Look for Savings in Drug Distribution Chain, Researchers Urge

In the face of growing popular concern over prescription drug prices, opportunities may exist for significant savings in the drug distribution chain, according to two papers presented at a forum hosted by the USC-Brookings Schaeffer Initiative for Innovation in Health Policy in Washington, D.C.

Industry panelists at the forum—titled Fostering Competition in the Pharmaceutical Distribution Chain— disputed some of the findings. While urging some reforms they also warned against disrupting what they see as an efficient system.

The first paper used profit data from 2015 US Securities Exchange Commission filings of the largest publicly traded companies in the pharmaceutical distribution system to track the flow of funds through the chain. The second paper proposed a transparency scheme to foster competition in the distribution of generic pharmaceuticals.

Neeraj Sood presents his paper at the conference.

Neeraj Sood, lead author of the first paper and director of research at the Leonard D. Schaeffer Center for Health Policy & Economics, noted 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).

While the analysis cannot say definitively whether any sectors make excessive profits, Sood said, greater scrutiny of pricing policies of each sector and more competition throughout the distribution system is warranted. At the same time, policymakers need to take relative risk levels and industry consolidation trends into account, he said.

Drug manufacturers have high net profits- even when compared to other similar industries, but they also shoulder huge risks in drug development, Sood noted. By comparison, middlemen in the distribution chain have comparatively modest profits, but benefit from substantial consolidation which reduces competitive pressures.  The top three pharmacy benefit managers, which negotiate prices on behalf of health plans, control two-thirds of their market. Three companies control 80 percent of drug wholesaling, and three companies control 50 percent of retail pharmacy sales.

Panel member Jennifer Bryant, senior vice president at Pharmaceutical Research and Manufacturers of America (PhRMA), argued that studies “tend to overstate the profitability in Pharma.”  She said that “the reality is that the system is largely working.”

At the same time, health care costs could be productively slashed by reducing administrative costs in drug distribution, she said. “Every insurance commissioner in the country could be thinking about this,” she said.

Matthew Eyles, executive vice president of America’s Health Insurance Plans, countered that enhanced competition among manufacturers is the key to affordability. As far as cost containment, insurers are one of the few entities in the distribution chain that have regulatory oversight, certainly as compared to drug makers, he said.

Ed Adamcik, chief pharma trade relations officer at Express Scripts, said the trend line for pharmacy benefits manager profits is declining. He added that a key component to driving down prices is faster approval of generics and biosimilars at the FDA to enhance competition.

Lynn Quincy, director of the Healthcare Value Hub at Consumers Union, said that since consumers are limited in how much shopping they can do for drugs that “competition is not the complete answer.”  She argued for use of drug reimportation, Medicare price negotiation, and “price regulation where needed.”

Steven M. Lieberman, lead author of the second paper and non-resident fellow at Brookings, said that almost 9 of 10 retail prescriptions—4 billion—were for low-cost generic drugs, accounting for about $100 billion in drug spending. The generic ingredient cost is a small fraction of what pharmacies are paid, while brand drugs typically have much more expensive ingredients, which means that retail pharmacies find that selling generic prescriptions, with average reimbursement at $26 per prescription, is more profitable than selling brand medicines that average $308 per prescription.

Lieberman asked whether pharmacy benefit managers have created a conflict of interest by also operating mail-order pharmacies.  Since their health plan clients pay similarly for retail and mail-order drugs, the PBMs could profit by keeping generic drug reimbursement generous.

His paper, which was co-authored by Paul Ginsburg, director of public policy at the Schaeffer Center, posits the questions of whether a lack of information about actual generic drug costs leads to excessive reimbursement. The two authors proposed a strategy to make that information selectively available to health plans with the goal of lower reimbursements to retail and mail-order pharmacies. They noted that spending would decline by $1 billion for every 1 percent reduction in the average reimbursement for a generic prescription, so a 4 percent reduction (equivalent to a $1 reduction in the average reimbursement for a generic prescription) would save $4 billion.

Christine Simmon, senior vice president of the Association for Accessible Medicines, said squeezing more savings out of generics misses the big costs that exist in branded medicines. “We in the generic industry are 89 percent of prescriptions and just 26 percent of overall cost,” she said.

Some generics have had price run ups because of lack of competition, and that needs to be solved by getting more makers into the market faster, she said.

Tom Moriarty, executive vice president at CVS Health, disagreed that PBMs are risking conflict of interest by owning mail order pharmacies. The FTC has looked at the issue three times and taken no action, he said.   “Actually, it helps” PBMs do their job on behalf of health plans, he said.

Ginsburg said the paper supports the idea that “a lot can be done at the pharmacy level” regarding prices, but B. Douglas Hoey, chief executive of the National Community Pharmacists Association, disagreed.

Margins in terms of actual dollars are so slim that “if you take a dollar out of retail and you may be putting thousands of pharmacists out of business,” he said.

“It was true for many years that a generic was more profitable for pharmacies,” he said. “That is not so true today.”

Download the Sood paper here.
Download the Lieberman paper here.