Supply Chain: The Big Leak Fueling High Drug Prices

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The end-to-end U.S. pharmaceutical market is complex, as numerous players are involved in executing the various steps of manufacturing, shipping, supplying, and paying for the prescription medicines. The reported pharmaceutical spending figures often miss mentioning the retrospective rebates and discounts, which decrease the final net cost for the payers and for the healthcare system.

Escalating competition has recently led to the offering of increased rebates from drug makers to payers in exchange for formulary positions. (For more, see How Pharmaceutical Companies Price Their Drugs.)

A report by Berkeley Research Group and commissioned by the Pharmaceutical Research and Manufacturers of America (PhRMA), highlightedhe proportion sharing of spend across the different entities. It indicates that the multifaceted pricing system, which is accompanied by a complex distribution process, may not necessarily have the drug makers as the primary beneficiaries from the high drug prices.

A significant portion goes towards the other units, but its the drug manufacturers who are mostly at the receiving end of the public bashing. (For more, see Trump Continues Fight Against Drug Companies.)

Supply Chain: Significant Expense Contributor

The study centers on the analysis of the net drug expenditures in the U.S. in 2015 which stood at a total of $469 billion after accounting for all rebates and discounts realized by patients and their health plans. The study finds that branded drugs garnered $219 billion, or 47% of the total $469 net expenditure, and the generics took $108 billion, or 23%. However, the “non-manufacturing stakeholders”, which include supply chain entities, pocketed a hefty $142.8 billion, or 31% of the total.

Analysis of gross drug expenditures reveals that brand manufacturers, who end up in the eye of the storm for high drug prices, actually realize less than half of total drug expenditures. On the other hand, non-manufacturer stakeholders realize a significant 42% of initial gross drug expenditures.

Interestingly, between 2013 and 2015, the percentage share of gross drug expenditures by both the brand and generic manufacturers have reduced by 2 percentage points each, while that of non-manufacturer has shot up by 4 percentage points. During the period, the retrospective rebates, discounts and fees paid to health plans, pharmacy benefits managers, and the government for brand medicines increased from an estimated $67 billion to $106 billion.

The findings get support from drug makers, which have been quoting the complex drug pricing system in the U.S. In November, Novo Nordisk’s executive Jakob Riis said that “the drug pricing system is incredibly complex,” which leaves “an impression that companies like ours realize all the profits from the “list price” increases we’ve made over the last decade.”

Similar thoughts were expressed by Mylan CEO Heather Bresch, who claimed that “middlemen account for more than half of EpiPen’s cost.” (For more, see New York State Attempts to Revamp Drug Pricing.)

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