Originally published on Mar 13, 2019.
The Big 3 consolidated into the behemoths they are today through the 1990s and early 2000s. With so much volume being captured, the Big 3 gained the power to control the relationship they have with generic drug manufacturers. A few examples include:
Mystery Chargeback deductions (Shameless plug: Five Rivers RX provides Chargeback audits!);
And of course, Service Fees (described below)
McKesson, as the prime pharmaceutical supplier to the VA Healthcare System, sells at products to the Department of Veterans Affairs at Wholesale Acquisition Cost (WAC) LESS 8% to 10.14%. How can they sell below WAC?
In generic pharmaceuticals, as with all commoditized industries, money is made on the buy. And so, the Big 3 can take up to 18% of revenue through the collection of service fees (otherwise included in “cost”) and make money on the spread:
10% to 12% of purchases
2% cash discount
1% for central redistribution
50 to 75 basis points for controlled drugs
50 to 75 basis points for cold chain
50 to 100 basis points when keeping price increases
REMS $20K enrollment and $5K quarterly fees
(Shameless plug: if you are a manufacturer looking to get more favorable terms with wholesalers, please reach out – we can help!).
Branded and Specialty Drugs
Things change a little bit for branded (patented) and specialty products. For these products, the Brand companies retain better control of their supply chain and pay much less on a percentage basis (also likely due to the cost of the product to start with). Additionally, by circumventing the Big 3, specialty drug manufacturers can reduce their total fees to 3.5% to 6%, which directly benefits their bottom line.
Amazon & Service Fees
Amazon seller fees include account fees and referral fees. Account fees range from $0 to $39.99 per month, and referral fees range from 6% to 20% of a product’s selling price, with the average seller paying 15%.
By providing a direct to patient model, Amazon can take full advantage of buying from manufacturers directly (as many larger pharmacies already do!).
With the current service fees and margins on independent pharmacy transactions, Amazon can quite easily become a viable competitor in the space. Their logistical prowess (automated warehouses, internal air freight, spread of warehouses, forecasting and optimization technologies, etc.) could pose a true challenge to the existing market participants.
PillPack Technology and Consumer Love Versus PBMs
PillPack had a very public fight in 2016 with Express Scripts – as per their usual MO, Express Scripts abruptly terminated PillPack from its network because the pharmacy misrepresented itself as a retail pharmacy instead of a mail-order pharmacy. In a Medium blog post, founder TJ Parker stated his case:
“The only way that healthcare will ever get better in this country is by allowing new and innovative solutions to thrive. If we allow massive corporations to defend antiquated services through market manipulation and anti-competitive power, we all lose.”
PillPack took the fight with Express Scripts public, the only way they could; and in a few short weeks, the matter was put to rest because of the national outrage that followed.
PillPack & Independent Pharmacy
PillPack maintains pharmacies in Manchester (NH), Brooklyn (NY), Miami (FL), and Austin (TX). Additionally, it is an in-network pharmacy with all major pharmacy benefit managers, including the following: CVS Caremark, Express Scripts, Optum Rx, Prime Therapeutics, Humana Pharmacy Solutions, Cigna, Aetna, MedImpact, EnvisionRx, and CastiaRX. As part of these relationships, PillPack is also in network with most major Medicare Part D plans.
Although PillPack has technology, size, and reach on their side, their greatest asset is identical to independent pharmacies: patient trust and great service with a personal touch.
Based just outside of Philadelphia, Five Rivers RX provides actionable guidance and excellent administrative services with a focus on client care across Compliance, Commercial, and Quality solutions. Our mission is to improve the health and welfare of the American public by providing solutions and implementing best practices for companies in the pharmaceutical supply chain.