The pharmaceuticals market in the U.S. is very complex. On the distribution side, physical drug products such as a pill or vial leave the manufacturer when it is purchased by a distributor. Distributors then sell and ship the products to retail pharmacies where patients access their prescription medications. On the financing side, since the 1980s, pharmaceutical benefit managers (PBMs) have evolved to provide services to help payers like insurance companies manage their drug benefits. PBMs developed as employers added outpatient prescription drug coverage to their health insurance plans. By 2015, industry consolidation resulted in three PBMs accounting for almost 75 percent of the PBM market – CVS Caremark, Express Scripts, and United Health’s Optum.
Distributors play an intermediary role in product distribution by purchasing from manufacturers, providing warehousing services, and shipping products to retailers. This reduces the number of transactions that would be required if the retailers purchased directly from the manufacturer. Distributors handle about 91 percent of overall pharmaceutical sales revenues. Like PBMs, the distributors have consolidated and currently three companies account for 85 percent of the market share – AmerisourceBergen, Cardinal Health, and McKesson. In 2015, the estimated combined revenues for these three companies was $378 billion. Also in 2015, an estimated 4.4 billion prescription drugs were distributed in the U.S. Of the approximately 60,000 pharmacies in the U.S., 38,000 were chain stores and 22,000 independent pharmacies. Retail pharmacies can be divided into three major categories: chain pharmacies and mass merchants with pharmacies (i.e. Costco), independent pharmacies, and mail-order pharmacies. The 15 largest retailers, including CVS, Walgreens, Express Scripts, and Walmart, generated more than $320 billion in 2015. Of the total figure generated, $167 billion represented retail revenue, $103 billion mail-order sales, and $48 billion from independent pharmacies.
As far as prescription benefits for patients, most public and private health insurance plans provide this coverage. In 2015, 44 percent of prescription drug spending was from private insurance, 30 percent from Medicare, 10 percent from Medicaid, and about 14 percent from out-of-pocket payments. Medicare covers pharmaceutical products separately depending on whether or not they were directly administered by a physician. Part B covers physician-given drugs and Part D covers oral and self-administered medications. Although Part D plans generally have “open” formularies (i.e. few drugs are excluded from the plan), 98 percent have very aggressive five-tier benefit structures. By law, Medicare cannot negotiate with manufacturers and distributors to set drug prices (like many of our laws, that doesn’t make a lot of sense to me). As to Medicare funding, Part A hospital insurance is paid for by Medicare payroll taxes. Parts B and D are paid for by general tax revenues, beneficiary premium payments, and some support from states. In 2015, Medicare required $250 billion in general tax revenues and that figure is estimated to rise to $542 billion by 2025.
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