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.