Today’s Managing Health Care Costs Number is 15.5%
Distribution of Payment for a Drug
Pharmacy costs are escalating rapidly, and we often focus on the brand name pharmaceutical companies. Many of these companies have rapidly inflated their prices, often on drugs that are close to losing their patent protection, and where any past research investment has long ago been paid off.
Julie Appleby of Kaiser Health News put together an infographic last week that explains how many dollars are siphoned off at each stage of drug distribution, using a hypothetical brand name drug with a “list” wholesale price of $250. I’ve been noodling with this for a number of days to figure out, in her example, who really makes what money when this prescription is filled?
First of all – on the “sources” side, the employer is paying $182 and the patient is paying $25 – so the total amount spent on the drug is $207. The list price “wholesale acquisition cost, or WAC is $250 and the AWP is $300 (AWP stands for “average wholesale price,” or as Appleby says “ain’t what’s paid”.)
Now- how is that $207 split up?
The Pharmacy Benefit Manager (likely CVS Caremark, Express Scripts, or Optum Rx) is paid $15.50, the wholesaler is paid $2.50, and the pharmacy is paid $14. This leaves $175 for the pharmaceutical company. The total amount taken by intermediaries is $32, or 15.5% of the total paid by the employer and the patient.
This isn’t necessarily high – remember that this 15% is not pure profit. Pharmacies have to keep the lights on, PBMs have to contract with the pharmaceutical companies and manage claims, and wholesalers have to get the drug to the pharmacy. We often pay more than 15% of the cost of acquisition of a product to middlemen –whether they are auto dealers or grocery stores.
But as drug prices increase, the absolute amount paid to intermediaries has continued to increase, even while the resource costs expended by each intermediary has not increased at such a rapid clip. Appleby’s graphic shows us at least one reason why intermediaries are not exactly bummed out at rapid drug price increases.
Use this URL to download a PDF of this graphic. Source: Kaiser Health News
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