An often-overlooked aspect of this complex mechanism is the role of pharmaceutical distributors. It’s well known that pharmaceutical distributors are exceptional logistics partners. While navigating a highly complex regulatory environment, distributors supply hundreds of thousands of sites of care with medications every single day. What’s not as well understood is that distributors have been a driving force behind the pharmaceutical industry for years, enhancing access to medicines through the financial services they provide to both manufacturers and healthcare providers.
The financial services that distributors provide to manufacturers are part of fee-for-service arrangements. In these arrangements, distributors take ownership—or title - to a manufacturer’s product and then sell that product to pharmacies and other healthcare providers. When distributors take title, they become responsible for collecting payment from these provider customers. Distributors do this whether it’s a $10 pill or a $10,000 biologic. The compensation model for this arrangement is based on how global financial markets compensate risk.
The concept behind the fee-for-service model and a mortgage is the same; the more risk the lender assumes, the higher the monthly interest payment. Distributors’ fees are based on a percentage of list price. As list prices go up and the distributor pays more to acquire pharmaceutical products, the level of financial risk also increases. The fee-for-service model enables pharmaceutical distributors to be fairly compensated for this risk while operating lean profit margins. At AmerisourceBergen, for example, we operate at around 1 percent. This is lower than the transportation and logistics industry overall, which is approximately 6.5 percent as of the third quarter 2018.
It is important to note that distributors do not markup brand and specialty products. At AmerisourceBergen, we buy at manufacturer list price and we sell at manufacturer list price. We do not contribute to the gross-to-net spread of pharmaceutical products.
The fee-for-service model brings tremendous benefit to manufacturers, providers and patients. When distributors pay manufacturers upfront for their products, they get to realize that revenue right away and it allows them to focus their capital more efficiently on core functions such as research, drug development and commercialization. On the provider side, distributors help bridge the gap between dispense and reimbursement for providers by providing the short-term financing of pharmaceutical products. This creates a more efficient cash-flow system for these pharmacies and practices and allows them to apply more focus and resources to patient care.
Overall, distributors are often the first step in making traditional brands or high-cost specialty products less expensive since we can supply and deliver products more inexpensively and can maximize the access of pharmaceutical products. A study conducted by Booz & Co. found that healthcare costs would increase by nearly $42 billion per year if manufacturers were to take on the delivery of drugs directly to providers. Distributors also create other efficiencies in the marketplace. A recent study by PwC Strategy and The Center for Healthcare Supply Chain Research showed that distributors save providers 6.5% in financing costs for specialty drugs. It also showed that the specialty drug supply chain without distributors would generate incremental distribution costs of $8.6 billion.
Despite the efficiencies and benefits that exist with the distribution model today, it is impossible to neglect that significant challenges exist in our healthcare system. Patients across the country are struggling to afford medications, and drug pricing and benefit design are the subject of many news headlines. Solving these problems is going to take a new level of collaboration. Stakeholders across the supply chain will need to work together to provide more value and create solutions. While we believe in the model that exists today since it enables cost-effective access, we also believe in partnership. Manufacturers should seek creative conversations with their distribution partners and vice versa. Distributors are not just here to survive the changes happening in healthcare today, we are here to help shape what’s next and ensure our healthcare system can thrive for years to come.
President, Strategic Global Sourcing at AmerisourceBergen