Health insurance and healthcare costs are on the minds of just about everyone.

And for good reason—the cost of healthcare continues to rise with increases consistently outpace the overall rate of inflation.

In reaction, the U.S. Congress and many states, including Connecticut, have an increasing interest in how medicines are priced and the lack of transparency in the supply chain from manufacturers to pharmacy shelves.

SB 445 addresses medicine pricing and the supply chain.

From one standpoint, medicines are the most transparent part of the supply chain. Biopharma companies establish a price for their medicines that is meant to cover their research and development costs (approximately $2.6 billion per FDA-approved drug).

And patients—consumers—know, through insurance and co-pays, the price they pay at the pharmacy.

But the rest of the system is strikingly opaque—a complex array of arrangements for discounts, rebates, and fees among drug wholesalers, pharmacy benefit managers, and retail pharmacies.

Many are surprised to learn that when the various contractual provisions with all the players in the drug supply chain are settled, biopharma companies realize only about 58% of a drug’s list price.

So where does the rest go?

Complexity, Lack of Transparency

The process begins with a drug wholesaler buying a medicine from a drug company manufacturer.

Wholesalers warehouse and otherwise work to maintain an adequate inventory to meet demand for a drug at pharmacies.

Typically, what the wholesaler pays the manufacturer is at a discount from a drug’s list price.

Next, pharmacies purchase medicines from wholesalers, typically at a premium to the discounted price the wholesaler paid.

It's easy to see why it makes sense to shed more light on the labyrinth of fees attached to medicines.
Complexity and lack of transparency now goes into overdrive as pharmacies seek reimbursement for what they have paid wholesalers.

Of course, they receive a co-pay or deductible amount from the consumer/patient.

With a few notable exceptions that payment covers only a fraction of a drug’s cost.

For the rest, the pharmacy works through a pharmacy benefit manager for payment from a payer—an insurance company, the government (e.g., Medicare, Medicaid, the Veterans Administration), or a large company or organization that self insures.

Pharmacy Benefit Managers

As the name implies, PBMs provide a valuable service managing the complex mechanisms and contractual arrangements for payment across the supply chain. They do this, however, through an often convoluted and secretive web of contracts and procedures with other players in the system.

PBMs do not operate through a single contract with drug companies and payers.

Instead, they have multiple contracts between, on the one hand, each of their various payer clients and, on the other, wholesalers, drug companies, and pharmacies.

Each has a unique menu of provisions and reflects its set of discounts off the various prices stated by the other parties in the supply chain.

Further discounts may be predicated on a certain volume of purchases.

Rebates may be paid after drug purchases are otherwise settled (retrospective rebates) and may be tied to sales targets.

It is difficult to overstate the creativity and intricacy of PBM contracts.

Other typical provisions include pharmacy dispensing fees and a variety of administrative fees, including those associated with prior authorizations.

In that case, a PBM may recommend to a payer that a certain medicine should require a prior authorization, place such a provision in its contracts with the payer—including, for example, a $50 payment to the PBM for each prior authorization.

Cost Disclosure Prohibitions

Though the work is carried out mostly by the pharmacy, the PBM reaps a prior authorization fee and whatever fees are associated with the drug or its alternative when dispensed.

One particularly disadvantageous contractual provision often embedded in PBM contracts is a prohibition on the disclosure to consumers of a pharmacy’s cost to dispense.

This means a consumer may not realize that the cost, including profit, of many generic drugs is less than the consumer’s co-pay and that it would be in their interest to forgo using insurance and, instead, pay with cash.

As with other junctures in the delivery of medicines to consumers, each contractual provision drawn up by PBMs offers an opportunity to siphon additional revenue—this is why PBMs are among the most profitable of businesses.

With this being the case, it’s easy to see why it makes sense to shed more light on the labyrinth of fees attached to medicines after they leave biopharma manufacturers.


For more information, contact CBIA Bioscience Growth Council executive director Paul Pescatello (860.244.1938) | @CTBio