Pricing Tutorials

Navigate the various pathways in our Pricing Tutorials to learn how the US drug pricing and reimbursement system works.
The Pathways

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There are two ways a patient can get a prescription drug: from the pharmacy or at an outpatient clinic, such as a physician's office. Explore how pharmacy-dispensed drugs and clinician-administered drugs are purchased and reimbursed in the US. Despite their differences, both pathways create incentives that may distort drug prices in ways that do not align with their value.

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The Key Stakeholders

Pharmacy-Dispensed Clinician-Administered
Stakeholders Physical Journey Financial Journey
Key Stakeholders

Multiple stakeholders participate in the distribution and financing of drugs dispensed by pharmacies.

Hover over the icons on each stakeholder to learn more about their role. Start the journey by clicking on the green link below and continue using the arrows and circles above.

Overview
A Drug’s Physical Journey to the Patient
The Whole Picture

The physical journey of a pharmacy-dispensed drug starts at the pharmaceutical company, and travels through the wholesaler to the pharmacy counter before reaching the patient.

Step 1
A Drug’s Physical Journey to the Patient
Pharmaceutical Company to Wholesaler

The wholesaler obtains the drug in bulk from the pharmaceutical company.

Step 2
A Drug’s Physical Journey to the Patient
Wholesaler to Pharmacy

The pharmacy obtains the drug from the wholesaler.

Step 3
A Drug’s Physical Journey to the Patient
Pharmacy to Patient

The pharmacy dispenses the drug to the patient.

Overview
The Financial Journey Along the Process
The Whole Picture

More stakeholders are involved in the financial journey. Follow the flow of cash as the drug makes its way from the pharmaceutical company to the patient.

Step 1
The Financial Journey Along the Process
Pharmaceutical Company

The pharmaceutical company sets the drug’s list price, or the Wholesale Acquisition Cost (WAC).

Step 2
The Financial Journey Along the Process
Wholesaler to Pharmaceutical Company

The wholesaler buys the drug from the pharmaceutical company, paying WAC plus a negotiated discount. The discount is often larger for volume purchases or prompt payment.

Step 3
The Financial Journey Along the Process
Pharmacy to Wholesaler

The wholesaler sells the drug to the pharmacy for a negotiated price that is usually 15-20% higher than WAC.

Step 4
The Financial Journey Along the Process
Patient to Pharmacy

The pharmacy dispenses the drug to the patient, who pays the pharmacy a flat fee (copayment) or a fixed percentage of the drug’s price (coinsurance). The drug’s price is set by the pharmacy, usually at WAC plus a dispensing fee as negotiated with the health plan or PBM.

Step 5
The Financial Journey Along the Process
Pharmacy Benefit Manager (PBM) to Pharmacy

The pharmacy submits a claim to the PBM for the drug dispensed to the patient. The PBM pays the remainder of the drug’s price after the patient’s copayment or coinsurance.

Step 6
The Financial Journey Along the Process
Health Insurer to PBM

The PBM’s payment to the pharmacy is reimbursed by the health insurer.

Rebates
The Financial Journey Along the Process
Pharmaceutical Company to PBM and PBM to Health Insurer

Depending on the terms negotiated in advance, the pharmaceutical company may rebate the PBM for the drug. Rebates are typically contingent on sales volume or favorable placement of the drug on the PBM’s or the health plan’s formulary.

The PBM passes any rebates received from the pharmaceutical company, minus processing fees, to the health insurer.

 

Drug Transactions: Annual Retained Revenue*

Less

More

Pharmaceutical Company

i
Develops, produces, and markets prescription drugs.
$
Retained Revenue

$323B

Step 1

Step 1

Rebate

Step 2

Pharmacy Benefit Manager (PBM)

i
A third-party organization that aims to reduce pharmacy and administrative costs for health insurers by managing formularies and negotiating drug rebates and discounts.
$
Retained Revenue

$23B

Step 6

Rebate

Step 5

Health Insurer

i
Insures beneficiaries and pays for health-related products and services obtained in the inpatient, outpatient and pharmacy setting.
$
Retained Revenue

$8.6B

Commercial
i
Insurance provided and administered by non-governmental entities. Most commercial insurance is group-sponsored, offered by an employer.
Government
i
Insurance provided by the government to qualified individuals. These include Medicare, Medicaid, CHIP, and military insurance (VA, TRICARE).

Wholesaler

i
Distributes drugs in bulk to clinics, pharmacies, and other intermediaries in the supply chain.
$
Retained Revenue

$17.7B

Step 2

Step 3

Pharmacy

i
A brick-and-mortar retail store or mail order service that dispenses drugs directly to patients.
$
Retained Revenue

$73B

Step 3

Step 4

Patient

i
Person receiving the drug.
Retained Revenue

* Source: Retained revenue for each stakeholder includes both pharmacy-dispensed and clinician-administered drugs. IQVIA Medicine Use and Spending in the U.S., 2016 (manufacturers' net revenue); Health Affairs Blog, "Spending on Prescription Drugs in the U.S.," 2018 (estimated gross profits for supply chain intermediaries, 2016).

The Key Stakeholders

Multiple stakeholders participate in the distribution and financing of drugs administered by clinicians in the outpatient setting.

Hover over the icons on each stakeholder to learn more about their role. Start the journey by clicking on the green link below and continue using the arrows and circles above.

Overview
A Drug’s Physical Journey to the Patient
The Whole Picture

The physical journey of a clinician-administered drug starts at the pharmaceutical company, and travels through the wholesaler to the outpatient clinic before reaching the patient.

Step 1
A Drug’s Physical Journey to the Patient
Pharmaceutical Company to Wholesaler

The wholesaler obtains the drug in bulk from the pharmaceutical company.

Step 2
A Drug’s Physical Journey to the Patient
Wholesaler to Outpatient Clinic

After estimating how much of the drug they expect to administer to patients in the near future, the outpatient clinic obtains the drug from the wholesaler.

Step 3
A Drug’s Physical Journey to the Patient
Outpatient Clinic to Patient

A clinician administers the drug to the patient in the outpatient clinic.

Overview
The Financial Journey Along the Process
The Whole Picture

More stakeholders are involved in the financial journey. Follow the flow of cash as the drug makes its way from the pharmaceutical company to the patient.

Step 1
The Financial Journey Along the Process
Wholesaler to Pharmaceutical Company

The pharmaceutical company sets the drug’s list price, or the Wholesale Acquisition Cost (WAC). The wholesaler buys the drug from the pharmaceutical company, paying WAC plus a negotiated discount . The discount is often larger for volume purchases or prompt payment.

Step 2
The Financial Journey Along the Process
Outpatient Clinic to Wholesaler

The outpatient clinic purchases the drug from the wholesaler at a price set by a government contract (e.g. 340B discount) or negotiated by the health insurer.

Step 3
The Financial Journey Along the Process
Patient to Outpatient Clinic

A clinician administers the drug to the patient, and the patient pays the outpatient clinic a fixed percentage of the cost (coinsurance), inclusive of the drug’s WAC price, a markup, and any fees for administration.

Step 4
The Financial Journey Along the Process
Health Insurer to Outpatient Clinic

After administering the drug to the patient, the outpatient clinic submits a claim to the health insurer. The health insurer reimburses the outpatient clinic after the patient’s coinsurance amount.

For government-sponsored health plans, reimbursement for the drug is set at ASP plus a 6% markup to include administration fees.

Rebate
The Financial Journey Along the Process
Pharmaceutical Company to Health Insurer

Depending on the terms negotiated in advance, the pharmaceutical company may rebate the health insurer for the drug.

For Medicaid, rebates ensure that the state program is receiving the best price for the drug, which includes a 23.1% discount and an inflation penalty if the list prices rises faster than inflation.

Drug Transactions: Annual Retained Revenue*

Less

More

Pharmaceutical Company

i
Develops, produces, and markets prescription drugs.

Rebate

Step 1

Step 1

Health Insurer

i
Insures beneficiaries and pays for health-related products and services obtained in the inpatient, outpatient and pharmacy setting.
Commercial
i
Insurance provided and administered by non-governmental entities. Most commercial insurance is group-sponsored, offered by an employer.
Government
i
Insurance provided by the government to qualified individuals. These include Medicare, Medicaid, CHIP, and military insurance (VA, TRICARE).

Step 4

Wholesaler

i
Distributes drugs in bulk to clinics, pharmacies, and other intermediaries in the supply chain.

Step 2

Step 2

Outpatient Clinic

i
A treatment setting in which infusion therapies and injectables are administered by a healthcare professional. For Medicare beneficiaries, this is covered under Part B.

Step 3

Step 3

Patient

i
Person receiving the drug.

* Source: Retained revenue for each stakeholder includes both pharmacy-dispensed and clinician-administered drugs. IQVIA Medicine Use and Spending in the U.S., 2016 (manufacturers' net revenue); Health Affairs Blog, "Spending on Prescription Drugs in the U.S.," 2018 (estimated gross profits for supply chain intermediaries, 2016).

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