Pharma Manufacturers Say Supply Chain Stakeholders Now Getting a Bigger Cut

Pharmaceutical companies are retaining a smaller share of the prescription drug spend than is typically reported by outside agencies, according to a new report conducted by the Berkeley Research Group (BRG) and commissioned by industry trade group PhRMA. The study concludes that the share of gross drug expenditures realized by brand manufacturers has declined since 2013 (from 41% in 2013 to 39% in 2015). Meanwhile, the share realized by all the other non-manufacturer entities, such as participants in the supply chain, has increased, say report authors.

Increases in drug list prices have been offset by increases in retrospective rebates and discounts that manufacturers granted to other industry stakeholders, the report claims. Historical calculations of gross drug spend (such as those that are presented in IMS Health and similar reports) do not take rebates into account, so they are misleading, according to BRG. BRG says that payers are increasingly demanding higher rebates so that a product remains on a formulary, contributing to outgoing funds. The growth of the 340B drug discount program for hospitals, as well as increases in mandatory rebates in Medicaid, are also contributing to pharma’s lower returns. In 2015, manufacturers retained less than half (47%) of total United States spending on prescription drugs, cites the BRG report.

PhRMA's President and CEO Stephen J. Ubl implied in a company press release that the other stakeholders in the supply chain are to blame for increasing costs to patients, and the discounts and rebates that manufacturers award to those in the supply chain should be passed down to patients. Ubl commented in the release, “The study begs an important question: Are we doing enough to ensure the growing amount of rebates and discounts flow to the patient?”

BioPharm International spoke to one of the BRG study authors, Aaron Vandervelde, to gain a bit of insight into how the data were calculated for the study and how information on manufacturer rebates-which is typically not public information-was collected.

Methodology

BioPharm: How were these data calculated (i.e., did the sample size ‘n’ include distribution to both specialty pharmacies and commercial pharmacies)?
Vandervelde: The analysis was done comprehensively for the entire market (i.e., we did not use a sample). We started with IMS data and then categorized drugs into four buckets: retail brand, retail generic, non-retail brand, and non-retail generic. We then applied a category-specific reimbursement formula to each of the four categories to determine total initial gross drug expenditures made by health plans and patients. We then allocated total gross drug expenditures across the supply chain based on various data, industry reports, and government publications available to us.

BioPharm: I know the operational costs from a supply chain perspective are typically higher with specialty pharmacies because of the additional costs associated with special handling (cold chain, special storage, etc.). How do the costs of distribution play into your report calculations?
Vandervelde: The analysis did not consider operational costs at all. The goal was to understand the volume of total initial gross drug expenditures and the allocation of those expenditures throughout the supply chain. Each individual stakeholder has its own unique cost structure and that was not accounted for in this analysis.

Secret rebates

BioPharm: The report acknowledges that rebate info is not public knowledge and as a result, is not always disclosed. If this is the case, how did you calculate that 20% of gross drug expenditures are transferred from manufacturers to other entities via rebates?
Vandervelde: Commercial rebate information is not publicly available but aggregated rebate information for Medicare Part D is made available by The Centers for Medicare & Medicaid (CMS). We utilized that data to determine the rebate percentage in Part D and then applied the same percentage to the commercial channel.

BioPharm: The report excludes ‘fees and costs in the pharmaceutical supply chain, such as dispensing fees paid to pharmacies, manufacturer payments to specialty pharmacies, and claims administration fees paid to PBMs [pharmacy benefit managers] by health plans and employer groups.’ How do you think the overall calculations would have changed if these fees had been included?
Vandervelde: We excluded any fees or costs that were not tied directly to the gross, net, or list price of a drug. So, for example, a rebate is included because rebates are structured as a percentage of the list price, but we excluded dispensing fees because those transactional costs are not tied to a pharmacy’s ingredient costs. If we were to include these costs, it would have departed from the original goal of the paper, which was to allocate the initial gross drug expenditures-and transactional costs are not part of the initial gross drug expenditure. It is unclear to us how or whether it would have changed the findings of the report. My suspicion is that inclusion of all of these transactional costs would not have meaningfully changed the results.

BioPharm: The analysis says it does not take supply chain operating expenses into account that could ‘further reduce margins and realized net revenue.’ Does this mean the ‘final cut’ that supply chain stakeholders take in the end could be much smaller than reported if operating expenses were taken into account?
Vandervelde: From a whole dollars perspective, yes, but from a percentage perspective, not necessarily. Each entity in the supply chain (including manufacturers) has various operating costs that were not included in the analysis. If we had attempted to include all of these, the percentage retained by each individual stakeholder may have stayed the same because all stakeholders’ numbers are being reduced at the same time.

BioPharm: There are differences in payer reimbursement schemes for branded vs. generic drugs. So, why are branded and generic manufacturers included in the same pie charts (Figure 2 and Figure 3 in the BRG report)? Wouldn’t it be more illustrative to present a graph of total drug expenditures for brand manufacturers and a separate graph for generic-drug manufacturers to show how these two types of manufacturers have different returns in the pharmacy space?
Vandervelde: I understand the point and we did show a brand-only table in the Appendix of the report. But, it is important to include brand and generic manufacturers together in the same pie chart for a different reason. Historical IMS figures-which most media outlets rely on to report US drug spending-reflect the acquisition cost to pharmacies. Generics discount directly to pharmacies because they are competing with each other for space on the pharmacy’s shelf. Manufacturers, however, rarely discount to pharmacies. Instead they provide retrospective rebates to health plans because they are competing for a position on the health plan’s formulary. As a result, their ‘acquisition cost’ from the pharmacy’s perspective is much higher and the IMS reported figures make it appear that brand manufacturers are a much bigger percentage of ‘US drug spend’ than they really are. For example, IMS reports indicate that brand manufacturers account for approximately 75% of US drug spend, whereas our analysis, which is a more accurate apples-to-apples comparison, reveals that brand manufacturers actually account for approximately 67% of total net drug spend retained by either a generic or brand manufacturer (see Figure 3 in the report).

Sources: PhRMA, BRG