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What is wrong with the pharmaceutical pricing model?
December 7, 2008
I was speaking this week with an industry insider about pharmaceutical and health care packaging and the topic of the pricing model for these products came up. I think that there is a fundamental flaw in this supply chain that is affecting healthcare for all of us.
Let's take a typical consumer product supply chain and lets be generous with the various steps of it. Suppose that a manufacturer produces a discretionary consumer product, like some sort of snack food, for a cost of $1.00. Although often times this product may go directly to a retailer, let's say for the sake of argument that the manufacturer sells this product to a wholesaler for $2.00. Most would be very happy with this, and out of that $1.00 margin, the manufacturer would fund his R&D, some capital expenditures, marketing and sales expenses.
Now let's give the wholesaler a decent living and say that he sells the product to a retailer for $3.00. Since we also want the retailer to send his kids to college, the retailer can sell it for $4.50. That's a 4.5 times markup on the original cost. In some industries, that is a lot of markup. In others, maybe it's not so much. But order of magnitude, as we physicists say, it is in the ballpark.
Now let's compare that to a pharmaceutical. We know that pharmaceutical companies demand and deserve a significant markup to fund the cost of R&D. So, a product that costs $1.00 to make will sell to a wholesaler for $10. That gives the pharmaceutical company an extra $8 to fund research. But let's now follow this pharmaceutical through the rest of the supply chain.
The wholesaler sells the $10 item to a retailer for $20. The retailer sells the item to the insurance company of the patient for $40. On the snack food, the end customer, who is buying essentially a luxury item, pays a 450% multiple for the $1 item. On the pharmaceutical, the end customer, who is buying a necessity, pays a 4000% multiple.
We already agreed that the pharmaceutical company needs the extra $8 of markup to fund R&D, but why is the rest of the supply chain entitled to a $28 premium to move a $1 product from wholesaler to customer? We'd be better off to pay $4.50 for the $1.00 pharmaceutical and have a 200% tax to fund R&D. As consumers, we'd save $26.50 on our prescription, the pharmaceutical company would get just as much to spend on R&D, there would be $1 available to fund the tax collection process, and the supply chain would have to perform as efficiently as it does for other consumer products. Maybe this is how the big retailers are able to supply medicines for $4.00 per month.
OK, I didn't account for the fact that pharmacists have to count out the pills. But couldn't the pills come prepackaged with an accurate count? A good scale and bagger can weigh out and package candy with an accuracy of less than plus or minus one piece. Am I missing something here?
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Comments
Dear Mr. Campbell
I appreciate the fact that there is a disproportionate and unjustified cost of pharmaceuticals caused by wholesalers. However, your last statement appears to compare the practice of pharmacy with packaging candy. How can you compare prescription medications with candy?
I am both an industrial scientist and a practicing pharmacist and I see the pharmaceutical business from R&D to delivery of the drug to the patient. I can assure you that the person dispensing prescription medications had better know what they are doing. The number of products, dosage forms and potency of modern pharmaceuticals are complex and require an educated person to oversee their distribution to the public. Moreover, someone needs to monitor and keep track of a patient's drug therapy, especially when multiple doctors treat a patient for several ailments, a common occurrence these days. You apparantly don't see any value in this.
A good pharmacist is a tremendous asset to their community. When properly consulted, I have seen good pharmacists save consumers money by providing expert advice on OTC drug use and selection and provide advice on numerous medical conditions. Too bad more people don't recognize or take advantage of our expertise. Greed has created a business enviroment that often minimizes our expertise.
Joe Rubino, PhD, RPh
and Keith's reply.........
Joe;
Thanks for you note. Point well taken, and I didn't mean to reduce the importance of a pharmacist as part of the overall health care system. On the other hand, I watch my pharmacist counting pills into a bottle rather than doing the kind of value-added work that you describe. I would think that many prescriptions fall into the category of 30 pills per month of some standardized dosage, and the pharmacist should be able to receive them prepackaged and ready to dispense, and yes, packaged by the same type of automation systems that package candy with 100% accuracy. Wouldn't pharmacists be more accessible to us and be providing even more valuable services if that were the case?
Regards;
Keith S. Campbell
Posted by: Keith Campbell on December 8, 2008
Mr. Campbell,
Your blog post was forwarded to me by a client. FYI, your figures are highly inaccurate for the drug channel, where margins are much smaller than other industries.
On average, a brand drug manufacturer gets about 85% to 90% of the retail sales price of a pharmaceutical. A relatively small percentage of that amount gets paid to the payer in the form of a rebate.
Average drug wholesaler gross margins for drug distribution are about 3% and average retail pharmacy gross margins are about 25%. Keep in mind that these averages blend brand and generic drugs -- the latter are generally more profitable. For data on pharmacy margins under Part D, see my post Pharmacy Profits & Part D.
Regards,
Adam J. Fein
http://www.DrugChannels.net
Posted by: Adam Fein on December 8, 2008
Mr Campbell,
As a pharmacist for over 40 years and knowing the industry
fairly well, I have some comments. Not on pharmaceutical
pricing,but on the packaging of
prescriptions at the pharmacies
in the USA. It is an antiquated
system and needs to come to the 21st century. There is no good reason to count pills on a counting tray today. Most countries in the world, even
Mexico, dispense medications
in tamper proof, sterile
packaging. There are many
reasons and some obstacles to
change in our system. Tradition. Physician control
of prescriptions as to quantities, etc. Insurance
control as to number of tablets dispensed. And on and on.
The amount of unnecessary waste and errors in the pharmacies from
our antiquated system is silly.
Another area not talked of is
the possible unsanitary conditions of pharmacies counting out medications. I have seen tech's touching medications
while counting and there is
no provision I am aware to be
certain of a tech's good restroom habits. I have opened containers to pour on
to counting trays, and a $4-5
tablet has hid in the cotton
and accidentally fell to the floor. What to do? Loose the
$ or pretend it fell on napkin
and dispense it. Another issue. Containers of medications come with the
expiration date and lot number
stamped on the bottle. In our
repackaging system this information is not normally
transferred to the prescription label. It is silly not to have this information on your private medications.
How to change it? Very hard.
I would like to film tech's
counting pills, while touching them with their fingers and put on
YOUTUBE or maybe get a federal
judge to force the industry to
have expiration dates and
lot numbers on patients medications. why not?
MRT
Posted by: Melvin Taylor on January 12, 2009
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| About Keith Campbell |
| Leaders learn from the past while
looking to the future - and bring both to bear on the here
and now. This is the philosophy that has steered Keith Campbell's
30+ years in manufacturing. It has worked for him in operations,
maintenance, engineering, R&D, education, consulting and
professional organizations--and now he's putting it to work
for you--taking you to the edge of his thoughts on packaging
operations. |
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