Prescription Drug Supply Chains

An Overview of Stakeholders and Relationships

by Andrew W. Mulcahy, Vishnupriya Kareddy

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Research Questions

  1. What stakeholders and relationships are involved in prescription drug supply chains, including those dispensed through retail pharmacies and those dispensed through other channels (outpatient facilities, physician offices, and inpatient hospitals)?
  2. For each channel, what financial incentives are in play?

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 report 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.

Key Findings

  • Financial incentives drive the structure of prescription drug supply chains and the behavior of stakeholders.
  • Approximately 80 percent of spending but only 10 percent of prescriptions are for brand-name drugs. The remaining 20 percent of spending and 90 percent of prescriptions are primarily from generic drugs.
  • Manufacturing includes sourcing of active pharmaceutical ingredients, formulation, and packaging.
  • The next step is distribution. Three distributors—AmerisourceBergen, Cardinal Health, and McKesson—account for nearly all the U.S. market. Customers include large pharmacy chains, independent pharmacies, physician offices, and hospital systems.
  • Pharmacies have substantial leeway in setting retail prices. Pharmacies receive payments from pharmacy benefit managers (PBMs) and patients. PBMs assemble networks of pharmacies that agree to the PBM's payment terms in exchange for an increase in prescription volume from PBM patients.
  • The three largest PBMs—Express Scripts, CVS/Caremark, and OptumRx—cover three-fourths of U.S. prescription claims.
  • Payments for prescriptions covered by insurance involve four components. (1) Patients pay some of the cost at the point of dispensing. (2) The PBM pays the pharmacy the balance of the amount owed, as determined by their contract. (3) Discounts negotiated between the market authorization holder (the authorized seller of the drug) and PBMs are paid as rebates from the market authorization holder to PBMs. (4) PBMs are reimbursed for their payments to pharmacies and pass most or all of the rebates to payers (health insurers, large employers, or government programs), resulting in net prices to payers that are often lower than the amounts paid to pharmacies.

Table of Contents

  • Chapter One

    Introduction and Approach

  • Chapter Two

    Retail Pharmacy Supply Chain Stakeholders and Relationships

  • Chapter Three

    Outpatient Facility, Inpatient Hospital, and Physician Office Supply Chains

  • Chapter Four

    Discussion and Conclusion

  • Appendix

    Pricing Term Glossary

Research conducted by

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.

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