Back to Blog

Partial Transparency is No Transparency at All


Although Congress has devoted much attention to exploring pharmaceutical manufacturers and pharmacy benefit managers, less attention has been paid to how wholesalers and the pharmacy services administrative organizations (PSAOs) that they own increase the bargaining power of independent pharmacies, and increase what patients ultimately pay for prescription drugs. Now, Jack Kemp Foundation Senior Fellow, Ike Brannon, has published a piece in Forbes arguing that despite Congress’ heavy scrutiny of the drug supply chain, much remains unknown about the role that these entities play.

Wholesalers purchase drugs from pharmaceutical manufacturers and distribute them to pharmacies for sale. The three largest wholesalers in the U.S. represent 90% of the market and are closely aligned with many small pharmacies through their ownership of PSAOs.

PSAOs themselves are even less well understood. Working behind the scenes, PSAOs represent thousands of independent pharmacies as they negotiate with other players in the supply chain. The largest PSAOs are owned by wholesalers and represent thousands of pharmacies. Concerningly, both PSAOs and wholesalers may receive fees and compensation based on the list price of a drug.

As Brannon writes in his piece, the picture becomes murkier the closer you look:

“Wholesalers charge manufacturers by adding a margin of 10 to 12 percent to the list price, which adds to healthcare costs. The wholesalers also own many of the largest PSAOs, which raises questions about wholesalers’ potentially conflicting incentives in the supply chain: They first negotiate prices for prescription drugs with manufacturers that they then sell to pharmacies, and they also own the organizations that negotiate reimbursements from PBMs for those same drugs on behalf of the pharmacies.”

Other experts sounded similar notes of caution in a recent Bloomberg article, with one analyst saying that fees from wholesalers “are absolutely part of inflating the cost of drugs.” Similarly, another leading expert told Bloomberg, “If you argue on the other side that these pharmacies are already doing well, and all the PSAOs are doing is over-increasing the size of the reimbursement for pharmacies, it just enables them to make more money,” which increases costs.

As Brannon concludes, legislators should slow down, measure twice, and cut once:

“If Congress is intent on reforming how the market functions, looking at only a single actor in the drug supply chain would be a grievous mistake, especially given that the current legislation under consideration will likely be the only chance the body has to address drug prices before the next election. Congress should take the chance to reduce costs for patients, instead of raising them.”

You can read the full piece in Forbes. For more on the high cost of policies pushed by independent pharmacies and PSAOs, see Ike Brannon’s recent work with Tony LoSasso here.