How do drug distributors make money?

Pharmaceutical distributors buy products from manufacturers at list price and we sell them to customers at list price. Pharmaceutical distributors make money by charging manufacturers a percentage of the wholesale acquisition cost (WAC) of their products, or list price, for distribution services. In brand-name drug markets where wholesalers have little influence on price, such as limited-distribution drugs, they may earn some income from selling at a higher price than they bought, such as buying from WAC minus 5 percent and selling to WAC minus 3 percent. For example, in cases where large wholesalers have shortages of specific generic drugs in their supply centers, smaller, “gray” wholesalers can sell their inventory of these drugs at a higher price, increasing prescription drug costs.

For example, instead of basing wholesale charges to providers and pharmacies on list prices, they could be structured as a fixed fee per unit of prescription drugs or per wholesale service. Wholesalers can ensure that a specific volume of generic drugs is distributed to the manufacturer in exchange for the manufacturer selling at lower prices to the wholesaler. This has led to more drugs bypassing traditional wholesale distribution channels (8% in 201), and specialty drugs comprise the majority of these cases. Generic drug manufacturers compete with each other for contracts with the three major wholesalers, which can put wholesalers in a position to set prices and create a market for generic drugs.

Sometimes, consumers pay more for a prescription than for the insurer's cost of purchasing the drug, a common experience with high-deductible health plans. Wholesalers purchase drugs from brand-name manufacturers on WAC minus a negotiated discount, which is kept confidential. Members who have not exhausted their deductible pay the total average wholesale price of 8 for drugs out of pocket, although the plan purchases them at a discount and collects reimbursement from the partner manufacturer. Despite recent reports of triple-digit price increases for certain drugs, increased public scrutiny of drug price increases has slowed the average rate of list price increases.

Contractual agreements under which wholesalers purchase the entire supply of a drug from a single manufacturer can also leave wholesalers vulnerable to manufacturing interruptions.

Rachel Celli
Rachel Celli

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