The Healthcare Breakdown No. 048 – Breaking down the Drug Trade Ecosystem (and not the fun kind). It’s Part II of the PBM series!

Brought to you by Forward Slash / Health

What we’re breaking down: The wild west of how drugs flow and are paid for in the healthcare system

Why it matters: Oh, I don’t know, maybe it’s the $621B we spend on this every year

Read time: Longer than you were able to watch the debate (8 minutes for real though)

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I don’t know about you but few things have me fired up this summer like that Shaboozey song and Pharmacy Benefits Managers (PBM). They both have the propensity to make you want to throw caution to the wind, throw on some cowboy boots, get in a pickup truck and just drive. Far, far away.

And in today’s episode we are going to unpack the pharmacy ecosystem. How the goods move, who is in bed with who, and who is paying.

Spoiler, you ultimately pay, but that’s a different topic.

But FIRST! Our sponsor for this series. The good people at Forward Slash / Health. The company that makes your clinical practice run like a boss and changes it’s ads like every two days. They’re cool though.

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This is a follow up to our last episode in which we introduced you to the PBM and all the fun things they do.

In that episode, I shared this little gem.

Now, this graphic doesn’t even fully cover all the goods and detail, but it’s close. Here’s one more sourced by the Guru of all things drug flow and PBMs, Adam Fein at Drug Channels.

What is about to ensue is a whole lot of splainin about the players and relationships in this hot mess.

We are going to go playa by playa and then bring it all back home. Hopefully it will make more sense or less sense depending on whether you are more of a blue pill kinda gal or red pill.

1. Manufacturer

I figured we could start at the source. Our friends at Eli Lilly, Novartis, Pfizer, Amgen, Teva, and the likes.

We are starting with the top flow. The Manufacturer has two customers in our little diagram and one major game.

Customer one is the wholesaler. As always we need as many intermediaries as possible in our world of specialization. Wholesalers buy the drugs from the manufacturer for distribution to pharmacies. It’s one of the simpler relationships here.

The manufacturer also has deals with the PBMs to get preferred placement on formularies. Essentially they pay to play through rebates and incentive payments. These are otherwise known as kickbacks. Sorry not sorry.

Lastly, manufacturers have these awesome programs and a topic for another day called Patient Assistance Programs. Essentially they give patients money that will go towards their deductible in order to cover the cost of the drug.

It’s great for patients because they get like $2K of their deductible knocked out. It’s bad overall because it’s a way for manufacturers to overcharge and get your health plan on the hook for the remaining $80K, when you may have opted for something equally effective but less expensive had the program not been in place.

Games.  

On to the next one!

2. Wholesaler

Still in the realm of simplicity, and an effective oligopoly, we have the wholesalers. There are three essentially.

McKesson, Cardinal, Amerisource Bergen.

You’re looking at 85% of the market. Naturally great things happen when so few entities control the supply of drugs. Lucky for us, they hardly make any money.

Margins are mighty slim in the distributor world and one of these lads may net $3.00 on a prescription. But, millions of three dollars certainly adds up.

So these guys buy the drugs directly from the manufacturer and then sell them to the pharmacy at some minor markup. Or they sell it for less but get rebates and back end payments from the manufacturer.

Fun right?

They will also charge fees to manufacturers so they know where the drugs are going. And there are other fees they make up and may charge to pharmacies for their services outside of the drug costs. But at the end of the day the margins are still slim.

Take a peek:

Small margin. Big dollars.

But let’s move on to the place where you can also buy a pint of ice cream, a pack of cigarettes, and a Bud. Go figure.

3. Pharmacy

We’re going to dive a little deeper here in another episode, because there is so much to unpack. But as the saying goes, the poo rolls downhill. And pharmacies are getting squeezed on both sides.

It’s especially hard for independent pharmacies. Mostly, because as with much of healthcare, they have to buy things at normal prices and then sell them, using a lot of high paid person power (hello pharmacists) at weird, random, way-discounted prices in which they have no say.

They also get locked into bananas contracts where they pay all kinds of fees if, for instance, a patient doesn’t have an 80%+ medication adherence. Like, how is Debbie’s pharmacy setup to help with patient engagement when almost no one can crack that code and the best thing we have is annoying text messages reminding you 17 times to show up to your doctor’s appointment.

Anyways, the pharmacy pays the wholesaler for drugs. Just like you would in high school. The main difference is they will usually do it based on a contract and negotiated rates by a Group Purchasing Organization (GPO). Yes, yet another entity that you have the pleasure of paying so you can get better pricing. And the GPO makes money on both sides of the coin, from the wholesaler and from the pharmacy.

Once the pharmacy has the meds, they charge you a copay, set by your health plan, and then get reimbursed by the PBM.

At face value it all seems so simple, but really, it’s not such a treat considering independent pharmacies are often losing money on dispensing drugs not to mention the clawbacks and additional fees they pay left and right to the PBMs. That $1.00 dispensing fee isn’t quite making up for it.

Somehow our pharmacists, wildly important and talented clinicians, have been reduced to pill container movers. An effective last mile distributor.

And it’s a bunch of B.S.

But like I said, we’ll unpack this a bit more in another issue.  

4. You

On to my and your favorite topic. You. The patient. The person who needs their statin because cheeseburgers taste better when you are staring down the possibility of heart disease. Living on the edge!

By the way, I take a statin, so it’s cool. We all do it.

Moving on. You go to the pharmacy, usually the closest one, where you grocery shop, bulk shop, or that CVS since Wallgreen’s is disappearing. You pay your copay and get your meds.

Pretty simple. You do also pay your monthly premiums, sometimes get copay assist, and have the rest of your health plan costs covered by your lack of salary increases since your employer is on the hook for so much of the ever-rising healthcare costs.

This is the part of the ecosystem we are all the most familiar with. Considering it’s us, after all.

5. Health Plan/Plan Sponsor

I am including health plan and plan sponsor in one, because for this unpacking session, it makes sense. The health plan is the well, plan. What gets paid, how much, who is allowed to do stuff. You know, the rules. And the plan sponsor is the money that pays for stuff.

But of course, pharmacy is complicated so plans outsource pharmacy benefits to managers. Aptly named, Pharmacy Benefits Managers. They control the purse strings.

And the health plan collects premiums, shares in some of the rebates when the PBM tells the truth, and pays out the money for the PBM to keep and sometimes distribute.

As you know, may insurers now have their own PBM, since they have been shown to be so lucrative. It makes sense in a lot of ways. Why do we need a sub-insurer to manage pharmacy and the main one to manage medical. Seems like the one company should be able to do both. And they do now. The issue is that PBMs provide a vehicle to generate outsized profits since they are held to different regulations.

That aside, in this ecosystem diatribe, the health plan/sponsor is making its money from premiums, trying to pay out as little as possible, gets a little cut back from the PBM, and pays for the stuff with your money.

6. Pharmacy Benefits Manager

Well, well, well. We meet again.

There is not too much to add here that you couldn’t read in the first installment of this riotous series.

I’ll just point out again that in both images, the PBM has the most arrows going in and out. They are in control of the drug trade because they are in control of the money flow.

The key is that while they control the flow, it’s not their money. It’s the plan sponsor’s money. Which is free to do with as they please. One of those things could be using a different, transparent PBM.

I know like 28 people you can talk to about that, by the way.

To put a bow on this little ditty, and since you come here to see numbers, here are some numbers based on this fun filled ecosystem…

This is just an example and adapted from the fine resources at Drug Channels.

The thing to notice here, is first, this is an illustrative example. Second, there are fees, calculations, and entities not fully represented here.

The takeaways are the PBM retaining a significant portion of profit relative to the pharmacy and that health plans are at the mercy of PBM opacity. It also shows some concepts we’ll be touching on in Part III, like spread pricing.

Welp, that’s all she wrote.

See you in the next one.