Flow of Money Through the Pharmaceutical Distribution System
 
 
 

    Additional Materials


    Conference:

     

    Fostering Competition in the Pharmaceutical Distribution Chain

    Wednesday | June 14, 2017
    9:00 AM- 11:15 AM ET

    The Brookings Institution
    Faulk Auditorium
    1775 Massachusetts Avenue NW
    Washington, DC

    Health Affairs Blog Post:

    Follow The Money: The Flow Of Funds In The Pharmaceutical Distribution System

    Related White Paper:


    Would Price Transparency for Generic Drugs Lower Costs for Payers and Patients?

    The Flow of Money Through the Pharmaceutical Distribution System

     

    Abstract

    US spending on prescription drugs has been growing rapidly, prompting calls for government intervention to slow the upward trend.  But any intervention should be predicated on a clear understanding of the economic forces that drive price increases, and the parties responsible for them. We collect gross and net profit data from the 2015 US Securities Exchange Commission regulatory filings of the largest publicly traded companies in the pharmaceutical distribution system, and use them to describe the flow of funds across the drug distribution system to understand how much each sector profits from its transactions.  Gross (net) margins average 71% (26%) for manufacturers, 22% (3%) for insurers, 20% (4%) for pharmacies, 6% (2%) for pharmacy benefit managers and 4% (0.5%) for wholesalers. These margins imply that for every $100 spent at retail pharmacies, about $17 compensates for direct production costs, $41 accrues to the manufacturer ($15 of which is net profit), and $41 accrues to intermediaries in the distribution system: wholesalers, pharmacies, pharmacy benefit managers and insurers (with $8 of net profit split among them). The allocations differ depending on whether the drug is generic or branded. Manufacturers have higher gross profit margins for branded drugs and intermediaries have higher gross profit margins for generic drugs. Gross margins on generic drugs are lower for manufacturers (50%), and much higher for pharmacies (43%).  More than $1 in every $5 in spending on prescription drugs goes towards profits of firms in the pharmaceutical distribution system.  While the current analysis cannot say definitively whether any sectors make excessive profits, greater scrutiny of pricing policies of each sector and more competition throughout the distribution system is warranted.

    Download the full white paper here.

    Download the technical appendix here. 




    Download the full paper here (PDF).

    Download the technical appendix here (PDF).


    Authors


    Neeraj Sood, PhD
    Director of Research, Schaeffer Center

    Tiffany Shih, PhD
    Research Economist, Precision Health Economics

    Karen Van Nuys, PhD
    Executive Director, Value in Life Sciences Innovation Project, Schaeffer Center

    Dana Goldman, PhD
    Director, Schaeffer Center