Generic Wholesale Distributors
Florentina Holcombe
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).
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.
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
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.
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
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).
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 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
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
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.
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In the Request for Information (RFI), the FTC and HHS are seeking public comment regarding market concentration among large health care GPOs and drug wholesalers, as well as information detailing their contracting practices. The joint RFI seeks to understand how both GPOs and drug wholesalers impact the overall generic pharmaceutical market, including how both entities may influence the pricing and availability of pharmaceutical drugs. The joint RFI is asking these questions to help uncover the root causes and potential solutions to drug shortages.
The joint FTC and HHS RFI released today is requesting public input via comments, documents, and data regarding several topics with respect to generic drug markets and the potential causes of generic drug shortages, including:
The Federal Trade Commission develops policy initiatives on issues that affect competition, consumers, and the U.S. economy. The FTC will never demand money, make threats, tell you to transfer money, or promise you a prize. Follow the FTC on social media, read consumer alerts and the business blog, and sign up to get the latest FTC news and alerts.
WASHINGTON -- The Federal Trade Commission (FTC) and HHS jointly issued a request for information on the practices of "opaque middlemen" in the pharmaceutical supply chain and what role they play in ongoing generic shortages, FTC Chair Lina Khan announced on Wednesday.
"Today, I'm pleased to announce that we are launching an inquiry into how group purchasing organizations [GPOs] and drug wholesalers may be contributing to chronic shortages of generic medications used to treat everything from asthma, to fevers, to cancer," said Khan during the American Medical Association's (AMA) National Advocacy Conference.
"You all have seen first-hand how these persistent and acute drug shortages can, for very sick patients, literally mean the difference between life and death," she said, citing the example of a father who can't afford an inhaler for his daughter with asthma and a cancer patient forced to skip treatments due to drug shortages.
In March 2023, Akorn Operating Company ceased production of albuterol. Fifteen different cancer drugs were in shortage last year as a result of manufacturing and supply chain problems, according to the White House.