A primer on brand-name prescription drug reimbursement in the United States

Abstract

Branded prescription drug reimbursement in the United States is complex and comprises multiple transactions among the parties involved in the drug supply chain, including manufacturers, wholesalers, pharmacies, health care providers, health plans or insurers, pharmacy benefit managers, and patients. This primer provides an overview of the parties involved in the reimbursement of brand-name drugs under both the pharmacy and medical benefits of an insurance policy and the flow of products and payments among them.

Prescription drug spending in the United States grew from $30 billion in 1980 to $335 billion in 2018, and 80% of spending is on brand-name drugs.^1,2 Pharmaceutical spending and drug prices have been the focus of intense debate in recent years, which has brought attention to the complexity of the drug supply chain. This primer provides a high-level overview of the distribution and reimbursement of brand-name drugs (italicized words are defined in the Glossary) used in the outpatient setting and covered by health plans or insurers in the United States. The focus is on the parties involved and the flow of products and payments among them. The purchase of drug products outside of insurance and differences in drug reimbursement between private and public insurers are outside of the scope of this primer.

Participants in the Distribution and Reimbursement of Brand-Name Prescription Drugs

The distribution and reimbursement of brand-name prescription drugs in the United States is a complex enterprise comprising transactions among the multiple parties involved in drug manufacturing and distribution (manufacturers and wholesalers); provision of the drug product to patients (pharmacies and health care providers); reimbursement and payment under an insurance benefit (health plans or insurers and pharmacy benefit managers [PBMs]); and negotiation of purchasing and reimbursement rates among parties (group purchasing organizations and pharmacy services administrative organizations).

Manufacturers of brand-name pharmaceuticals research, develop, and bring new drug products to market. Once a drug is approved for commercialization in the United States by the US Food and Drug Administration, manufacturers serve as the source of the drug product.

Wholesalers act as distributors of drug products. Wholesalers purchase the drug product from manufacturers and distribute it to pharmacies and health care providers. Wholesalers serve as intermediaries, managing drug product inventory, warehousing, and the complex logistics of shipment of drug products to thousands of pharmacies and health care providers.

Pharmacies dispense drug products to patients, serving as the main outlet through which patients obtain self-administered prescription drugs (as opposed to medications administered by a health care provider). The primary types of pharmacies include retail, mail order, online, specialty, and institutional.

Health care providers administer drug products that need to be provided under the supervision of a health care professional, such as infusions and some types of injections. Additionally, health care providers prescribe self-administered medications, which are dispensed by pharmacies. Health care providers may practice independently in solo practices or as part of larger clinics or institutions. In the latter case, drug purchasing and billing are performed at the clinic or institution level.

Patients act as consumers of drug products. Patients seek care from health care providers and receive medications from pharmacies. When patients are covered under an insurance policy, they are often referred to as beneficiaries or members.

Health plans or insurers provide coverage for medical and pharmacy services to their members. Employers and members pay premiums for coverage, and public insurance programs (eg, Medicare) are partially funded with tax dollars. Drugs dispensed to patients at outpatient pharmacies are covered under the pharmacy benefit of an insurance policy, whereas provider-administered drugs are covered under the medical benefit. Health plans or insurers often subcontract the administration of pharmacy benefits to PBMs. Health plans or insurers are also referred to as payers.

PBMs administer the pharmacy benefit of insurance policies on behalf of health plans or insurers. PBMs design formularies, negotiate discounts with manufacturers, establish pharmacy networks, negotiate contracts with pharmacies or pharmacy services administrative organizations, and process and pay claims. The largest PBMs operate as platform businesses that are affiliated with or owned by insurers, pharmacies, and—more recently—group purchasing organizations.^4-6

Group purchasing organizations are buying consortiums that aggregate purchasing power among their members, allowing them to negotiate better discounts than they would access on their own. Group purchasing organizations do not take possession of the product but rather negotiate purchasing rates for their members, which are applied by wholesalers. Group purchasing organizations play a major role in the negotiation of purchases on behalf of their members, including health systems, clinics, specialty pharmacies, retail pharmacies, and PBMs.

Pharmacy services administrative organizations manage and negotiate contracts with PBMs on behalf of independent pharmacies. This involves the negotiation of contract terms, reimbursement levels, and participation in pharmacy networks. Some pharmacy services administrative organizations are affiliated or owned by wholesalers.

Flow of Brand-Name Drug Products and Payments Through the Distribution and Reimbursement Chain

The parties and transactions involved in distribution and reimbursement of drugs depend on whether products are covered through the medical or pharmacy benefit of an insurance policy.

DISTRIBUTION AND REIMBURSEMENT OF BRAND-NAME DRUGS COVERED THROUGH THE PHARMACY BENEFIT OF AN INSURANCE POLICY

Figure 1 shows a simplified description of the flow of products and payments through the parties involved in the distribution and reimbursement of self-administered brand-name drugs, which are covered by the pharmacy benefit of an insurance policy. Each transaction numbered in the figure corresponds to its description in the list below.

FIGURE 1.

Distribution and Reimbursement of Brand-Name Drugs Covered Through the Pharmacy Benefit of an Insurance Policy

1. Manufacturers produce the drug product and establish the list price. Wholesalers purchase the drug product from manufacturers based on list price with or without discounts.⁸ Wholesalers arrange distribution service agreements with manufacturers, which enable wholesalers to handle the distribution of the product.

2. Wholesalers distribute the drug product to pharmacies. Contracts between pharmacies and wholesalers determine the rate that pharmacies pay wholesalers for the drugs. Wholesaler revenue is a combination of fees paid by manufacturers for distribution, which are often a percentage of list price, margins associated with prompt payments, and the difference between the price the wholesaler pays the manufacturer for the drug and the amount it receives from the pharmacy.⁸ Group purchasing organizations may play a role in the negotiation of purchasing rates.

3. In some cases, the price at which the wholesaler distributes the drug to the pharmacy is lower than the price that the wholesaler negotiated with the manufacturer. In these instances, wholesalers invoice the manufacturer to recover the difference in the form of a chargeback.

4. Pharmacies dispense drugs to patients and collect out-of-pocket payments from them. Patient out-of-pocket payments include payments toward the deductible of the insurance policy, as well as copayments (fixed amounts), or coinsurance (calculated as percentage). Payments in the deductible phase of an insurance policy and coinsurance are based on the list price of a drug.

5. Manufacturers often offer copay assistance to help insured patients access their brand-name drugs when facing high out-of-pocket costs. Assistance often takes the form of copay coupons or cards accepted by pharmacies and applied at the point of sale. Traditionally, the value of copay coupons or cards counted toward the patient’s deductible and out-of-pocket maximums. More recently, some health plans do not allow the counting of manufacturer coupons toward the deductible or out-of-pocket maximum; these restrictions are called copayment accumulators.^9,10

6. Pharmacies submit claims to PBMs for reimbursement of the insurer share of the drug dispensed to patients, which commonly includes payment for the drug (ie, drug ingredient cost) as well as a dispensing fee. Reimbursement rates are established on the contracts negotiated between pharmacies and PBMs directly or, in the case of independent pharmacies, often through pharmacy services administrative organizations. There may be postsale adjustments that claw back money from pharmacies to PBMs after the transaction.¹¹ AMCP opposes the use of these postsale adjustments.¹²

7. Health plans or insurers often subcontract the administration and management of the pharmacy benefits to PBMs and thus remit payment to PBMs for their services. Contracts establish the payments for the costs of drug claims and other services rendered by the PBMs.

8. PBMs design formularies and determine patient cost-sharing for drug products. Typically, PBMs negotiate for manufacturer price concessions based on the volume of drug product used and placement in the formulary (some large health plans or insurers may directly negotiate with manufacturers). These price concessions often take the form of rebates paid retroactively. PBMs may rely on rebate aggregators, group purchasing organizations, or similar organizations to negotiate price concessions with manufacturers.

9. PBMs pass a share of rebates to health plans or insurers, depending on the contract stipulated between them.

DISTRIBUTION AND REIMBURSEMENT OF BRAND-NAME DRUGS COVERED THROUGH THE MEDICAL BENEFIT OF AN INSURANCE POLICY

Unlike for drugs covered by the pharmacy benefit, reimbursement of drugs administered by a provider in the outpatient setting and covered by the medical benefit of an insurance policy does not typically involve intermediaries between health care providers and health plans or insurers. Instead, health care providers (or the clinics or institutions where they practice) purchase, prescribe, administer, collect out-of-pocket expenses, and bill the health plan or insurer for the drug product. For this reason, this reimbursement system is commonly denominated “buy-and-bill.” Each transaction numbered in Figure 2 corresponds to its description in the list below, with abbreviated explanations provided for steps that closely resemble those in the pharmacy benefit.

FIGURE 2.

Distribution and Reimbursement of Brand-Name Drugs Covered Through the Medical Benefit of an Insurance Policy

1. Wholesalers purchase the drug product from manufacturers based on list price, with or without a discount.

2. Wholesalers distribute the drug product to health care providers. Group purchasing organizations often negotiate purchasing rates on behalf of health care providers.¹³ Providers pay wholesalers the rates negotiated by group purchasing organizations.

3. Group purchasing organizations receive administrative fees from manufacturers and wholesalers. These fees are typically a percentage of the sales that the members of group purchasing organizations purchase through the contracts negotiated by group purchasing organizations.^3,14

4. Wholesalers submit chargeback invoices to the manufacturer to recover differences between the amount paid to the manufacturer and the amount received from health care providers, when applicable.

5. Health care providers administer the drug product to patients. Providers collect patient out-of-pocket payments for the drug product and the professional services associated with its administration. The amount of these out-of-pocket costs is governed by the design of the medical benefit of the insurance policy.

6. Health care providers submit claims to the health plan or insurer for the drug administered and professional services involved in the administration. Reimbursement rates for the drug product are typically calculated as a percentage of the acquisition cost of the drug. This percentage often exceeds 100%, with the markup intended to cover costs associated with storage and handling of the drug product. This reimbursement system incentivizes providers to favor higher-cost drugs, as the margin associated with the markup is higher.

7. Increasingly, health plans or insurers negotiate with manufacturers for rebates on provider-administered drugs in exchange for coverage without prior authorization or step therapy requirements.

Looking Forward

In recent years, the reimbursement of brand-name drugs covered through pharmacy benefits has been marked by increases in list prices partially offset by the dramatic rise of rebates negotiated between manufacturers and PBMs.¹⁵ Depending on the availability of therapeutic alternatives, these rebates can vary greatly across drug products. Public visibility of list prices and the proprietary nature of rebates placed some drug manufacturers in the spotlight,¹⁶ at least until the disclosure of rebate information by manufacturers and independent parties shifted scrutiny to PBMs.^15,17-22 The intense political debate surrounding drug prices contributed to the inclusion of several modifications to Medicare’s drug reimbursement system in the Inflation Reduction Act.²³ However, scrutiny of the drug reimbursement system did not end with the Inflation Reduction Act. The opacity generated by the increasingly large share of gross spending represented by confidential discounts has ignited legislative efforts to increase transparency and alignment of incentives in the drug reimbursement system.^24-26

Another theme characterizing the recent evolution of the drug reimbursement process has been the increasing vertical integration across the multiple parties involved in the drug distribution and reimbursement system. The last decades saw the mergers and acquisitions of the large PBMs by insurers and pharmacy chains,^4,27 the creation of group purchasing organizations owned by PBMs,²⁸ and the increasing establishment and integration of specialty pharmacies by PBMs. These trends have resulted in platform corporate structures with control of the flow and reimbursement of products through the supply chain,⁸ which have been subject to increased antitrust scrutiny.²⁹

Increasingly, health plans or insurers have shifted the reimbursement of specialty provider-administered drugs to the pharmacy benefit of the insurance policy. This trend has been motivated by 3 main factors: (1) the increased share of pharmaceutical spending by provider-administered drugs; (2) the traditionally low rebates negotiated for drugs covered through the medical benefit; and (3) provider incentives to favor higher-cost drugs to benefit from markups estimated as a share of the average sales price.^30,31 By having a specialty pharmacy dispense the drug and ship it either to the provider (“white bagging”) or to the patient (“brown bagging”), health plans or insurers are able to utilize the high-volume negotiating power of PBMs—often affiliated with the dispensing specialty pharmacies—to unlock increased price concessions from manufacturers. This strategy offsets provider partiality toward higher-cost products under the “buy-and-bill model” and reduces payments to providers.³² Given the potential large cost savings that can be had with such strategies, these trends will likely continue forward.

In conclusion, the reimbursement of brand-name prescription drugs in the United States is composed of transactions among the multiple parties involved in drug manufacturing, distribution, provision of the drug product to patients, reimbursement, and contract negotiation. The complicated and opaque relationships between these entities have captured the attention of policymakers in recent years as drug prices have been in the political spotlight. The drug supply and reimbursement chain will continue to evolve in response to new market trends and changes in the regulatory framework.

Glossary

All definitions are adapted from the AMCP Managed Care Glossary, available at https://www.amcp.org/about/managed-care-pharmacy-101/managed-care-glossary.

Brand-name drug: A drug that has a trade name and is protected by a patent. A brand-name drug may be produced and sold only by the company holding the patent.

Copay or copayment: A cost-sharing arrangement in which a health plan member pays a specified charge for a specific service, such as a fixed dollar amount for a prescription drug.

Copay coupons or cards: Discount cards provided by pharmaceutical manufacturers to patients to reduce patient cost share for prescriptions for a certain period of time.

Coinsurance: A cost-sharing arrangement in which a health plan member pays a percentage of the charge for a specific service, such as a percentage of the cost of a prescription drug.

Deductible: A fixed amount that an insured person must pay out of pocket before health care benefits become payable. Usually expressed in terms of an annual amount.

Dispensing fee: A contracted rate of compensation paid to a pharmacy for filling a prescription and processing the claim. The dispensing fee is added to the negotiated formula for reimbursing ingredient cost.

Formulary: A continually updated list of medications and related products supported by current evidence-based medicine, as well as the judgment of physicians, pharmacists, and other experts in the diagnosis and treatment of disease and preservation of health.

Manufacturer price concessions: Financial incentives provided by manufacturers to organizations providing pharmacy benefits in exchange for improved formulary placement and defined in contractual terms. May take the form of discounts, rebates, or other incentives.

Member: A participant in a health plan; a person covered by health insurance.

Network: The group of physicians, health care professionals, hospitals, or pharmacies that a managed care organization has contracted with to deliver services to its members.

Out-of-pocket costs: The portion of payments for covered health services required to be paid by the member, including copayments, coinsurance, and deductibles.

Prior authorization: A type of utilization management that requires health plan approval for members taking certain drugs for a claim to be covered under the terms of the medical or pharmacy benefit. Prior authorization promotes the use of medications that are safe and effective and provide the greatest value.

Rebate: A manufacturer price concession that occurs after drugs are purchased and involves the manufacturer returning some of the purchase price to an organization providing pharmacy benefits that is set in contractional terms. May be based on volume, market share, outcomes, or other factors.

Self-administered prescription drugs: Medications that a patient can typically take themselves, without assistance of a health care professional. Examples include pills, tablets, and self-injections.

Step therapy: A type of utilization management that requires the use of a safe, lower-cost drug first before a second drug that is usually more expensive is approved under the terms of the medical or pharmacy benefit; may be administered through a prior authorization.