Exploring Human Potential

The U.S. Pharmaceutical Supply Chain – Seen and Unseen

Posted on | May 25, 2017 | No Comments

Mike Magee

Complexity is the friend of the Medical Industrial Complex. Whether hospital, insurer, organized medicine, pharmaceutical or government agency, profitability, market advantage and career advancement can be found in the cracks of the deliberately Byzantine network.

For those intent on regulating or managing the American system as it is, just understanding and unraveling the opaque morass can be a full time job. A single piece of it can occupy a career. This reality is in part why Americans grudgingly keep coming back to single payer simplicity with the promise to expose supply lines, remarkable waste and fraud, and poor performance.

Consider the case of US pharmaceuticals – at least the visible part of it.

There are roughly 4 1/2 billion prescriptions filled each year with about 90% of them supplying generic drugs. Just under 50% of American residents have filled 1 prescription in the past 30 days, and 10% of the population takes 5 or more different prescription drugs.

Many of the major multi-national pharmaceutical corporations are based in the United States. But most of the raw materials, and much of the drug construction is contracted overseas by a $46 billion dollar manufacturing conclave . Once the company produces an individual drug, it does not go to a pharmacy outlet directly. Instead it is shipped to a U.S. distributor. 85% of all drugs consumed by Americans go through one of three giant distributors – AmerisourceBergen, Cardinal Health, and McKesson. They do not provide their services for free. The bill for distribution of U.S. drugs for these three in 2015 was estimated at $378 billion (85% of $444 billion total.)

Most Americans get their prescriptions filled at one of the 60,000 pharmacies, either in person or by mail order. 38,000 (63%) of the outlets are part of retail chains, and 22,000 (37%) are independents. All told, the retail pharmacies collect about $365 billion in revenue a year.

Chains dominate with just 15 (including CVS, Walgreens, Walmart and Express Scripts) controlling 74% of all retail income. They collect 62% of this in person and 38% by mail order. Independents lag financially garnering just under $50 billion a year of the total retail revenue.

Americans pay for their drugs through a confusing partnership mix and match designed by varied insurance companies. This requires negotiating deductibles, coinsurance and copays. For the total paid out, 42% comes from private plans, 30% from Medicare (Part B and D), 10% from Medicaid, and 14% from individual themselves.

Out-of-pocket average cost for a brand name prescription in 2015 was $44, while the average payment for a generic was $8.

Insurers use a variety of strategies to limit their financial obligations. Most insurers use tiered systems, placing drugs in 3 to 5 buckets, varying the percentage of payment from bucket to bucket. They employ companies called Pharmacy Benefit Managers or PBMs to act as middle-men to negotiate prices with the pharmaceutical companies and to execute a range of strategies designed to encourage consumers to choose lowest cost options.

PBMs are big business and of the biggest three one is owned by the pharmacy chain mega-giant CVS (CVS Caremark), a second by insurer UnitedHealth Group (UnitedHealthOptum), and a third geared toward mail order (Express Scripts). Together these three control 72% of the PBM market.

The top 15 pharmaceutical companies generated more than $500 billion in U.S. sales in 2015. The top five U.S. revenue producers were Gilead Sciences ($28B), J&J ($22B), Merck ($21), Novartis ($20), and Pfizer ($19.6B).

These are the facts and figures of just what is visible. But what if I were to tell you that a Senate Investigative report in 2012 revealed a vibrant and opaque gray market, not from Canada or overseas, but inside the U.S., where trading, and selling and reselling of pharmaceuticals was commonplace, profiteering on a large scale by thousands of small business arbitrageurs, with drugs coming in and out of pharmacy back doors, and everyone taking a piece of the action?

What if I were to tell you that 15% of all the large rig heists in America involve pharmaceuticals each with an average value of $3.7 million?

More on that next week.


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