By Doly Han, RCA intern
When we buy a drug at the pharmacy, how is the price decided, and who makes money from this purchase? To better understand the flow of money, I spoke with Alex Arnold, a law student at Boston University who worked for a pharmacy benefit manager as a consultant designing profit models. She gave me a realistic description of how drugs are priced and move throughout the supply chain, from manufacturer to pharmacy to you. The long list of actors and transactions reminded me of a play, so I decided to turn this usually dry topic into a (hopefully) amusing one-act play. Enjoy!
Manufacturers: Drug companies such as Pfizer, Sanofi, and Novartis.
Wholesalers: Companies that purchase drugs in bulk and supply them to pharmacies. The top three wholesalers in the US are McKesson, AmerisourceBergen, and Cardinal health.
Pharmacy benefit managers (PBM): These are intermediary companies like Express Scripts that serve four major functions:
- They negotiate with drug manufacturers on formulary placement.
- They negotiate rebates with a manufacturer (so that they can decide whether they put a drug on the formulary or not).
- They process insurance claims.
- They develop and manage pharmacy networks. When a pharmacy is part of this network, the pharmacy will be able to receive prescriptions from physicians and dispense their drugs to the insurer receiving direct payment from the PBM through electronic billing system.
Insurers: Health plan companies such as BlueCross or United Health that pay for health care services and prescription drugs for beneficiaries.
Pharmacies: CVS, Walgreens, Rite Aid, and many other local places where you can buy prescribed drugs.
Beneficiaries: Those who pay health premiums to our insurers for drug coverage (You!).
Setting: A peaceful melody is playing in the background upon flute and piano, in a forest of buildings in the city where Pharmaceutical companies, Pharmacies, Wholesalers and Pharmacy benefit managers talk about their contracts.
The curtain rises.
Manufacturer: (Excited) Hey guys! I’ve created a wonderful drug that can save millions of lives!
Beneficiary: Hooray! Thanks, Manufacturer. I have been waiting for this drug to heal my illness.
Manufacturer: Umm, well, as you know, there is no free lunch. Therefore, there is no free drug. I am setting the price of this drug for only $100.
Beneficiary: (Startled) Woah! That’s expensive.
Insurance: Don’t worry beneficiary, you pay your premium to us. We’ve got you covered. If only you pay your co-pay, you can get that drug pretty cheap.
Beneficiary: (Relieved) Ah, thanks Insurance.
Manufacturer: Well just be patient, there is a pharmaceutical distribution system. I used to be able to sell drugs to you directly, but everybody complained so much about my high prices, so the PBMs convinced the insurers to let them handle it. Now, I have to talk with the Pharmacy Benefit Manager and give some rebates to them first.
(Beneficiary just stands there, looking confused.)
Manufacturer: (Condescendingly) Because they set the formulary and if this drug can’t be a part of the formulary, you won’t have access to this drug at your local pharmacies.
Beneficiary: I don’t know what the heck you are talking about dude, but okay.
Pharmacy Benefit Manager enters
PBM: Hey folks.
Manufacturer: (With desperation) Glad you came, we’ve been waiting for you!
(To audience) If I don’t offer a big enough rebate, we won’t get this drug on the formulary and our sales will go way down!
PBM: So…What’s the deal?
(PBM takes a sip of coffee, expression completely blank)
Manufacturer: (To PBM) I’ve been thinking about you – I mean, I’ve been thinking about giving you $48 for a rebate.
PBM: (To audience) The other manufacturer proposed $40 as a rebate – this is $8 more! This could be a great deal for the insurance beneficiaries, if I pass on the full rebate to them… Or I could keep some of it as profit…
(To Manufacturer) That’s an okay deal, I guess. We’ll take it. Your drug will be part of the formulary and I will help pharmacies process insurance claims with that drug.
(Turns to Insurer) Insurer, don’t you also owe me for processing claims and managing the pharmacy benefits? I don’t make deals for nothing, there’s no free lunch!
Insurer (Scared): Of course, I have it here (handing over money)
Beneficiary (Baffled) Who are all you people??
Insurer: Don’t worry about it, just pay your copay
Beneficiary and Insurer exit
Wholesaler: Hello, Manufacturer, I heard you and PBM made a deal. I guess you need help distributing those drugs you’ve made. But as you know, there is no free lunch, so there is no free distribution. Just give me $5, and I will distribute them to all the pharmacies.
Manufacturer: Alright then, here is my $5 (gives it to the wholesaler).
Wholesaler: Also, you have to sell me the drugs at a discount, for $98.
Manufacturer: Fine. Even with all these discounts I still make $45 in profit.
Wholesaler: Hey local pharmacy, I brought some drugs for you. Only $94.
Pharmacy: Thanks, Wholesaler!
Wholesaler (to Audience): Even though I’m selling the drugs to the pharmacy for less, I still make $1 in profit because I got a discount and distribution fee from the manufacturer.
Pharmacy (to herself): Well, well, well! We just spent $94 for these drugs, I guess we have to make some profit since there is no free drug…
PBM sidles up to Pharmacy
PBM: You know what PBM stands for right? I’m the pharmacy benefit manager! We can help you manage your benefit.
Pharmacy: I’m listening.
PBM: We know that you want to make some money. But you guys don’t want any risk with these drugs. You don’t want them to be expired. You don’t want to wait until insurance pays you their portion for drugs. But no worries, we will pay you right away after we process insurance claims from the beneficiaries.
Pharmacy: We know, that’s why we love you.
PBM: Let’s make some contracts. If you sell these drugs with a copay of $30 to the beneficiary, we will give you $67 as reimbursement for the drug.
Pharmacy: Agreed! (Hands over the money)
PBM (to Audience): It seems like I just lost a lot of money with that deal, but if you were paying close attention, you’ll remember that I got paid from 3 places – the Pharmacy, the Insurer, and the Manufacturer. The Insurer gave me $73 as per our contract, for managing prescription drug coverage for their beneficiaries.
The manufacturer gave me a rebate of $48 so the drug would be part of the formulary and the beneficiaries could buy it. I’m supposed to pass on the rebate to the beneficiaries, but the insurer doesn’t know how much the rebate is… so I’ll pass on $20 to them and keep $28.
So… $28 plus $73, minus $66 is a hefty $34 profit.
Beneficiary enters, looking significantly more haggard and sickly
Beneficiary: (to Pharmacy) I could really use that medicine right now. Is it available yet?
Pharmacy: Yep! Your copay will be $30.
Beneficiary: Oh, thank goodness, that’s way less than $100 (hands over money). I’m so glad I have insurance.
Insurance: I’m glad I have the PBMs getting us discounts!
Pharmacy: I’m glad I have the PBMs to take on the risk for these drugs
PBM: Really, guys… You’re too kind.