By Steve Ariens, P.D. Pharmacist
I started working in a local community pharmacy in the summer of 1967 as a pharmacy student.
“Way back then”, there was no Medicare, Medicaid, Insurance drug cards, prior authorizations or Controlled Substance Act. The whole community medication distribution system was very simple and straight forward. involving a drug wholesaler, pharmacy and physician.
The average prescription price was $4 and change and the wholesale price of medications was fairly static and there were few generics. The market place was dominated by independent pharmacies – some 40,000 to 50,000 independent pharmacies. The chain store industry “giants” were measured with hundreds of stores, unlike the tens of thousands today.
The turn of the decade marked the turn of how community pharmacies operated. The UAW contract in the fall of 1969 with the BIG THREE car manufacturers, International Harvester, and John Deere, brought us the infamous “drug card” and contract with insurers/PBM (prescription benefit managers) on a “take it or leave it basis”…”if you don’t accept our contract and what we will pay you, we will get our insured – your customers – to go to one of your competitors.”
During the 70’s we had states passing mandatory generic substitution, the Medicaid system implemented MAC (Maximum Allowable Cost) pricing and MANDATORY rebates (kickbacks) from the brand name manufacturers and the growth of the PBM’s share of paying for prescriptions at the retail level.
During the 80’s we had continued growth of generic utilization and per-cent of prescription paid for by the PBM’s and pharmacies started putting in computers to help handle all the extra paperwork associated with billing the PBM’s
During the 90’s we had most insurance companies demutualized. Prior to this most insurance companies were “mutually owned” meaning that they were not-for-profit companies owned by their policies holders. Demutualizing meant that these previously not-for-profit insurance companies now were publicly traded stocks with a FOR PROFIT motive, stock holders and the stock market to “keep happy”.
We entered the new century with medication distribution system amassing many new middlemen, each with their own cost overhead and motive to make a profit. Generic utilization continued to increase along with the per-cent of prescription paid for by PBM’s.
During the first decade of this century, the PBM’s – with their ever-growing share of the prescription market place – they exerted their “buying power” to extract discounts/rebates/kickback against; particularly, the brand name manufacturers. They even went as far as telling a particular manufacturer that they would “sway” their drug to a higher market share to whoever gave them the highest “give back”.
They got so brazen that they would send letters to doctors, telling them that they could save the system money, if they could switch their patient from Drug A to Drug B – because they were considered “therapeutically equivalent”…
No one knows what or how much these “give backs” were because there is no transparency with the PBM’s, but when they prefer a brand name drug over a generic, it must be substantial.
In the last decade, there has been such a consolidation of generic companies in chasing the ability to sell their products at a lower cost, that we have reached a point where there are only 1-2 companies producing a particular generic or line of generics. The “bums rush” to get less and less expensive generics has created less competition and higher prices.
Today, we have brand name medications, accounting for 10%-15% of all prescriptions and those medications have to cover all the cost of R&D (research & development) for new drugs. Something that nearly 100% of all prescriptions bore 50 years ago. New drugs use to cost a few hundred million of dollars to get to market, until today – it can cost 2-3 billion to get a new medication to market. Generic manufacturers do no R&D, they just produce medication that are no longer protected by a patent.
No one really knows how many different middlemen there are in our prescription medication distribution system, but I have identified at least three different categories of profit driven middlemen.
It was recently stated by the CEO of a pharmaceutical manufacturer that they only get 45% of the retail price. I know what the average gross profit is of wholesalers and pharmacies is, and as a percentage, it is HALF of what it was 50 yrs ago. So, it would appear that the middlemen who are supposed to be saving the system money, are consuming some 25%-30% of the retail price – to cover their overhead cost and generate a profit.
Steve Ariens is a pharmacy advocate, blogger, and National Public Relations Director for The Pharmacy Alliance.