By Amanda Frost, PhD Vice President, Research, PCMA

Last year, the U.S. spent $1.363 trillion on prescription drugs, and every year we spend more. We all want this money to be invested in healthier lives for Americans. But do we know if we’re getting our money’s worth? Policymakers have recently been asking this question and demanding transparency. With transparency comes accountability, which is crucially important at these high spending levels.

Recently, Congress used the Consolidated Appropriations Act (CAA) to enact sweeping reporting requirements for pharmacy benefit managers (PBMs), ensuring one small section of the prescription drug supply chain has the bright light of transparency.

Thanks to the CAA, employers, labor unions, health insurers, and state and federal governments will have drug-level pricing, payment, and utilization data from PBMs. But this unprecedented transparency does not apply to the other parts of the supply chain. And if policymakers want to understand what our spending is buying us, they need to look across to the one participant that plays a role in nearly all parts of the supply chain: drug wholesalers.

Drug Wholesalers: Hiding in Plain Sight 

Prescription drug wholesalers’ primary jobs are buying prescription drugs from manufacturers and selling and transporting those drugs to pharmacies. Though they do much more than that, as we’ll discuss. This market in the U.S. is utterly dominated by just three companies, McKesson, Cencora, and Cardinal Health, whose combined annual revenues total nearly a trillion dollars and control well over 90% of U.S. drug distribution. All three are Fortune 15 companies.

Haven’t heard of them? Don’t worry, you aren’t alone, as they have cleverly managed to keep themselves, and all of their affiliated organizations, out of the legislative and regulatory spotlight.

As Professor Joey Mattingly recently wrote, “They 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.”

There are many things we don’t know about the drug wholesalers and how they operate their businesses. But one thing we do know is how many businesses that they operate. And those operations snake through nearly all segments of the prescription drug supply chain.

The Prescription Drug Supply Chain? You Mean the Wholesaler Drug Supply Chain 

The drug wholesalers sit at a unique, central point within the prescription drug supply chain. They do business with nearly all of the other supply chain participants, buying and selling drugs, negotiating prices and discounts, and many other tasks that are less visible but no less consequential.

In addition to their primary jobs, each of the three major wholesalers have been quietly inserting themselves across the supply chain. Wholesalers are now vertically aligned with franchise retail pharmacy chains, pharmacy services administrative organizations (PSAOs), physician’s group purchasing organizations (GPOs), generic drug companies, and even health care provider groups. Wholesalers are so ingrained in the pharmacy market that around 70% of independent retail pharmacies are a part of a wholesaler-affiliated franchise chain. In fact, the payment portion of the supply chain is the only one that wholesalers aren’t operating in. (Check out the great work over at Drug Channels to see exactly who these affiliated organizations are.)

With these relationships in mind, we can return to our original question: Are we getting our money’s worth on prescription drug spending? With so much of the total spend flowing through the drug wholesalers and their affiliates, it’s a fair question.

These three vertically aligned companies along with their affiliates are now involved in every part of the prescription drug transaction: sourcing, delivering, prescribing, and dispensing. At each of these points, a wholesaler-affiliate sets a price that someone else, often another affiliate, pays.

Wholesalers decide which generic drug companies they will buy drugs from and then sell those drugs to their franchise retail pharmacies. PSAOs negotiate the reimbursement rates the franchise pharmacies will receive from PBMs for dispensing the drugs. Providers prescribe the drugs that patients receive from franchise pharmacies. Physician GPOs sell goods to physician groups and provider offices.

With a design like this, the incentives for reducing drug spending are misaligned. Which means the entire wholesaler-affiliated supply chain is in need of a big dose of sunlight.