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The Impact of Pharmaceutical Wholesalers on U.S. Drug Spending

A pharmacy manager retrieves a bottle of antibiotics from the shelf

A pharmacy manager at a Publix Supermarket in Miami retrieves a bottle of antibiotics from the shelf on Aug. 7, 2007. Consolidation in the pharmacy industry has resulted in large chains being able to negotiate lower generic drug prices with wholesalers. Photo: Joe Raedle via Getty Images

A pharmacy manager at a Publix Supermarket in Miami retrieves a bottle of antibiotics from the shelf on Aug. 7, 2007. Consolidation in the pharmacy industry has resulted in large chains being able to negotiate lower generic drug prices with wholesalers. Photo: Joe Raedle via Getty Images

  • U.S. policymakers looking to increase the affordability and accessibility of prescription drugs should attend to the role of wholesalers — intermediaries that distribute the majority of drugs

  • New research finds wholesalers’ actions in the prescription drug market influence prices, competition, and availability

  • U.S. policymakers looking to increase the affordability and accessibility of prescription drugs should attend to the role of wholesalers — intermediaries that distribute the majority of drugs

  • New research finds wholesalers’ actions in the prescription drug market influence prices, competition, and availability


  • Issue: Pharmaceutical wholesalers are a critical part of the drug supply chain and distribute most prescription drugs in the United States. In addition to buying and selling brand-name and generic drugs, wholesalers offer a wide range of services to manufacturers, pharmacies, and providers. Understanding how wholesalers’ business practices affect drug pricing and access can help U.S. policymakers as they consider how to increase the affordability of prescription drugs.
  • Goal: Identify and summarize aspects of the pharmaceutical wholesaler market with the greatest implications for pharmaceutical prices, spending, and access.
  • Methods: Literature scan of articles in peer-reviewed journals, government reports, and newspapers, supplemented by interviews with experts from academia, the wholesaler industry, and other sectors in the drug supply chain.
  • Key Findings: The wholesaler industry influences the purchase and distribution of prescription drugs in four key areas: setting generic drug prices, leveraging list price increases, competing in specialty drug distribution, and mitigating or exacerbating drug shortages. An understanding of wholesalers’ broad impact would inform policymakers’ efforts to reform pharmaceutical payment practices, reduce drug spending, and ease drug supply shortages.


Wholesalers purchase drugs from manufacturers, store those drugs, and then sell and distribute them to chain pharmacies, independent pharmacies, hospitals, clinics, nursing homes, and mail-order pharmacies. About 92 percent of prescription drugs in the United States are distributed through wholesalers, with three — AmerisourceBergen, Cardinal Health, and McKesson Corporation — accounting for more than 90 percent of wholesale drug distribution in the United States.1

As intermediaries, wholesalers have received little attention from policymakers, yet they play an important and lucrative role in the supply chain. In 2016, wholesalers reportedly retained $18 billion in revenue, or about 4 percent of retained revenue across the U.S. pharmaceutical sector (Exhibit 1).


Wholesaler business practices impact which drugs are ultimately distributed to patients. Wholesalers compete with each other for contracts with providers and pharmacies and derive their primary revenues from generic drugs. They also earn revenue in ways that are not transparent or obvious to policymakers, such as through “forward-buying,” a practice that involves purchasing extra inventory at today’s prices so they can sell at higher prices in the future.

Wholesalers’ Roles in the Prescription Drug Market

Brand-Name Drugs

For each drug, manufacturers set a list price, known as the wholesale acquisition cost (WAC). Wholesalers purchase drugs from brand-name manufacturers at WAC minus a negotiated discount, which is kept confidential. As illustrated in Exhibit 2, wholesalers then also sell brand-name drugs to pharmacies at WAC minus a negotiated discount, which is also kept confidential. In most branded-drug markets, wholesalers act as price-takers, often selling at the same discount off WAC that they buy at, such as WAC minus 5 percent. In branded-drug markets in which wholesalers have little influence over price, as may be the case with limited-distribution drugs, they may derive some revenue from selling at a higher price than they purchased, such as buying at WAC minus 5 percent and selling at WAC minus 3 percent.2

The difference between what wholesalers pay for brand-name drugs and what they charge pharmacies can represent a major source of revenue for wholesalers, although it remains a very small fraction of overall brand-name drug prices and spending.


Generic Drugs

Wholesalers play a more active role in the distribution and pricing of generic drugs. Generic drug manufacturers compete with each other for contracts with the three big wholesalers, which can put wholesalers in the position of being price-setters and market-makers for generic drugs. If generic manufacturers do not secure contracts with one of the big wholesalers, they can be effectively excluded from the market, giving wholesalers important leverage in generic price negotiations.3

In some cases, wholesalers have even acquired their own sources of generic production via vertical integration.4 In other cases, they may engage in preferred contracting with generic drug manufacturers. Wholesalers may guarantee distribution of a specified volume of generic drugs for the manufacturer in exchange for the manufacturer selling at lower prices to the wholesaler. The wholesaler then sells generics at marked-up prices to cover the cost of their operations.

Wholesalers may increase generic sales by offering discounts to pharmacies that purchase a specified volume of generic drugs. Experts report overall generic markups in the range of 10 percent to 15 percent, although confidential contracts make it difficult to verify the accuracy of these estimates or determine the exact levels at which wholesalers are able to mark up specific drugs.5

Even though wholesalers mark up generic prices by a larger percentage than they do for brand prices (where they are price-takers, as described above), they derive greater revenue per unit from the latter. For example, a 15 percent markup on the average generic price of $30 for a month supply amounts to average generic wholesaler revenue of $4.56. In comparison, a 2 percent markup on the average brand price of $566 per month supply amounts to $11.33 in brand-name drug revenue for wholesalers.6 However, because generics comprise 90 percent of retail prescriptions, wholesalers make more money from generics than brands.7

Wholesalers Benefit from Price Increases for All Drugs

Most generic drugs in the U.S. are extremely inexpensive, although there are some corners of the market in which lack of competition allows generic manufacturers to raise prices substantially. One review of generic drug prices in Medicaid found that for about 6 percent of products, there was a price hike of greater than 100 percent in 2017.8 In such relatively rare circumstances, wholesalers would benefit if they bought before the price hike and were able to charge the new, higher price.

Wholesalers also derive revenue from brand drug price increases by “forward buying,” the practice of building an inventory of drugs that were purchased at old, lower prices and waiting to sell until manufacturers increase prices. In 2020, manufacturers increased prices for 860 drugs by an average of 5 percent.9 In these cases, even small percentage price increases on expensive brand-name drugs may result in substantial revenue for wholesalers. Forward-buying was estimated to account for 40 percent of wholesalers’ revenues from 2002 to 2004.10 More recent reports suggest that in the past five years, wholesalers have gained less revenue from forward-buying, because manufacturers slowed rates of some list price increases.11

Wholesalers Are Diversifying Their Business

Despite some generic drug price spikes, generic drug reimbursement has been decreasing overall in the past decade. Generic retail prices in the U.S. now average 84 percent of those in other high-income countries.12 Consolidation in the pharmacy industry has resulted in large chains being able to negotiate lower generic drug prices with wholesalers.13 Although this may represent increased purchasing efficiency for payers and patients, it puts financial pressure on institutions that have historically relied on generic drug margins to remain profitable, such as independent pharmacies and wholesalers.14

Increased scrutiny on generic drug price increases among policymakers may further squeeze wholesalers’ margins. In the face of growing political pressure, some manufacturers have pledged to not raise list prices,15 which would further reduce wholesalers’ revenue growth. A proposal to limit price increases to inflation starting in 2023 was a central part of the Build Back Better Act’s drug pricing reform framework considered by Congress in 2021. Under this legislation, manufacturers would be required to pay back price increases that exceed the rate of inflation in the form of rebates to Medicare. The House version of the bill would apply these inflationary rebates to both brand-name and generic drugs, although the Senate version exempted generic drugs from these requirements.

To diversify their business lines, generate additional sources of revenue, and provide value-added services to their customers, wholesalers have developed a variety of other services over the past two decades (see box).

Drug Wholesaler Services in the U.S.

  • Pharmacy services administrative organizations, group-purchasing organizations that negotiate discounts with pharmaceutical benefit managers on behalf of chain and independent pharmacies
  • Drug distribution data provided to manufacturers and pharmacies
  • Drug repackaging of large volumes of generic drugs into smaller quantities, often sold to providers
  • Buy-back programs that facilitate manufacturer buy-backs of nearly expired drugs from pharmacies
  • Just-in-time deliveries that give pharmacies flexibility in inventory management
  • Medical products and equipment, along with software ordering platforms
  • Information technology platforms that facilitate interoperability of data exchange and digital solutions across software programs

Source: McKesson Health Solutions, “McKesson Health Solutions Introduces the Intelligence Hub,” press release, Sept. 19, 2016.

Wholesalers Are Entering the Specialty Drug Market

Payers increasingly handle so-called specialty drugs — prescription medications that are particularly expensive or require complicated handling — differently from other brand-name drugs. Although specialty drugs comprise a small share of the drug market by volume, they account for a large share of pharmaceutical spending. In 2019, 4.9 percent of commercially insured patients took specialty drugs, but these drugs were responsible for about half the drug spend that year.16

AmerisourceBergen, Cardinal Health, and McKesson have acquired specialty drug distributors to increase their share of the specialty drug market, and specialty drugs now account for more than 30 percent of their revenue, a result of the high prices for many specialty drugs.17 Despite these acquisitions, one recent trend in the specialty drug market is for manufacturers to engage in limited distribution channels by contracting directly with select pharmacies to manage their drugs or by sourcing their drugs through smaller specialty drug distributors. This has resulted in more drugs bypassing traditional wholesaler distribution channels (8% in 2017), with specialty drugs comprising most of these cases.18 The practice of bypassing traditional distribution channels for specialty drugs may result in lower competition between wholesalers and larger wholesaler markups on specialty drug list prices.

Wholesalers Can Improve or Worsen Drug Shortages

One area of interest to policymakers has been wholesalers’ roles in exacerbating or alleviating drug shortages. In 2021, more than 100 drugs were put on the FDA’s drug shortage list.19 The reasons behind such shortages are multifaceted: they include generic drug companies exiting the market, as well as shocks to the supply chain when a manufacturer has a quality control problem. But some wholesaler practices also contribute to drug shortages. For example, inventory for just-in-time deliveries can be vulnerable to supply chain shocks. Contract arrangements under which wholesalers purchase all of a drug’s supply from a sole manufacturer also may leave wholesalers vulnerable to manufacturing disruptions.

Drug shortages can then drive higher costs. For example, in cases where large wholesalers have a shortage of specific generic drugs at their supply centers, smaller, “gray” wholesalers may sell their inventory of these drugs at a higher price, increasing prescription drug costs.20

Wholesalers also can prevent and address possible drug shortages through management systems that predict shortages, track existing shortages, and recommend drug alternatives until the shortage is resolved.21 When COVID-19 lockdowns spiked demand for some drugs by as much as 50 percent,22 wholesalers responded strategically by partially filling orders in lower-demand areas to meet increased demand in other areas. While there were shortages for selected drugs used in intensive care units and ventilation, big distributors mostly were able to leverage their national networks to prevent distribution disruptions.

Wholesalers also were able to shift distribution across channels to meet new demand, such as from in-person pharmacies to mail-order pharmacies. Demand for mail-order drugs in the last week of March 2020 grew 21 percent from the previous year.23

Implications for Spending and Future Wholesaler Practices

Because wholesalers’ revenue is tied to list prices, as discussed earlier, they have little incentive to lower total supply chain costs for pharmacies, payers, and patients. Despite recent reports of triple-digit price increases for certain drugs, increased public scrutiny on pharmaceutical price increases has slowed the average rate of list price increases.24 While this has the potential to improve drug purchasing efficiency for payers, it threatens wholesalers’ margins.

Wholesalers have adapted to these changes by diversifying their businesses. Further decreases in generic drug reimbursement rates and continued slowing of drug list price increases could lead the wholesaler industry to further change its business practices. For example, instead of basing wholesaler charges to providers and pharmacies on list prices, they could be structured as a fixed fee per prescription drug unit or per wholesaler service.25

A fixed fee per prescription drug unit could function similarly to the way Medicaid reimburses pharmacies for drugs, where reimbursement includes the acquisition cost of the drug and a dispensing fee to cover the cost of the pharmacy’s operations or, in this case, the cost of the wholesaler’s operations. In addition to being predictable, such a mechanism would result in a more efficient distribution chain for payers and patients.26 It also could increase transparency in the distribution chain, as wholesalers would need to make drug acquisition costs public, or at least transparent to pharmacies and providers.


The wholesaler industry is a vital part of the pharmaceutical market in the United States. Like other areas of the health care system, wholesalers have undergone vertical and horizontal integration. They act as price-takers in the distribution of brand-name drugs but play a more active role in establishing the price of generic drugs.

More powerful chain pharmacies, increased competition from specialty drug distributors, and public scrutiny of drug price increases are squeezing the margins of wholesalers. Wholesalers have found ways to adapt and evolve in the changing health care system by diversifying their business lines, helping to ensure stable supply chains, and playing a critical role in vaccine distribution during the COVID-19 pandemic.

The views presented herein do not represent those of the federal government.


The author thanks Aaron S. Kesselheim, M.D., J.D., M.P.H., and Stephen W. Schondelmeyer, Pharm.D., Ph.D., for helpful comments on earlier versions of this brief.

  1. Deloitte and Healthcare Distribution Alliance, The Role of Distributors in the U.S. Health Care Industry (Deloitte and HDA, 2019).
  2. Adam J. Fein, “Building a New Drug Wholesaler Compensation Model: What Happens as Brand Inflation Slows?Drug Channels (blog), July 24, 2018.
  3. Chain pharmacies have largely moved away from purchasing directly from manufacturers, preferring to purchase the majority of their drugs from wholesalers. See Deloitte and HDA, Role of Distributors, 2019, chapters 1–2.
  4. Henry J. Kaiser Family Foundation, Follow the Pill: Understanding the U.S. Commercial Pharmaceutical Supply Chain (KFF, Feb. 2005).
  5. Specifically, the experts’ roles at the time of the study were a professor of pharmaceutical economics who is a leading expert in pharmaceutical wholesaler pricing, a vice president of a pharmacy services administrative organization and group purchasing organization, a former health policy analyst at a large wholesaler, an executive director of a state independent pharmacist association, and a former vice president of a pharmaceutical benefit manager.
  6. Stephen W. Schondelmeyer and Leigh Purvis, Trends in Retail Prices of Prescription Drugs Widely Used by Older Americans: 2017 Year-End Update (AARP Public Policy Institute, June 2019).
  7. IQVIA Institute, Medicine Use and Spending in the U.S.: A Review of 2018 and Outlook to 2023 (IQVIA, May 2019).
  8. Aayan N.Patel, Aaron S. Kesselheim, and Benjamin N. Rome, “Frequency of Generic Drug Price Spikes and Impact on Medicaid Spending,” Health Affairs 40, no. 5 (May 2021): 779–85.
  9. Michael Erman and Carl O’Donnell, “Drugmakers to Hike Prices for 2021 as Pandemic, Political Pressure Put Revenues at Risk,” Reuters, Dec. 31, 2020.
  10. Adam J. Fein, Drive the Right Supply Chain Behaviors (Harvard Business School Publishing, Aug. 2005).
  11. Adam J. Fein, “What McKesson’s Profit Warning Means for Manufacturers and Pharmacies,” Drug Channels (blog), Oct. 31, 2016.
  12. Andrew W. Mulcahy et al., International Prescription Drug Price Comparisons: Current Empirical Estimates and Comparisons with Previous Studies (RAND Corporation, 2021).
  13. Elizabeth Seeley and Surya Singh, Competition, Consolidation, and Evolution in the Pharmacy Market: Implications for Efforts to Contain Drug Prices and Spending (Commonwealth Fund, Aug. 2021); and Adam J. Fein, “AmerisourceBergen Charts the Profit Headwinds Facing Drug Wholesalers,” Drug Channels (blog), May 19, 2016.
  14. Seeley and Singh, Competition, Consolidation, 2021; and Carly Helfand, “AmerisourceBergen Sees End in Sight for Industrywide Generic Woes,” FiercePharma, Nov. 3, 2017.
  15. Fein, “Building a New Drug Wholesaler,” 2018; and Ed Silverman, “Wholesale Drug Prices — and Net Prices — Keep Falling for Most Drugs,” STAT, June 4, 2020.
  16. Seeley and Singh, Competition, Consolidation, 2021.
  17. AmerisourceBergen, “AmerisourceBergen to Acquire H.D. Smith,” press release, Nov. 20, 2017; and Deloitte and HDA, Role of Distributors, 2019. In 2018, AmerisourceBergen acquired H.D. Smith for $815 million. H.D. Smith was the largest privately owned wholesaler in the country and had both retail and specialty pharmacy customers. McKesson also has positioned itself as a lead distributor of oncology drugs, acquiring U.S. Oncology in 2010 and Vantage Oncology and Biologics in 2016.
  18. Deloitte and HDA, Role of Distributors, 2019.
  19. U.S. Food and Drug Administration, “FDA Drug Shortages” n.d.
  20. Benjamin J. Davies, Thomas J. Hwang, and Aaron S. Kesselheim, “Ensuring Access to Injectable Generic Drugs — The Case of Intravesical BCG for Bladder Cancer,” New England Journal of Medicine 376, no. 15 (Apr. 13, 2017): 1401–3.
  21. Adam Rubenfire, “Surviving Drug Shortages by Eliminating the Middlemen,” Modern Healthcare, Mar. 9, 2016.
  22. Rebecca Willumson “Fierce Pharma Sits Down with AmerisourceBergen and HDA,” Fierce Pharma (video), Jan. 7, 2021.
  23. Jared S. Hopkins, “Mail-Order Drug Delivery Rises During Coronavirus Lockdowns,” Wall Street Journal, May 12, 2020.
  24. U.S. House of Representatives Committee on Oversight and Reform, Drug Pricing Investigation: Majority Staff Report (U.S. House of Representatives, Committee on Oversight and Reform, Dec. 2021); Institute for Clinical and Economic Review, “ICER Identifies Most Significant 2020 U.S. Drug-Price Hikes Not Supported by New Clinical Evidence,” press release, ICER, Nov. 16, 2021; and Deloitte and HDA, Role of Distributors, 2019.
  25. Deloitte and HDA, Role of Distributors, 2019; and Healthcare Distribution Alliance, “Re: Request for Information on HHS Blueprint to Lower Drug Prices and Reduce Out-of-Pocket Costs (Docket ID: CMS-2018-0075),” letter to Secretary of Health and Human Services Alex Azar, July 16, 2018.
  26. HDA, “Re: Request for Information,” 2018; and Fein, Drive the Right Supply, 2005.

Publication Details



Elizabeth Seeley, Health Policy Consultant; Adjunct Lecturer on Health Policy and Management, Department of Health Policy and Management, Harvard T.H. Chan School of Public Health

[email protected]


Elizabeth Seeley, The Impact of Pharmaceutical Wholesalers on U.S. Drug Spending (Commonwealth Fund, July 2022).