The High Cost of Access: Fact or Fiction?

Five myths about the value of the pharmaceutical distributor

In the United States, our expectations of access to pharmaceutical-led care are driven by experience. We have better access to medication here than anywhere in the world—access that is enabled by a complex pharmaceutical supply chain. For a long time, the biggest player in ensuring the supply chain is secure and efficient went largely unnoticed. But as drug prices reach unheard-of highs, more and more misconceptions about the role of the drug distributor are shedding light on companies like AmerisourceBergen—companies that are actually essential to healthcare delivery.

Myth:

Wholesalers make money by selling product to pharmacies and physician practices at marked-up prices.

Fact:

Pharmaceutical distributors purchase product from manufacturers at list price, and we sell it to customers at list price.

Pharmaceutical distributors actually make money by charging manufacturers a percentage of their product’s wholesale acquisition cost (WAC), or list price, for distribution services. Even though our distribution infrastructure investments are significant and position us to ship more than three million medication units per day, this fee covers a broad range of services beyond logistics. Those services include:

  • Contract, order and pricing management
  • Aggregated data on pricing, orders and inventory across all classes of trade and products
  • Activities and investments that protect the supply chain against fraud that harms patients
  • Customer service and sales outreach to tens of thousands of healthcare organizations
  • Strategic investments to grow key markets

And perhaps most importantly, distributors take on financial risk by taking title to and carrying inventory. We also extend credit for the products we buy from manufacturers and sell to customers. Distributors infuse critical cash into manufacturers’ areas of core competency (like R&D) and ensure critical products are on pharmacy shelves for the customers who need them.


"Distributors take title
to truckloads of inventory. In turn, [we] carry the economic risk of selling manufacturers' products and the financial risk of collecting payment. A change to this model should recognize the likelihood of reduced valuations for our manufacturer partners when they extend revenue cycles."

AKIN ODUTOLA, PRESIDENT, STRATEGIC GLOBAL SOURCING

Myth:

Distributors profit by keeping the "spread" between a product's WAC and net price (a drug's price after rebates and other discounts).

Fact:

Rebate arrangements are generally made between manufacturers and pharmacy benefit managers (PBMs), not manufacturers and distributors.

In terms of how our revenue is generated, distributors generally operate on low margins from the fee-for-service agreements described above. Our compensation structure is directly tied to the fees manufacturers pay us for the services we render and the financial risk we assume.

The compensation distributors receive is not driven by the "spread."

Myth:

Distributors benefit from—and encourage—high drug prices.

Fact:

Wholesalers' fees are in direct correlation to the amount of risk they take on for a product.




To put the value of taking on financial risk for costly specialty products in perspective, consider some examples. When you take out a mortgage for a home purchase, you end up paying more dollars in interest when the purchase price of the home is higher (even if the interest rate is the same). This compensates the lender for the financial risk it takes on in extending a home loan to you. Similarly, the average interest rate on a credit card hovers around 15 percent.1 The cost of financing is regularly tied to risk.

How do proposed contracting models challenge efficiency and value? How does the current model ensure distributors are compensated for the amount of risk they take on?

Myth:

Fees for distribution services add unnecessary cost to the supply chain.

Fact:

Not only do distributors operate the backbone of the healthcare supply chain, we also enable cost-effective medication access and deliver quantifiable benefits to providers so that they can deliver quality care.

Without distributors, costs to the entire healthcare system would go up:

  • Distributors save providers 6.5% in financing costs for specialty drugs2
  • The specialty drug supply chain without distributors would generate incremental distribution costs of $8.6 billion3
  • A subset of distributors’ value-added services for physician practices (e.g., reimbursement support) exceeds $1 billion per year4

Myth:

Manufacturers can save time and money by cutting out the "middle man" with direct distribution models.

Fact:

Direct manufacture-to-healthcare-provider distribution models often disrupt customer workflows and create costly inefficiencies.

Ultimately, direct models make what is already a highly efficient model—and the order process for our customers—far more complex. Our customers are ordering hundreds of drugs from us on a daily basis and driving the efficiency of that workflow is core to what a distributor like AmerisourceBergen does. When a manufacturer chooses to go direct, they create model that is outside of that workflow, and it can interfere with the day-to-day activity of a health system, for example. That can result in cumbersome business practices whereby the customer has to chase down product or seek additional credit terms, in turn delaying patient access to therapy.
The short- and long-term impact of direct distribution models.

Direct
models make what is already a highly efficient model far more complex. 

Learn more about how we drive access to the most efficient form of healthcare.


1. Credit Card Rates Hit an 18-Year High. CBS Money Watch. 14 June 2018. Accessed 17 August 2018. Available online at https://www.cbsnews.com/news/credit-card-rates-hit-an-18-year-high/
2. The Role of Distributors in the U.S. Specialty Pharmaceuticals Value Chain. Center for Healthcare Supply Chain Research. December 2015. Accessed August 2018. Available online at https://www.healthcaredistribution.org/resources/role-of-the-specialty-distributor-in-the-pharmaceutical-value-chain
3. Ibid.
4. Ibid.