Manufacturers create value in the system.
Drug manufacturers, sometimes called pharmaceutical companies, are responsible for discovering, developing, producing, and marketing drugs.
- Generally, about 50% of the pipeline of medications are discovered and developed in-house. The other half of the time, larger manufacturers are acquiring intellectual property (IP) or entire companies.
The manufacturer sends and receives payment to three places: the wholesaler, the pharmacy, and the PBM.
- The wholesaler - This is simple. The wholesaler sends the manufacturer payment for the product. The wholesaler then sends the drug to the pharmacy.
- PBM - In exchange for their drug being on a PBM formulary (or list of drugs covered by insurance), a manufacturer sends PBM's rebates.
- The pharmacy - the manufacturer sends the pharmacy money in exchange for service and data.
Wholesalers are the middle man between manufacturers and pharmacies. Here's how they interact with both parties.
Manufacturers - Wholesalers purchase drugs in bulk directly from manufacturers.
- McKesson, AmerisourceBergen, and Cardinal are the wholesalers responsible for 90-95% of drug distribution within the United States and sit at the 9, 10, and 15, respectively, on Fortune’s Top 500 list.
Pharmacies - Wholesalers distribute these drugs to pharmacies (which include hospitals, physician offices, retail pharmacies, and more) through another middle man, Group Purchasing Organization (GPOs).
- Group Purchasing Organization (GPO) - A collective bargaining group that brings together multiple healthcare organizations such as hospitals and physician offices to improve the organizations purchasing power during drug and supply price negotiations with wholesalers and manufacturers.
Pharmacies are the last touch point before patients. They are the providers and interact with four parties: wholesalers, manufacturers, PBMs, and patients.
Wholesalers - Pharmacies receive drugs from wholesalers through another middle man, a Group Purchasing Organization (GPO).
- Group Purchasing Organization (GPO) - A collective bargaining group that brings together multiple healthcare organizations such as hospitals and physician offices to improve the organizations purchasing power during drug and supply price negotiations with wholesalers and manufacturers.
Manufacturers - Pharmacies receive payment from manufacturers in exchange for service and data.
Patients - Pharmacies prescribe/give patients the drug in exchange for a copayment or coinsurance.
Pharmacy Benefits Manager (PBM) - PBMs pay pharmacies through reimbursement in exchange for network participation through another middle man, called a Pharmacy Services Aggregation Organization (PSAO).
- Pharmacy Services Aggregation Organization (PSAO) - Used by most independent retail and specialty pharmacies, PSAOs are a collective bargaining group that negotiates access & reimbursement rates on behalf of their constituent pharmacies with PBMs.