Prescription Drug Supply Chains

An Overview of Stakeholders and Relationships

by Andrew W. Mulcahy, Vishnupriya Kareddy

This Article

RAND Health Quarterly, 2022; 9(3):7

Abstract

The authors describe the stakeholders involved in prescription drug supply chains and the flows of products, payments, and information between stakeholders. Many stakeholders and steps are involved in the life cycle of a prescription drug as it moves from chemical synthesis and formulation through dispensing or administration to patients. The specific steps involved in prescription drug supply chains often differ depending on the type of drug, the channel of distribution, and the patient's source of prescription drug coverage. Although the authors present a typical supply chain for retail pharmacy drugs, they also highlight the important supply chain distinctions for specific distribution channels and for specific types of drugs. Disparate sources exist describing each component of the supply chain, but, to the authors’ knowledge, this study is the first to compile them to facilitate understanding of their interdependence and complexity. The typical stakeholders, relationships, and financial incentives in prescription drug supply chains vary depending on the characteristics of a drug and how it reaches patients. Even within a specific type of drug and a particular distribution channel, differences in business practices complicate a universal description of drug supply chains. There are four common core components of drug supply chains: manufacturing, distribution, coverage and payment, and prescribing and demand. Although prescription drugs are generally available to dispense when prescribed in the United States, there are important exceptions that warrant further investigation. The ability of policymakers to identify, assess, and respond to shortages and disruptions in supply chains is hampered by incomplete data.

For more information, see RAND RR-A328-1 at https://www.rand.org/pubs/research_reports/RRA328-1.html

Full Text

Patients, policymakers, researchers, reporters, and others often refer to prescription drugs collectively. All prescription drugs dispensed in the United States are used to treat or prevent disease and are regulated by the U.S. Food and Drug Administration (FDA). Beyond these similarities, there are key differences in how specific drugs are manufactured, distributed, dispensed to patients, and paid for. Relatedly, different stakeholders and economic incentives come into play depending on the category of drug, the distribution channel, and the patient population in question.

Understanding differences in supply chains across types of drugs and distribution channels is increasingly important in ongoing policy discussion and debate around approaches to address high drug prices, ensure optimal investment in drug research and development, and secure supplies of drugs needed to address the coronavirus disease 2019 (COVID-19) pandemic and other public health emergencies. Policy solutions that recognize and address differences in supply chains between categories of drugs and distribution channels are more likely to achieve these goals than those that do not.

This study provides an overview of prescription drug supply chains, first describing typical stakeholders and flows of information, product, and payment between stakeholders, and then detailing deviations from the typical case for different categories of drugs and distribution channels. We intend for the study to be a reference for those interested in the prescription drug industry and pharmaceutical policy and economics.

Approach

We collected information via a literature review, a stakeholder-focused environmental scan, and eight phone conversations with stakeholders of different types. We conducted a total of eight phone conversations with representatives from groups representing drug manufacturers, distributors, group purchasing organizations (GPOs), hospitals, pharmacies, and pharmacy benefit managers (PBMs).

Findings

We found that the typical stakeholders, relationships, and financial incentives involved in prescription drug supply chains vary depending on the characteristics of a drug and how it reaches patients. Even within a specific type of drug and a particular distribution channel, differences in business practices complicate a universal description of drug supply chains. Despite this complexity and variation, we identified four common core components of drug supply chains across all cases: manufacturing, distribution, coverage and payment, and prescribing and demand.

See Figure 1 for an illustration of a typical supply chain for brand-name drugs dispensed via retail pharmacies. In brief, a market authorization holder has FDA approval to sell a given prescription drug. Key steps in manufacturing, including formulation, packaging, and labeling, can be either in house or under contract. These steps rely on many different inputs, including active pharmaceutical ingredients and glass vials, which are often sourced globally and sometimes have applications outside pharmaceutical manufacturing. Finished drug products often reach pharmacies and other points of dispensing via a handful of national distributors, but there are many other distribution models. In general, payers and their PBMs seek more direct control over the route drugs take to get to patients for more expensive drugs.

There are complex flows of information and payments between payers, pharmacy benefit managers, patients, drug manufacturers, and sometimes providers, all of which can vary considerably depending on the drug, patient, and distribution channel. Several large retail pharmacy chains and groups negotiating on behalf of independent pharmacies negotiate both with PBMs and with distributors. For drugs dispensed in hospitals and physician offices, GPOs negotiate prices and other contractual terms on behalf of providers.

Figure 1. Typical Supply Chain for Brand-Name Drugs Dispensed Through Retail Pharmacies

Typical Supply Chain for Brand-Name Drugs Dispensed Through Retail Pharmacies

NOTES: c. = circa; DIR = direct and indirect remuneration; WAC = wholesale acquisition cost. Arrows denote relationships involving the flow of product (black arrows), information or negotiation (yellow arrows), and payments (green dashed arrows).

Discussion

Our analysis highlights the complexity of prescription drug supply chains and the important variation in stakeholders and relationships across different categories of drugs, distribution channels, and patient subgroups. As is often the case in U.S. health policy, discussion and proposals must recognize and address these differences rather than apply a one-size-fits-all approach; otherwise, the risk of unanticipated consequences is substantial.

Our analysis excluded supply chains for several categories of drugs, including vaccines, that warrant separate consideration and analysis. Our analysis also excluded narrow but important distribution channels, such as home health and long-term care facilities, that could also be the target of future study. Furthermore, we recommend further analysis on margins for different stakeholders (including study of variation in margins across products and firms), in-depth analysis of drug shortages related to supply chain issues, and the effects of horizontal and vertical integration on supply chains. Finally, given the pace of change in the prescription drug industry, including new arrangements and adaptations in response to the COVID-19 pandemic, we expect the need to revisit this overview of prescription drug supply chains in the future.

This research was funded by the U.S. Department of Health and Human Services and carried out within the Payment, Cost, and Coverage Program in RAND Health Care.

RAND Health Quarterly is produced by the RAND Corporation. ISSN 2162-8254.