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Follow the Pill: Understanding the Prescription Drug Supply Chain

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Prescription drugs are dispensed to patients through a complex supply chain that involves a broad array of entities, contract arrangements, and payments. The following diagram outlines how a typical prescription drug may flow through the drug supply chain.

Note: This chart is specific to a standard retail pharmacy drug distribution and does not account for physician-administered drugs or other nuances for particular products or entities.

Drug Flow and Contracting /

  • Manufacturers produce drugs and manage the distribution from manufacturing facilities to wholesalers, and in some cases, directly to retail pharmacy chains, mail-order and specialty pharmacies, hospitals, clinics or other entities. A manufacturer contracts with wholesalers which can include provisions for bulk-purchasing discounts or discounts for immediate payment; however, these discounts are typically negotiated on a case-by-case basis. In addition, manufacturers pay wholesalers a service fee to manage inventory, financial transactions, distribution, and data processing.
  • Wholesalers purchase drugs from manufacturers and distribute to a variety of customers, including independent, chain, or mail-order pharmacies, hospitals, long-term care, and other medical facilities. Wholesalers may also specialize in selling certain products such as biologic products or to specific customers in addition to providing more specialized services. Wholesalers typically purchase drugs at wholesale acquisition cost (WAC), adjusted for any negotiated purchase discounts (e.g., WAC – 2%).
  • Pharmacies purchase drugs from wholesalers, and occasionally directly from manufacturers. After purchasing these drugs, pharmacies must safely store and dispense these drugs to patients. Pharmacies typically purchase drugs at WAC, adjusted for any purchase discounts (e.g., WAC – 1%). The negotiated percentage is often influenced by a pharmacy’s volume of purchases.

Patient Access and Payments /            

  • On behalf of health plans, pharmacy benefit managers (PBMs) negotiate rebates and other discounts with manufacturers and work closely with the health plans in designing formularies. A formulary is a list of drugs that are covered under the health plan with information on tier placement and coverage criteria that correspond with patient cost sharing for each drug. PBM-Manufacturer rebates are often negotiated as a percentage of the drug’s list price; however, rebates can also take other forms. For instance, they may include value- or volume-based rebates that are paid if certain predetermined thresholds are met. For drugs dispensed, PBMs submit rebate claims to manufacturers for retrospective rebate payments. In most instances, rebates or discounts are not reflected in the price or copay a patient pays at the pharmacy.
  • PBMs then pass on a portion of negotiated manufacturer rebates onto health plans. The amount of rebates passed through to the health plan can vary based on contract terms and there are differences across markets; however, there is typically near-full pass through of rebates in Part D. PBMs can also offer services like drug utilization review, disease management, and consultative services to assist plans with their benefit structure. In addition, PBMs may offer fee-based services to manufacturers such as rebate or program administration and, data collection.
  • Pharmacies contract with PBMs for inclusion in their pharmacy network and submit claims for reimbursement at a negotiated rate. The reimbursement rate is typically based on a discount percentage from average wholesale price plus a dispensing fee, minus any patient cost sharing collected. Pharmacy networks consist of pharmacies that have agreed to dispense prescription drugs and provide pharmacy services to a health plan’s enrollees under a set of specified terms and conditions, which can sometimes require pharmacy payment of certain fees such as network access fees PBMs use a point-of-sale system to link pharmacies in their networks and distribution centers to verify coverage, formulary restrictions, and patient cost sharing. This information can be used by PBMs for clinical and intervention programs.
  • For drugs prescribed, patients may be required to pay out-of-pocket (OOP) cost sharing at the pharmacy with health insurance, cost sharing can be in the form of a copayment or coinsurance, with amounts dependent on the tier placement of the drug, the drug’s list price, and/or the patient’s health plan benefit structure including deductibles and OOP maximums. For instance, a patient with a deductible applicable to prescription drugs may face the full cost of the drug prior to reaching the deductible threshold, and then would pay applicable copayments or coinsurance under the benefit. In some markets, patients may have an OOP maximum that limits their total OOP cost liability during the plan year. Alternatively, patients without health insurance would face the full cost of the drug at the pharmacy, based on the drug’s list price. Cost-sharing assistance programs may be available to offset cost exposure for some patients.

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