The Economics Behind Patient Access

By Akin Odutola |

An executive Q&A with Akin Odutola, President, Strategic Global Sourcing, on how distributors are compensated for the value they provide to the healthcare supply chain.

Executive Q&A

The economics of access

It’s no secret that the drug prices some patients pay have reached a critical point. Understanding where pharmaceutical distributors fit into the value chain is essential as manufacturers and healthcare providers alike evaluate how to deliver cost-effective pharmaceutical care.
Q: Can you describe the role pharmaceutical distributors play in the price a patient ultimately pays for a prescription drug?

Odutola: There is no doubt that affordability is impacting many patients’ ability to access medications. And it's important that the healthcare system works to alleviate that financial burden. We're encouraged by what we see happening in the marketplace with payers introducing or utilizing point of sale rebates to reduce the impact of the gross-to-net “spread” on patient out-of-pocket costs. While distributors do not play a role in creating the gross-to-net spread, we serve a vital role in the U.S. healthcare supply chain in providing secure, efficient access to pharmaceuticals from all manufacturers to all healthcare provider customers.

Distributors buy product from manufacturers at list price and sell to customers at list price. We generally do not mark up product. There's a misperception that we make money from buying low and selling high. That's factually inaccurate. We actually offer discounts off of list price when customers meet certain contract terms.

As a result, manufacturers benefit greatly by our business model. Patients also benefit. We are often the first step in making products cheaper in the marketplace as a result of our discounts.

Q: Why is the current fee-for-service (FFS) model the most efficient in terms of enabling patient access?

Odutola: The North American pharmaceutical distribution model is still the most efficient model in the world. We have returned 100 cents on the dollar, net of fees, to manufacturers and have done so since the transition to FFS agreements. In addition, we have met or exceeded service levels for product availability in excess of 97 percent. This means 97 percent of the time we are able to ensure product is available at a pharmacy within 24 hours. I don’t know any other industry or any other distribution model anywhere else in the world that can match that degree of service. AmerisourceBergen continues to invest in ensuring that we have the most efficient supply chain and that we provide unmatched access to the manufacturer’s product for healthcare provider customers in the locations where they serve patients needing pharmaceutical therapy. We believe that this is the best model in North America, the best model for our manufacturer partners and, frankly, the best model for patients.

The current fee-for-service model is the most effective way for distributors to derive compensation for the value we provide to the supply chain—for the financial risk distributors take on in facilitating access to traditional brands or high-cost specialty products. The concept is very much like a mortgage; the higher the value of the mortgage, the more you pay in interest. The financial cost for borrowing someone else's capital is tied to the amount of money borrowed.

Let’s consider an example where distributors were to get paid a fee per unit as opposed to a percentage of list price. If a manufacturer develops a $100 product that they want to pay distributors $5 per unit for every unit sold, that's five percent. Now, let’s say that manufacturer develops a different and novel $1 million product and they still want to pay distributors $5 per unit. That means we're on the hook for a $1 million receivable from a customer. There's no rational player—a bank, an individual investor or, frankly, the manufacturer themselves—that would take on that level of risk for $5.

Delivery of pharmaceutical care is part of a complex system, and distributors provide a complex and valuable service. However, if there are to be changes in the model, as a leader in pharmaceutical distribution, we will be at the forefront of discussions with manufacturers to collaboratively design a model where we can continue to provide unmatched access and ensure we are appropriately compensated for the value of our services.  

"We believe that this is the best model in North America, the best model for our manufacturer partners and, frankly, the best model for patients."

Q: Why are proposed new models less beneficial for manufacturers?

Odutola: As in any industry, stakeholders are always looking at different economic models.  Some are now calling for fixed distribution fees. The fact is, this model already exists today and, in certain cases, can be the right model to satisfy a manufacturer’s needs. This type of service is offered by third party logistics (3PL) providers. In fact, ICS, an AmerisourceBergen company, is a 3PL provider specializing in the pharmaceutical industry. However, if applied to the entire supply chain, direct distribution models would result in a much less efficient system and ultimately impact patient access to critical medications. For manufacturers interested in exploring direct distribution through a 3PL provider, there are a number of important considerations. 

First, and perhaps most importantly, customers do not want to receive product from multiple sources. They prefer to receive product from a single distributor under their prime vendor agreement.  This ensures consistency in their workflow and optimizes the value of their agreement with their distribution partner.

A second important factor is that, under most 3PL models, the manufacturer retains title to the product until the point of utilization by a patient. It’s not until that point that the manufacturer can recognize the sale as revenue. This changes the cash conversion cycle dynamics for a manufacturer from what they typically experience with their distribution partners. Today, distributors like AmerisourceBergen take title to truckloads of inventory. In turn, distributors carry the economic risk of selling manufacturers' products and the financial risk of collecting payment. A change to this model should recognize the likelihood of reduced valuations for our manufacturer partners when they extend revenue cycles and increase financial risk factors.

A third and final consideration is the ready access to a customer marketplace that distributors provide. When a new manufacturer is looking to launch a new product into the North American market, they know they have access to an established network of customers. Consider the recent launch and growth of some of the novel hepatitis C virus (HCV) products. Those products reached tens of thousands of patients and grew into multibillion dollar products within the span of a year. Distributors enabled immediate access to these expensive products by supporting the economic investment required to drive such rapid growth. In effect, we enable a ready marketplace by being the largest provider of “short-term financing” to pharmacies and other dispensers through our prime vendor agreements.  We ensure healthcare provider customers can gain access to these novel products, and we facilitate the most efficient payment mechanism, both of which offer tremendous value to manufacturers.

Q: More importantly, can you describe how distribution models impact patients? How does a distributor facilitate the economics of ensuring patient access?

Odutola: For pharmacies and physicians, our current model means keeping minimal inventory in a tight reimbursement environment balanced against having reliable product supply when a patient needs it. The ability for product to be where it needs to be when a patient needs it is predicated on the fact that we take the financial risk of holding inventory.

Let’s revisit the launch of the life-saving novel HCV therapies as an example again. Imagine a pharmacist, an independent pharmacist, or even a specialty pharmacy that has ten patients show up looking for these high-cost, curative products. That's anywhere from $400,000 to $800,000, depending on the specific products prescribed, that the pharmacy would need to come up with to pay for that product. What's the likelihood a manufacturer would extend that much credit to an independent pharmacy—or to any private company with no public P&L? I think the probability they would get funded is quite low. Without distributors enabling access to short-term credit until insurance reimbursement kicks in, there could be fewer patients getting access to much-needed medication. This, in turn, means lower product sales for manufacturers and arguably higher healthcare costs from the limited access to medication. That's where we come in. We supply the capital to hold product in inventory and extend credit to pharmacies, enabling optimal and timely patient access to prescriptions.

Q: As scrutiny of the pharmaceutical industry continues, how can manufacturers and distributors work together to prioritize patient access?

Odutola: Our manufacturer partners are certainly feeling a lot of pressure about pharmaceutical pricing. And to some degree, that absolutely has resulted in them applying pressure to us. Our approach is—and has always been—to work with our manufacturer partners and come up with solutions together.

I think we should celebrate our business. What we do is really important; it's really valuable. Frankly, at some point, we're all going to be consumers of the healthcare channel and access models that we've all built. It's incumbent on us today to make sure that we are thoughtful about what we put in place and to ensure it is sustainable for patients and all stakeholders involved.

About the Author

Akin Odutola

President, Strategic Global Sourcing

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