Hailey Tran
Pharmaceutical wholesalers are a critical part of the drug supply chain, distributing most prescription drugs in the United States. They purchase drugs from manufacturers, store them, and then sell and distribute them to hospitals, clinics, pharmacies, and other sites of care. Wholesalers compete with each other for contracts with providers and pharmacies, and their business practices can impact drug pricing and access for patients. While most pharmaceutical products are ordered through wholesalers, hospitals may also purchase directly from manufacturers or compounding pharmacies. Understanding the pharmaceutical distribution models and the role of wholesalers is essential for healthcare professionals involved in procurement and distribution.
| Characteristics | Values |
|---|---|
| Who sells pharmaceuticals to hospitals and clinics | Pharmaceutical wholesalers, distributors, and manufacturers |
| How does it work | Wholesalers purchase medications from manufacturers and sell them to pharmacies, hospitals, and clinics |
| Benefits of wholesalers | Streamlined purchasing experience, reduced operational complexities, and support for compliance |
| Drawbacks of wholesalers | Lack of transparency in revenue generation, potential for higher drug prices |
| Examples of wholesalers | AmerisourceBergen, Cardinal Health, McKesson Corporation |
| Examples of manufacturers | Boehringer Ingelheim, AstraZeneca, Johnson & Johnson, Merck |
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What You'll Learn
Pharmaceutical wholesalers and their impact on drug spending
Pharmaceutical wholesalers play a critical role in the drug supply chain, distributing most prescription drugs in the United States. Wholesalers purchase drugs from manufacturers, store them, and then sell and distribute them to pharmacies, hospitals, and clinics. This traditional distribution model simplifies the procurement process for hospitals, as they can order from a single distributor instead of multiple manufacturers. About 92% of prescription drugs in the US are distributed through wholesalers, with three major players—AmerisourceBergen, Cardinal Health, and McKesson Corporation—controlling over 90% of the market.
Wholesalers have a significant impact on drug spending in several ways. Firstly, they set generic drug prices and compete in specialty drug distribution, influencing the purchase and distribution of prescription drugs. Wholesalers compete for contracts with providers and pharmacies, and their primary revenues come from generic drugs. They also engage in practices like "forward-buying," buying extra inventory at current prices to sell at higher prices later, which is not always transparent to policymakers. Additionally, wholesalers can mitigate or exacerbate drug shortages, further impacting drug spending.
The consolidation of the pharmacy industry has led to the emergence of chain and mass retail pharmacies, which can negotiate lower prices by bypassing the wholesaler markup. This can potentially reduce costs for the healthcare system and patients. However, the impact of market changes on competition, drug prices, and access to pharmacy services is still debated. While consolidation may increase efficiency, it is important to consider its effects on independent pharmacies and overall drug spending.
Specialty drugs, which account for a small volume of the drug market, represent a significant share of pharmaceutical spending. Wholesalers have been acquiring specialty drug distributors to increase their market share in this lucrative segment. While manufacturers have started engaging in limited distribution channels, bypassing traditional wholesalers, wholesalers still play a crucial role in the specialty drug market. Understanding the dynamics among pharmacy types and the impact of wholesalers is essential for policymakers aiming to reform pharmaceutical payment practices, reduce drug spending, and improve drug supply.
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Hospitals buying directly from manufacturers
In the United States, most prescription drugs are distributed through wholesalers, who purchase drugs from manufacturers, store them, and then sell and distribute them to hospitals, pharmacies, and clinics. However, there are times when hospitals purchase directly from a manufacturer or a 503A or 503B compounding pharmacy.
Traditional distribution channels, or acute care distribution, simplify the procurement process for hospitals. Distributors or wholesalers make the buying process more efficient for hospitals by allowing them to order from a single distributor instead of multiple manufacturers. This distribution model is commonly used for hospital pharmaceutical procurement.
On the other hand, specialty distribution caters to the unique needs of high-cost, complex medications. For example, specialty oncology distribution provides tailored solutions for physician clinics and hospitals. These distribution channels focus on a limited number of products and utilize their own distribution channels.
When hospitals purchase directly from manufacturers, they may have more opportunities to negotiate prices, especially when similar drugs are available from competing manufacturers. Manufacturers may offer discounts and rebates in exchange for their products being listed as the preferred option on formularies, which are lists of drugs that guide doctors' prescribing practices.
Overall, pharmaceutical distribution models aim to ensure that patients receive the drugs they need in a timely manner. Each patient setting may require a different distribution model, and hospitals may choose to buy directly from manufacturers or go through wholesalers depending on their specific needs and the nature of the medications required.
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Specialty distribution for clinics
The distribution of pharmaceuticals to hospitals and clinics is a critical aspect of the healthcare supply chain. While most pharmaceutical products are ordered through wholesalers, hospitals and clinics may also purchase directly from manufacturers or compounding pharmacies. This process is simplified by distributors or wholesalers, who act as intermediaries, buying from manufacturers and selling to hospitals and clinics, as well as pharmacies and other providers.
Specialty distribution is a key part of this process, catering to the unique needs of high-cost, complex, or rare medications. These medications often require special handling, such as refrigeration, and may be needed to treat chronic or rare diseases. Specialty distributors are often subsidiaries of full-line wholesalers, and they play a crucial role in ensuring that patients receive the right drugs when they need them.
Specialty oncology distribution, for example, provides tailored solutions for physician clinics. Drugs are purchased under a clinic license for use in a physician's office or infusion suite, either provider- or hospital-based. This distribution model focuses on a limited number of products, and distributors can break down package sizes to cater to the lower volume needs of physician practices.
The success of a specialty pharmaceutical relies on a well-constructed distribution channel. Specialty pharmaceuticals are often one-of-a-kind products developed for small patient populations, so the flow of product to patients is vital. Specialty distributors handle distribution to smaller specialty pharmacies and retail pharmacies, and they can offer services beyond those of a typical retail pharmacist.
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Traditional distribution channels
The traditional distribution model in the pharmaceutical industry relies on large, centralized wholesale distributors to manage the supply chain. This model is still the most efficient for a large percentage of products. In this model, pharmaceuticals are developed and produced at a manufacturing site, then transferred to wholesale distribution centers, transported to suppliers, and finally administered to patients.
Wholesalers purchase drugs from manufacturers, store them, and then sell and distribute them to chain pharmacies, independent pharmacies, hospitals, clinics, nursing homes, and mail-order pharmacies. About 92% of prescription drugs in the United States are distributed through wholesalers, with AmerisourceBergen, Cardinal Health, and McKesson Corporation accounting for over 90% of wholesale drug distribution in the country.
Wholesalers compete with each other for contracts with providers and pharmacies and derive their primary revenues from generic drugs. They also earn revenue through "forward-buying," a practice that involves purchasing extra inventory at today's prices to sell at higher prices in the future. For each drug, manufacturers set a list price known as the wholesale acquisition cost (WAC). Wholesalers then sell brand-name drugs to pharmacies at WAC minus a negotiated discount, which is kept confidential.
The traditional distribution model simplifies the procurement process for hospitals, allowing them to save time and resources by ordering from a single distributor instead of placing orders with numerous manufacturers. It also provides smaller package sizes and less frequent orders to cater to the lower volume needs of physician practices.
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The role of sales reps in the hospital-Big Pharma relationship
Pharmaceutical wholesalers are a critical part of the drug supply chain, distributing most prescription drugs in the United States. Wholesalers purchase drugs from manufacturers, store them, and then sell and distribute them to hospitals, clinics, pharmacies, and other buyers. While most pharmaceutical products are ordered through wholesalers, hospitals sometimes purchase directly from manufacturers or compounding pharmacies.
Sales representatives, or "detailers," employed by pharmaceutical companies, play a significant role in the hospital-Big Pharma relationship. They are tasked with marketing their company's products to physicians and other healthcare professionals with prescribing authority. Pharmaceutical companies spend billions of dollars annually on these marketing efforts, which include providing gifts, meals, travel, and other benefits to physicians.
These interactions between sales reps and healthcare professionals have been associated with changes in prescribing practices and increased prescription rates for the sponsor's medications. While some physicians argue that trying new drugs is part of a scientific or therapeutic process, these relationships have also raised concerns about conflicts of interest, undermining public trust, and increasing healthcare costs. Regulatory efforts, such as the Sunshine Act, have been implemented to increase transparency and address these concerns.
Hospitals, health systems, and corporate entities are becoming more appealing career paths for physicians, with around 70% of physicians now employed by these entities. This shift has implications for pharma sales efforts, as each entity has multiple stakeholders with varying goals and interests. While some hospitals and health systems restrict pharma reps' access, others still allow them, contributing to ongoing debates about the role and influence of sales reps in the hospital setting.
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Frequently asked questions
Pharmaceutical wholesalers sell medications to hospitals and clinics.
Pharmaceutical wholesalers are businesses that purchase medications in bulk from manufacturers and then sell them on to pharmacies, hospitals, and clinics.
Wholesalers provide a streamlined purchasing experience for their clients, including access to supplies and information. They also deliver products upon request, and ensure that all products meet regulatory standards.
AmerisourceBergen, Cardinal Health, and McKesson Corporation are the three largest wholesalers in the US, accounting for over 90% of wholesale drug distribution in the country.
Yes, there are times when hospitals purchase directly from a manufacturer or a compounding pharmacy. However, this is less common as it is more time-consuming and resource-intensive than purchasing from a single wholesaler.
