At a time in everyone’s life, we come to find ourselves in a situation where the music stops, and we must go on.  The unfortunate truth about life is that the unexpected will happen. Some of us learn from it, some of us change because of it and some of us find our life’s calling because of it. The latter was the case for me.  After our dad picked us up from middle school, we spent that afternoon like we had every afternoon that month. We went to the oncology unit at the hospital, where my brother was admitted.



I remember him. I remember the man in the dark blue sarong the same way I remember the lines on back of my own hand. He was hunched over next to a column on a dirty platform at a railway station in Calcutta, India in the middle of the harsh summer sun. His hands were withered, his fingers and toes looked like tiny nubs, and he was completely malnourished and alone. He had opaque blue eyes, as if fog had taken place of his irises and pupils.



I studied insects in college; my favorite insects were the bees (I found them diligent and so helpful to humankind).  One of my favorite classes was about medical diseases caused by insects. My professors noticed my interest in the medical side of things and connected me with a professor who did clinical research. Our work focused on a clinical trial for children with intractable epilepsy and exposed me early on to patient care and patients.


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accounted $103 billion dollars, and independent pharmacies generated only $48 billion dollars in revenue.

Financing of Pharmaceutical Products

The financing of pharmaceuticals in the US is primarily through Pharmacy Benefit Managers and public and private health insurance plans. By 2015, industry consolidation had resulted in three PBMs surviving:  CVS Caremark, Express Scripts, and UnitedHealth’s Optum. These three controlled a 70% share of the PBM market.

With regard to public and private health insurance plans, 42% of prescription drug spending in 2015 was from private health insurance, 30% from Medicare, and only 10% from Medicaid. Another 14% was from private out-of-pocket payments.

Physician-administered drugs to Medicare beneficiaries, such as oncology treatments and most infusions, are considered part of the medical benefit of Medicare and are covered under Part B. Oral and self-administered medications are covered under the drug benefit, Medicare Part D.

While Part D plans generally have “open” formularies (i.e., few drugs are excluded from the plan), 98% have implemented very aggressive five-tier benefit structures.  Medicare is currently precluded by law from negotiating prices with manufacturers or from setting prices for drugs purchased through Part D. (This is subject to change during the new Trump administration.).

Medicare Parts B and D are funded separately from Medicare Part A (hospital insurance). The financing is complicated.  Part A is supported by the Medicare Payroll Tax. Parts B and D are supported by general tax revenues. Overall, parts B and D received 76% and 80% of their funding, respectively, from federal general tax revenues in 2015.

As a result, Medicare required $250 billion in general tax revenues for support of these programs in 2015, and Medicare is projected to require $542 billion in annual support by 2025 (1/2 trillion dollars).

Medicaid is the public health insurance plan for low-income persons and some individuals with disabilities. It covers individuals with incomes below 138% of the federal poverty level in states that expanded Medicaid under the Affordable Care Act.  Interestingly, pharmaceuticals are considered an optional benefit by Medicaid, but all states currently provide outpatient drug coverage to enrollees.

Most employer-based health insurance plans include a drug benefit. Many employers and health insurers provide pharmaceutical benefits through a PBM. The structure of these plans is similar to Medicare Part D prescription drug plans, but they are not required to offer a catastrophic drug benefit. For individuals who purchased private health insurance through an Affordable Care Act health insurance exchange, prescription drug coverage is considered an essential benefit. However, the structure of that benefit can vary across plans. In 2015, commercial health insurance was the source of payment for 49% of all retail prescriptions. This is down from 56% in 2012.

In 2015, the average patient payment for a branded prescription drug, using commercial insurance, increased from $36.00 in 2015 to $44.00 in 2015. On the other hand, the average patient payment for a generic prescription drug has remained stable at $8.00 since 2010. Unknown to most physicians and patients, drug manufacturers provide a series of cash payments to health plans, PBMs, and distributors in the form of rebates and chargebacks. This is the result of complex pricing arrangements across the industry. The end result of these complex transactions in 2015 was $115 billion dollars. This was a whopping 27% of total pharmaceutical sales paid as a give-back or fee by manufacturers of drugs and medications to various entities throughout the drug distribution and financing systems (I wonder if Chief Justice Roberts would call this a tax or a rebate?).


The American Medical Association published in JAMA (May 15, 2017) a recent article by Dr. Dabora and Dr. Turaga, two Harvard Business School professors (MD, MBA), who are joined by Dr. Shulman (MD) of the Duke University School of Medicine. The following is a summary of this article.

The distribution of US pharmaceutical products is fairly simple. The physical drug product, such as a pill or vial of drug, leaves a manufacturer and is then purchased by a distributor. Distributors ship the product to retailers, where patients access their prescription medications. On the financing side, Pharmaceutical Benefit Managers (PBMs) provide services to help payers, such as insurance companies, manage their drug benefits. Payers, the sources of financing for drug benefits, include public sources such as Medicare or Medicaid, or private sources such as private health insurance and out-of-pocket payments. The financial relationships for these movements and distributions are a complex set of financial relationships that tie together the distribution side to the financing side.

Pharmaceutical product distribution has evolved over many years. Distributors play an intermediary role in the supply chain between manufacturers and retailers. Their evolution has reduced the number of transactions that would have occurred if each retail pharmacy or healthcare practitioner had to order products directly from manufacturers, which was the method for distribution


in the first-half of the 1900s. Ninety-one percent of all pharmaceutical sales revenue is passed through medication distributors in the United States.

Distribution of Pharmaceutical Products

In recent years, the US Distribution market has become highly consolidated. Three companies now account for more than 85% of the market share: Amerisource Bergen, Cardinal Health, and McKesson. These three firms in 2015 had combined revenues from drug distributions of $378 billion dollars (more than one-third of a trillion dollars).

In 2015, generic prescriptions represented 89% of drug prescription volume. The retail pharmacy market is now divided into three major categories: chain pharmacies and mass merchants with pharmacies, independent pharmacies, and mail-order pharmacies. Approximately 74% of mail-order pharmacy revenue comes through 15 large firms, including CVS, Walgreens, Express Scripts, and Wal-Mart. These 15 companies generated $270 billion dollars in revenue in 2015 (one-fourth of a trillion dollars).

Of the three major categories noted above, chain pharmacies and mass merchants produced $167 billion dollars in revenue, mail-order revenue


Robert P. Granacher, Jr., MD, MBA practices clinical and forensic neuropsychiaty in Lexington and Mt. Vernon, KY. He is a noted scientific author and past president of the Kentucky Psychiatric Medical Association. He is currently president-elect of the Lexington Medical Society and Clinical Professor of Psychiatry at the University of Kentucky College of Medicine.