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title: missing middlemen
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NEW PRICE TRANSPARENCY EVENT ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­    ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­  

| View in browser Dear Reader, This August, Insiders will get a quick overview of price transparency policies in health care and what to watch moving forward with Christopher Whaley from Brown University.  Learn About Price Transparency The Middleman Missing from the Drug Price Debate Every other link in the pharmaceutical supply chain has a public villain problem.   Pharmaceutical manufacturers get hauled before the Senate over insulin and GLP-1 list prices.   PBMs get FTC investigations and bipartisan reform bills. Hospitals get PhRMA's "Meet Mark" ad campaign over 340B drug pricing tactics. Each of these fights has a villain, a hearing, or a hashtag.   Then there are the wholesalers, the companies that physically move drugs from the manufacturer to your pharmacy.   Three of them, McKesson, Cencora, and Cardinal Health, handle north of 90% of every prescription dispensed in the US.   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.   That absence is worth taking seriously, because it isn't obviously deserved.   The easy reads are there's nothing here, thin margins and boring logistics, or the reverse, that the least-scrutinized player must be the one worth watching most. Both miss what's actually going on.   Wholesalers are hard to see because the drug pricing debate is primarily organized around a brand-name drug’s list price, and that number is less important to the companies moving drugs from manufacturer to pharmacy.    I must admit throughout my own career I have largely ignored these giants of the pharmaceutical supply chain.   I fell into the trap of thinking this part of the business was boring. This article is a public mea culpa.   An apology to those who have followed my work on drug pricing policy and an attempt to make amends through a piece focused specifically on these very important intermediaries that may have a bigger impact at the pharmacy counter than many people realize. Meet the Invisible Oligopoly Wholesalers do something genuinely unglamorous.   They buy drugs from manufacturers, warehouse them, and deliver them to the roughly 200,000 pharmacies, hospitals, and clinics that dispense them.   This is logistics, not glamour, and is part of why they escape notice.   Nobody makes a documentary about a distribution center.   The three largest wholesalers each hold roughly a quarter to a third of the market, with McKesson and Cencora in the mid-30% range and Cardinal Health somewhat smaller, leaving little room for anyone else.   Much has been written in academic journals and lay press about the market concentration of insurers, with little attention to this group of market-dominating companies.   The Thinnest Margins in the Supply Chain In a widely cited analysis of how money flows through the pharmaceutical distribution system, Sood and colleagues at the USC Schaeffer Center estimated wholesalers operate on gross margins around 3.7% and net margins around 0.5%.   Of a $100 prescription, the wholesaler keeps roughly $2 and walks away with about 30 cents in actual profit. For comparison, that same analysis put manufacturers' net profit at $15 of that $100.   It is hard to build public outrage around thirty cents, and honestly, you shouldn't try.   On a per-prescription basis, the wholesaler runs one of the leanest operations in health care. If this were the whole story, the silence around wholesalers would be justified, and this newsletter would end here. Brands vs. Generics. On brand-name drugs, the wholesaler is essentially a price-taker.   The manufacturer sets a high price, the drug has no therapeutic equivalent, and the wholesaler often sells to the pharmacy at roughly the same discount off list price at which it bought.   There is little to negotiate and little value for the wholesaler to add. On generics, the picture inverts. With dozens of interchangeable versions of the same molecule, the wholesaler becomes a price-setter and a market-maker, sourcing among competing manufacturers and setting the terms on which pharmacies buy.    The consequence is counterintuitive, and a Commonwealth Fund analysis by Elizabeth Seeley lays it out cleanly.   Per unit, wholesalers actually earn more on brands: a 2% markup on a $566 brand-name drug is worth about $11, while a 15% markup on a $30 generic is worth under $5.   But generics are roughly 90% of all prescriptions dispensed, and that volume flips the result.   The wholesaler makes more money, in aggregate, from the cheap generic bottles than from the expensive brands, even though each individual brand unit is worth more to it.   The public's anger is focused almost entirely around brand-name list prices, the $1,349-a-month Wegovy and the "$1,000 hepatitis C pill." I have argued before in this newsletter that fixating on brand list prices distorts the debate.   Here is another cost of that fixation.   On brands, the number everyone watches, the wholesaler is a near-passive price-taker with little pricing power. Its actual leverage, and the bulk of its money, sits in the generic aisle nobody is looking at.   From the Pharmacy Counter Perspective Retail pharmacies typically do not buy drugs from whoever is cheapest that day.   These businesses typically contract with one of the Big 3 as their primary wholesaler and concentrate purchases there, because the discounts that keep it solvent are conditional.   Hit volume thresholds, buy enough through the wholesaler's generic sourcing program, pay invoices promptly, and discounts improve. Fall short, and they shrink.   As a result, the price a pharmacy actually pays to acquire a generic, its true net cost, can sit far below the invoice or list price outside observers see, and it varies pharmacy to pharmacy through a web of confidential terms.   A tier of smaller full-line distributors exists beneath the Big 3, including regional firms like Morris & Dickson and pharmacy-owned cooperatives like Mutual Drug, to work for the independent pharmacies that own it.   In practice, most independents still concentrate their buying with one of the three giants, which tells you something about how binding the arithmetic of volume discounts really is.   This is the number that decides whether a pharmacy makes rent, and it is nearly invisible from the outside, including to the government benchmarks meant to track it.   The National Average Drug Acquisition Cost (NADAC) survey Medicaid uses to set reimbursement is voluntary and does not capture the off-invoice discounts that determine real acquisition cost. In addition to the pricing and discounts of cost of goods sold, the relationship between pharmacy and wholesaler can have major operational implications.   It is not practical for every pharmacy to stock every drug that any patient may be prescribed on a given day – but a strong wholesaler distribution network allows most pharmacies to order just about any product with a next business day delivery.   In turn, many pharmacies schedule around wholesaler delivery schedules and build inventory practices to optimize operations and reduce waste.   While many people know me as an academic researcher, in a previous life I led district pharmacy operations at a chain pharmacy and helped build a long-term care pharmacy company.   I learned first-hand that a simple “bug” in the ordering process could lead to operational chaos, like receiving over 100 totes from a distribution center with many only containing one drug product (Figure 1).    This is also where the wholesaler relationship reveals its real weight. For a small pharmacy, the primary-wholesaler contract is not simply a vendor arrangement.   It is a critical determinant of cost of goods sold and operational efficiency, ultimately impacting the pharmacy’s chances of survival. That dependence is enormous, and almost entirely unexamined in public debate. Value of a Strong Wholesaler Industry A strong wholesale sector is a genuine public good. Today, a pharmacy in a small town can stock thousands of products at prices a solo operator could never negotiate alone.   Wholesalers absorb credit risk, manage the physical security and traceability the law now requires, and smooth the generic supply chain that delivers the overwhelming majority of US prescriptions at a fraction of brand cost.   The efficiency is real, and we would miss it immediately if it vanished.   The problem is not that wholesalers exist, or even that they are profitable. It is the market has two features that sit uneasily together.   The first is concentration: three firms, little competitive check, and a pharmacy customer whose viability depends on staying in one wholesaler's good graces.   The second is opacity: the terms that set a pharmacy's real acquisition cost, the generic discounts, the sourcing-program requirements, the off-invoice adjustments, are confidential, and the public benchmarks meant to approximate them miss the most important pieces.   Concentration without transparency is the actual concern.   That combination has consequences even if no one is behaving badly. When a benchmark like NADAC understates true discounts, it can distort public-program reimbursement in ways that ripple to every pharmacy.   When acquisition-cost terms are invisible, it is impossible to tell whether generic savings are reaching patients or being retained somewhere in the middle.   And when a pharmacy's survival hinges on volume thresholds it cannot hit in its early years, the market may be quietly shaping which pharmacies live and die, a plausible piece of the independent-pharmacy closure story that current data cannot yet confirm. What Can Be Done? The most useful single reform would be transparency into net, post-discount acquisition costs, rather than the list and invoice prices we currently fixate on.   Making that number visible, even in aggregate, would let payers, researchers, and patients see for the first time whether pharmacies are being squeezed, whether generic savings reach consumers, and where in the chain value is actually captured. It would also sharpen benchmarks like NADAC that public programs already rely on.   Transparency of this kind does not dictate outcomes or punish efficiency. It just makes the market legible.   A more structural option would change how wholesalers are paid at all: replace the percentage-of-list-price markup with a fixed fee per unit dispensed, closer to the way many Medicaid programs reimburse pharmacies.    Alongside either, anything that lowers the barrier to a fourth meaningful competitor, or that reduces how completely a pharmacy's economics depend on a single wholesaler relationship, would ease the concentration side of the problem.   The goal is not to dismantle a system that genuinely works. It is to keep its efficiency while removing the opacity that lets a highly concentrated market operate unwatched.   None of this makes the wholesaler a villain, and that is precisely why it deserves more attention, not less.   The loudest fights in drug pricing happen over the biggest, most visible numbers. The wholesaler's business runs on the quiet ones, the generic acquisition costs and off-invoice discounts that no benchmark captures and no hearing subpoenas.   Until we insist on seeing those numbers, the debate will keep aiming its outrage a few feet to the left of where the money actually moves. Joey Mattingly, PharmD, MBA, PhD Associate Professor and Vice Chair of Research Department of Pharmacotherapy University of Utah College of Pharmacy August 19: Health Care Price Transparency: Policy, Practice, and Impact Join this event featuring a discussion on price transparency policies and their impact on the health care industry with Christopher Whaley from Brown University.   The NHE Projections Through 2034: Growth Assumptions, Policy Consequences Richard Frank and Sherry Glied   Administration Releases Medicare Drug Price Negotiation Program Proposed Rule For 2029 Kristi Martin and Rachel Sachs Why Healthcare Costs Are Rising in America: The $9 Trillion Outlook for 2025 and Beyond w/ Michael Chernew   About Health Affairs Publishing   Health Affairs Publishing delivers rigorous, nonpartisan research and analysis to improve health and health care. For over 40 years, we’ve turned complex health policy research into clear insights that guide decision makers toward effective solutions.   Sign up for all of our newsletters.   Copyright © Health Affairs Publishing, LLC   Privacy Policy   Health Affairs Publishing, 1101 Connecticut Avenue, NW, Suite 500, Washington,DC,20036,United States,202-408-6801 Unsubscribe Manage Preferences |
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