Welcome to the pharmacy section. Drug development, distribution, and pricing are likely the most complicated set of topics in this guide, so be patient as you learn. This guide is not supposed to be a comprehensive review but I have linked a few resources that will help you dive deeper.

Different kinds of medications in the system

• Brand drugs are manufactured by a business that holds exclusive rights (via a patent) to produce that drug.
• Generic drugs may be manufactured by several companies after the original patent expires, leading to high competition.
• Specialty drugs are meant to treat complex diseases impacting a small portion of the population, with both brand and generic specialty medications.

Medication Development & Acquisition

• Developers take part in the development of a drug from discovery through to patent and FDA approval (ex. large pharmaceutical companies, scientists with ties to academic medical centers, or small companies focused on R&D).
• 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.
• Food and Drug Administration (FDA) is the governmental body in charge of medication approval and use within the US.
  • Center for Drug Evaluation and Research (CDER) is responsible for evaluating new drugs before they reach the market.
  • New Drug Application (NDA) is a form that drug developers will submit after initial development and animal trials.

Pharmacy Benefits Managers (PBMs)

Pharmacy Benefits Managers (PBMs) are charged with managing the prescription drug benefit for payor beneficiaries (a.k.a. patients like you and me).

• Claims Processing refers to the process of a medication being dispensed from the pharmacy, and then the pharmacy being reimbursed. PBMs maintain your prescription benefit and send the scheduled reimbursement for the specific medication to the pharmacy.
• Rebates are "cash back" or discounts that are given by a manufacturer to the PBM to encourage patients to purchase their drug.
  • Manufacturer rebates move from manufacturer to PBM to payor to employer.
• CVS Caremark (with Aetna), Express Scripts (ESI) (with Cigna) and OptumRx (with United Health Group) process over [80% of all prescription benefit claims](https://www.hirc.com/PBM-market-landscape-and-imperatives#:~:text=CVS Caremark leads in PBM,Most Disruptive Trend in 2022.) within the US using their size and vertical integration with payors to negotiate better rebates and pressure manufacturers to lower drug costs.

A formulary is a list of drugs covered by your health plan. Manufacturers use rebates to get their drugs on or "higher up" on the formulary.

• Brand and Generic drugs on the formulary are bucketed into the following categories:
  • Preferred drugs have the lowest copays as an incentive for you to purchase.
  • Non-preferred drugs have higher copays.
  • Non-formulary drugs are not covered by your insurance. Patients need to pay the full list price.
• The PBM sets a drug’s formulary status based on the following factors:
  • How much the payor/employer wants to pay for the service. The greater the payment, the larger the formulary (more drugs are added to the preferred / non-preferred categories, and copays may be lower).
  • A drug's effectiveness and safety as determined by the PBM’s Pharmacy & Therapeutics Committee.
  • The rebate is paid to the PBM by the drug’s manufacturer. The greater the rebate sent from the manufacturer to the PBM, the more likely it is to be added to the ‘Preferred’ category.
    • Rebates are only given once a certain amount of drugs are sold - cash on the back end is sent to incentivize the sale of the drug.

Other resources:

• Learn more about the drug distribution system here ‣