All opinions are my own.

Saturday, November 25, 2023

USA’s Annual Ritual of Drug Sourcing/pricing and Shortages

In fourth quarter of every year in USA, there is a euphoria of finding the right prescription drug sourcing (1) plan. With number of players offering their plans one has to be careful to pick the right plan for their needs. It is interesting to note that we are given a filled price for the drug. Generally there is no breakdown of the components that make the payment to be made. 
It is generally accepted that the drugs will be available or shipped from the selected pharmacy and all will be good. It is worth noting that about 90% of the drugs dispensed are generic drugs (1, 2) and sourced through various suppliers under Medicare healthcare plans. According to US Census Bureau about 92.1 % of the US population has healthcare coverage (3). The numbers suggest that majority of the US population has access to generic drugs. However, issues of shortages and unaffordability prevails. Brand drug prices are not part of the discussion. Due to lack of any immediate competition they set their own sale prices. 
Pathway of the generic drug to the patient and pricing needs some explaining. PBMs (pharmacy benefit managers and their partners) purchase the drugs from manufacturers and distribute them. Their mission is maximize profits. 
Prescribers generally do not know the breakdown of the monies they pay i.e. cost of the drug, handling and shipping etc. Patient pays the price their drug provider charges. Table 1 reviews the price breakdown for two drugs. 
One of the age old trading practices is to pressure the manufacturer to lower their selling price. If the manufacturer does not make their desired profit, they will not sell the drug to PBMs and this will result in shortages. Patients will experience these. For PBMs drug becomes an “ITEM” of trade rather than a person’s life depends on it. To them profits are more important than the life of the patient/customer. 
Generally a cost breakdown of any drug is not in public domain. Their discussion is healthy as many ambiguities can be cleared. A cost breakdown and comparison with and without insurance (4) gives us the landscape. CostPlusdrugs.com (5) drug price breakdown is reviewed here. Prices of GoodRx.com (6) can be used for comparison. A review clears any misconception one could have. Perspective here reviews the cost of the generic drugs from the factory floor to the patient. Similar but different scale of numbers apply for the brand drugs. I am not influenced by any for or non-profit entity. Observations presented are my own. 
With such a large population being covered by various healthcare drug programs it is my belief that number of patients going outside their healthcare system to purchase drugs is going to be minimal. For patient going out of the network would be an anomaly. It would be same as an impulse purchase. It is  well known fact that such purchases are high priced (4). Thus listing of “retail prices” on respective sites (5,6) seems more like a scare tactic than a reality as very limited number will purchase drugs at retail prices.  

Lately drug shortages are increasing in the news. Has anyone analyzed why? Most likely no. They have a simple explanation. It is the profit at manufacturer level. Table 1 in the referred post (4) and this post clearly show the drug price component of each drug sell price. 
Even if manufacturing companies make a concerted effort to lower their manufacturing costs by using better processing technologies that can significantly lower their current environmental emission impact and are able to improve profits at their level, landscape will not change much. US will continue to see generic drug shortages (7) as PBMs will continue to pressure manufacturers to lower their selling prices. 
An analysis of adventure by Amazon, Berkshire Hathaway and J.P. Morgan (8) was bound to fail from the onset as they had no comprehensive and rational plan. Out of the box thinking” was needed but not considered (9, 10). Only viable alternate is that drug manufacturers take over the distribution and compete (7). Competition will be lower overall drug prices and will be an overall win for the country. Generally it is.  
Table 1 is a comparison of factory drug prices and what a customer would pay if they bought the drugs from Costplus Drug Company (5)and /or Amazon. Amazon does provide medications at discounted prices but details are not available unless one signs up (11).

It is interesting to note that the drug component even after manufacturer making 200% profit are a small percentage of the drug selling price after including handling and shipping. These charges can be as much as 700+% above the drug manufacturer’s selling price. My conjecture is that such markups apply across the generic drug sale landscape. Better API and formulation manufacturing technologies (12) and shipping and handling technology combination present an opportunity to improve profits and lower prices of drug manufacturers and their distributors.  
There are two notable features of Costplus Drug and GoodRx companies.  Unlike other drug plans patients do not have to become their subscriber. 

Table 1: Price comparisons


US healthcare system has serious issues. My conjecture is that US Legislators and policymakers have no real knowledge and/or grasp of the landscape. If they have any knowledge, it has been ignored. Drastic re-think is need. However, due to political and vested influence of many, an “ALL HANDS” re-think effort to handle the drug pricing, shortages and bring manufacturing home (7) would be needed. Patient to have the best pricing has to have knowledge of all offerings to make the best decision for themselves. This is not an easy task. Question is “Do we have what it takes to address the issues and simplify drug purchases?” or policy makers, bureaucrats will just talk about it and succumb to political pressures and do nothing?  
Girish Malhotra, PE
EPCOT International


1.   Editorial Board Bloomberg: Are Generics Too Cheap for Their Own Good? November 16, 2023
2.   https://www.fda.gov/drugs/generic-drugs/office-generic-drugs-2021-annual-report
3.   https://www.census.gov/library/publications/2023/demo/p60-281.html
4.   Malhotra, Girish: Systematic Demystification of Drug Price Mystique and the Needed Creative Destruction, Profitability through SimplicityOctober 2, 2019 
5.   Costplus Drug Company https://costplusdrugs.com
6.   GoodRx https://www.goodrx.com
7.   Malhotra, Girish: Roadmap to Reduce Drug Shortages and Bring Pharma Manufacturing Home (US), Profitability through Simplicity, October 30, 2023
8.   Malhotra, Girish: Could Amazon (A), Berkshire Hathaway (B) and J.P. Morgan Chase (M) be the Anti- Ballistic Missile (ABM) needed to Control/Curb Rising Healthcare Costs? Profitability through Simplicity, February 9, 2018
9.   Malhotra, Girish: Opportunities to Lower Drug Prices and Improve Affordability: From Creation (Manufacturing) to Consumption (Patient), Profitability through Simplicity, March 9, 2018 
10. Malhotra, Girish: Improving Drug Affordability for the United States Populous through Alternate Business Models, Profitability through Simplicity, May 4, 2018
11. Amazon: Courtesy Dr. Albinus D’Sa Senior Advisor November 19, 2023
12. Malhotra, Girish: Active Pharmaceutical Ingredient Manufacturing: Nondestructive Creation De Gruyter April 2022