Today, drug wholesalers make money from distribution in a straightforward manner: Buy low, sell high, collect early, and pay late. They also profit as brand-name list prices increase. Like other drug channel intermediaries, wholesalers have warped incentives to prefer ever-higher list prices.
But what happens to their business model if list prices don’t rise—or even if they decrease?
This question is no longer theoretical. Many drug makers—Pfizer, Roche, Novartis, Novo Nordisk, Sanofi, and others—have announced an intention not to raise list prices for 2018 or have rescinded planned increases. Merck has gone further and become the first major manufacturer to reduce the list price of a brand-name, patent protected product, albeit for a product with minimal sales. And for the first time, there is a serious attempt to pop the gross-to-net bubble and build a system without rebates.
Below, I analyze what this could mean for the Big Three drug wholesalers—AmerisourceBergen, Cardinal Health, and McKesson. I explain some of the problems that arise when wholesalers are compensated based on a brand-name drug’s list price. I then suggest an alternative approach that would reshape wholesalers’ economics. It appears that even the wholesalers’ trade association supports some sort of new model.
Given what’s happening, it’s clearly time for some ch-ch-ch-ch-changes.
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