With August recess underway, constituents are asking their elected representatives a key question: what are you doing to address the health care affordability crisis?
The Consolidated Appropriations Act (CAA) enacted in February included sweeping reform of pharmacy benefit managers (PBM), but Congress needs to do a lot more than that to ensure that prescription drugs are affordable for American families. That includes asking serious questions about other segments of the supply chain. Drug wholesalers, who have stayed under the radar for years, should be at the top of that list.
As PCMA’s Head of Research, Amanda Frost, PhD, writes, “[wholesaler] positioning in the middle of the supply chain means they exert significant influence over drug availability and pricing, especially generic drugs.”
Professor Joey Mattingly echoed Frost’s concerns in a recent Health Affairs Insider piece. He explains that wholesalers “are among the largest companies in American health care by revenue, and they sit at a point in the supply chain that every patient depends on. Yet in a national conversation consumed with who is to blame for high drug prices, wholesalers are almost never mentioned.”
If policymakers are serious about lowering drug costs, they need to prescribe sunshine to determine how money is moving through the market. Here are just three questions to start that conversation:
1. Do agreements between wholesalers and independent pharmacies raise drug costs by limiting the ability of pharmacists to shop around?
Economics 101 teaches us that market competition brings down costs when buyers can shop for the best price. Yet many independent pharmacies operate within a system where wholesalers own the pharmacy services administrative organizations (PSAOs) and group purchasing organizations (GPOs) that independent pharmacies hire to negotiate key business arrangements. The arrangements can restrict how and where independent pharmacies can do business and purchase drugs. PSAOs and GPOs are intended to leverage scale and create efficiency for independent pharmacies, but policymakers should ask whether those arrangements limit their ability to explore lower-cost options, just to strengthen the market position of large wholesalers.
2. How do wholesalers decide which drugs to purchase and then promote to independent pharmacies, particularly for generic drugs?
Generic drugs dramatically lower costs for patients and employers, which is why PBMs encourage their use. Because there tends to be many manufacturers of a generic drug, competition among manufacturers gives wholesalers leverage to demand better pricing and discounts. When setting their sales prices for generic drugs, wholesalers create “generic sourcing programs,” which are essentially lists of incentivized drugs they want to push independent pharmacies to buy. Lawmakers should explore whether these push strategies limit competition and artificially raise drug costs, while putting more rebate dollars in the hands of wholesalers.
3. What rebates do wholesalers get from manufacturers, and who benefits from those dollars?
The CAA mandates 100% pass-through for rebates negotiated by PBMs and enshrined unprecedented transparency into PBM industry business practices and financial transactions. However, in the wholesaler portion of the supply chain, that transparency is non-existent. And no such pass-through requirement exists. Drugmakers may provide discounts, service fees, or other payments to wholesalers, but there is no way to follow that money. Policymakers should ask what rebates wholesalers receive, how much is retained, and how much is passed along to the independent pharmacies they serve.
The Growing Need for Transparency Across the Supply Chain
Congress has already enacted unprecedented transparency from PBMs. If policymakers are serious about lowering drug costs, they should apply the same scrutiny to every part of the prescription drug supply chain, including the trillion-dollar wholesaler industry that sits smack in the middle.
Up Next: Are wholesalers too powerful and too opaque?