempts to encompass all pharmaceutical distribution financial flows. The conclusion: out of $469 billion spent by patients and payers for medicines in 2015, 47%, or $218.6 billion, was retained by brand manufacturers. Another 23%, or $107.6 billion, was retained by generic manufacturers. The remaining 30% went to “supply chain entities” (PBMs, pharmacies, and retrospective rebates).

On a gross-expenditure basis (i.e., starting with IMS Health’s National Sales Perspective data), brand manufacturers fared even worse, retaining only 39% of expenditures (the difference is the rebates and discounts that occur immediately when a manufacturer sells product to a wholesaler or PBM). A poorly understood part of the overall process (but one that pharma CFOs are well familiar with) is that there are some 20% of the gross expenditures rebated retrospectively—that is, after the drug has been purchased and dispensed. The 340b program for hospital pharmacies is one example; others are the rebates calculated for Medicare Part D programs.

The Berkeley analysts concede that many of these discounts are “based on secondary research where exact numbers are not publicly available;” so a debatable amount of estimating goes into the calculations. Even so, Steven Ubl, president of PhRMA, asks “Are we doing enough to ensure the growing amount of rebates and discounts flow to the patient?” while noting that many patient copays and the like are based on the list price of a drug, rather than its (real) discounted amount. The Berkeley analysis goes one further step, estimating that non-manufacturer costs of medicines have increased from 38.2% of the total in 2013 to 42.1% in 2015.

The full report, "The Pharmaceutical Supply Chain: Gross Expenditures Realized by Stakeholders," is available here.