Pharmaceutical distributors make money by charging manufacturers a percentage of the wholesale acquisition cost (WAC) of their products, or list price, for distribution services. This is done by aggregating price, order, and inventory data across merchant classes and products. The net profit margin of pharmacy benefit managers (PBMs) is misleading, as they list the cost of drugs as an expense even though they never actually handle drugs.
The drug supply chain involves a range of stakeholders, from the manufacturers who create the drugs to the pharmacies that distribute them and the PBMs who oversee the process. Manufacturers create drugs and sell them wholesale to wholesalers, who in turn sell drugs to pharmacies. Wholesalers use complex logistics and packaging methods to receive and deliver medicines on time and in good condition. PBMs, manufacturers and insurers develop drug lists (called formularies) for insurers to cover. PBMs can give a drug from a certain manufacturer a preferred place on their formulary in exchange for discounts and other incentive payments.
Insurers offer prescription drug coverage to their patients, transferring part of the savings negotiated for them by the PBM. Money can pass from one party to another only to be returned the first time (such as when pharmacies pass copayments to PBMs, which return payments to pharmacies). Patients never pay directly to the manufacturers that develop their drugs or to the pharmacies that distribute them. Insurance coverage can ultimately be determined by the incentives paid by the manufacturer to PBMs, rather than patient preferences or even effectiveness.
If the pending Aetna acquisition takes place, CVS will be present at all levels of the supply chain, except retail major. Similarly, Cigna's continued acquisition of Express Scripts, which was approved by the Department of Justice earlier this week, would provide it with a PBM and specialty pharmacy to complement its current pharmaceutical business. UnitedHealthcare's supply chain subsidiaries include Optum (a PBM) and BrioVarx (a specialty pharmacy). Several other companies are looking to make a little profit out of PBM's profits.
These companies negotiate on behalf of their clients or simply on behalf of the general public and have been gaining ground. These companies could potentially reduce the role of PBMs, negotiating discounts for manufacturers who sell directly to pharmacies or patients. In doing so, these companies essentially bypass the entire supply chain. Patients no longer have to go to a doctor, payer, PBM, wholesaler and pharmacy to receive these generic drugs, but can use a single application to receive and complete a subscription.
The pharmaceutical supply chain is extremely complicated in its current form. Supply chain intermediaries, wholesalers, PBMs, pharmacies and payers benefit from a combination of scale and opacity. Typically, the consumer pays more through the supply chain, as pharmacies also need to derive benefits from medicines. Wholesalers can also purchase and offer health-care-related products such as gauze pads, syringes, and surgical gloves.
Healthcare companies can also benefit from having to contact and order from a single wholesaler for complete lines of pharmaceuticals and medical supplies. While some might argue that wholesale suppliers are no longer needed, wholesale pharmaceuticals offer savings to customers and customers. Whether you're an independent pharmacy or part of a pharmacy chain, wholesale pharmacy supplies are a sensible way to increase revenue and save money. Without a license, a wholesale drug distributor can be linked to serious crimes including falsifying prescriptions and distributing unapproved drugs.
In conclusion, pharmacy wholesalers make money by charging manufacturers a percentage of their products' WAC for distribution services. They also purchase health-care-related products such as gauze pads, syringes, and surgical gloves which they then sell on to pharmacies or customers directly. Wholesale pharmaceuticals offer savings to customers while providing healthcare companies with access to complete lines of pharmaceuticals and medical supplies from one wholesaler.