Who Makes Money in the Drug Manufacture and Distribution Chain?

By February 2, 2017Commentary

With all the confusing information flying around about drug prices and who gets how much revenue and profit from the sale of drugs, an interesting analysis is put out by the Berkeley Research Group.   (BRG Report)   There are a number of intermediaries between the drug maker and the patient, and of course, they each want their cut of revenue and profits.  When complaints arise about prices, finger-pointing begins among these groups.  The authors start by looking at “initial gross drug expenditures”, which is the sum of payments made by patients and/or their third-party payer at the point of sale, so in the pharmacy, from mail order or at a hospital or other setting, and before any rebates or discounts after purchase.  Looking at this measure, in 2015 manufacturers of brand medications got 39% of total initial gross drug expenditures, generic manufacturers received 19%, and supply chain entities, like pharmacies, wholesalers and PBMs, got 22% and various retrospective discounts and rebates represented 17% of these initial expenditures.

After taking into account all the discounts and rebates received by patients and their third-party payers, in 2015 net drug expenditures were estimated to be $469 billion.  Of this amount brand manufacturers received 47%, generic manufacturers 23% and supply chain entities 27%.  Note that even though generic prescriptions are now around 80% of all prescriptions, brand revenues are over twice generic ones.  The authors say that between 2013 and 2015, the share of net expenditures received by brand manufacturers declined slightly, while that of supply chin entities increased.  This is attributed to increased discounts and rebates, often mandated by statute for programs like Medicaid and TriCare, but the report does add that these increases did not completely offset brand manufacturer price increases.

Part of the point of this paper seems to be that brand manufacturers aren’t ripping us off as much as it seems like.  Uhhh, I beg to disagree.  What a great model it is to be so generous as to say, you know what, I am raising my unit price 15%, but I am going to raise your rebate or discount 10%.  Meanwhile, if I am doing any kind of a decent management job my costs of goods and SG & A should be going down.  The tobacco companies have mastered the same model in regard to state taxes.  Oh, you raised taxes by 25%, so I will raise prices by 30%.  Great cover for making more money.  If the drug companies were actually spending all or even most of their inflated profits on truly new, innovative medicines I might be more sympathetic.  But they aren’t and the source of most of these profits are government-granted mini-monopolies, which seriously need to be re-evaluated.

Kevin Roche

Author Kevin Roche

The Healthy Skeptic is a website about the health care system, and is written by Kevin Roche, who has many years of experience working in the health industry through Roche Consulting, LLC. Mr. Roche is available to assist health care companies through consulting arrangements and may be reached at khroche@healthy-skeptic.com.

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