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Drug Spending in the US: Where the Money Actually Goes

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Copyright © DrugPatentWatch. Originally published at Drug Spending in the US: Where the Money Actually Goes

Nobody disputes that developing drugs is expensive. But what types of drug spending take place along the path from drug manufacturer to patient, and who gets what proportion of it?

People (and lawmakers, increasingly) want to know where money spent on prescription drugs goes.

Opacity in the chain from drug manufacturer to patient has caused great concern in Washington, with FDA Commissioner Scott Gottlieb calling for greater transparency for prescription drug spending in 2018. But establishing greater transparency first requires that we understand how much total drug spending takes place each year in the United States, and the many paths that the money takes.

Health Affairs analyzed precisely this. It doesn’t answer all the questions about why various relationships in the drug spending chain are the way they are, but it does shed light on where the money goes when a drug leaves the manufacturing plant and ends up in the hands of the consumer. Understanding drug spending more thoroughly should help make sense of drug prices – the thing the typical American consumer is most concerned with.

The Health Affairs analysis estimated that 2016 total U.S. expenditures on pharmaceutical drugs reached $480 billion.

Starting Point: The Manufacturers

Of the $480 billion in total drug expenditures, two-thirds ($323 billion) went to drug manufacturers as net revenues. This figure was obtained after excluding rebates, discounts and price concessions (like coupons), but did not subtract manufacturing expenses. The other one-third of retained revenues ($157 billion) went to wholesalers, pharmacies, pharmacy benefit managers (PBMs), providers, and insurers.

What Wholesalers Do and How Much Money They Make

Three wholesalers (McKesson, AmerisourceBergen, and Cardinal) create from 85% to 90% of drug distribution revenues in the U.S. Wholesalers connect some 60,000 U.S. pharmacies and outpatient dispensing entities with manufactures. This setup allows manufacturers to ship large quantities of drugs to a small number of wholesale warehouses rather than having to ship to 60,000 different dispensing outlets.

Of the $157 billion in prescription drug revenues that didn’t go to manufacturers in 2016, around $18 billion went to pharmacy wholesalers. Therefore, the top three wholesalers together collected just over $16 billion in revenues in 2016.

Interfacing with Patients: Pharmacies 

Retail pharmacies are the most common interface between consumers and the prescription drug industry.

Pharmacies are the primary interface between patients and prescription medications. Pharmacies in aggregate took in $73 billion of the expenditures on prescription drugs in 2016, based on estimated gross profits from various industry sources and figures from SEC filings. It is interesting to note that as demographics and purchasing habits shift among Americans, mail order pharmacy use is expected to increase significantly in coming years.

PBMs: Intermediaries Between Insurers and Other Entities

Pharmacy benefit managers (PBMs) aren’t really located on the line connecting manufacturers to wholesalers and wholesalers to dispensers. They operate as an intermediary between insurers and other entities like pharmacies and manufacturers in an effort to keep drug prices in line with consumer expectations.

Originating as simple claims processors, PBMs have grown to assume several responsibilities, like operating mail order dispensing programs, managing drug distribution among pharmacy networks, negotiating rebates, and managing formularies. Their estimated retained revenues for 2016 were $23 billion, based on SEC disclosures and the use of various estimating tools.

Providers and Insurers

Providers, including hospitals, clinics, nursing homes, and other organizations that dispense drugs to patients, took in an estimated $35 billion in prescription drug revenues in 2016, while insurers took in $8 billion. The following table summarizes where the Health Affairs study allocated prescription drug spending in their study of 2016 data:

Drug Manufacturers$323 billion
Wholesalers$ 18 billion
Pharmacies$ 73 billion
Pharmacy Benefit Managers (PBMs)$ 23 billion
Providers$ 35 billion
Insurers$  8 billion
Total$480 billion

In Summary

According to the Health Affairs study, in 2016, just under 90% of retained revenues for prescription drugs went to manufacturers (with the largest share by far), followed by pharmacies, and other providers (hospitals, clinics, nursing homes, etc. that dispense prescription drugs).

Drug spending matters to everyone in the long path from the development of drug patents through consumption of medication by consumers. Consumers, naturally, care most about drug prices. Understanding where the dollars spent on prescription drugs go is one of the most important steps in learning how to develop greater transparency along the path from manufacturer to patient.

Copyright © DrugPatentWatch. Originally published at Drug Spending in the US: Where the Money Actually Goes
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