I just now got around to reading some May 11 speech by Donald Trump who says he wants to reign in the high price of drugs. A laudable goal and Trump said some things that got applause. But ahem – he may no clue especially when he says things like this:
We’re very much eliminating the middlemen. The middlemen became very, very rich. Right? (Applause.) Whoever those middlemen were — and a lot of people never even figured it out — they’re rich. They won’t be so rich anymore.
Nancy L. Yu, Preston Atteby, and Peter B. Bach did some excellent research on where our drug money goes:
As a starting point, we relied on IQVIA’s 2016 estimate of the net revenue received by drug manufacturers … For 2016, IQVIA reported $323 billion in company-recognized net revenues.
Yea – this sector is characterized by huge profit margins so someone is getting rich. The large pharmaceutical manufacturers also have a knack for shifting income to tax havens. To his credit – Trump talked about generic competition and ending the lobbying efforts of those in this sector. But let’s turn to those middlemen:
The PBMs and wholesaler-distributors are extraordinarily concentrated, with the three largest companies dominating the market share within these segments…United Healthcare reports OptumRx’s revenues, to which we applied a 5 percent margin (comparable to CVS Caremark’s) to estimate its gross profits, bringing total profits for the “big three” to a little more than $17 billion. Assuming lower profitability margins for the remaining smaller players, we grossed up to an estimate of $22.6 billion in gross profits for the PBMs. The three largest pharmaceutical wholesalers, McKesson, AmerisourceBergen, and Cardinal …After aggregating the gross profits for these three dominant companies, we extrapolated the remaining 15 percent to come up with an estimate of $17.7 billion in gross profits for the overall segment.
They estimate that the gross margins for the PBMs and wholesaler/distributors were just over $40 billion. Net profits would be less as these companies bear at least a modest amount of operating expenses. While more competition might drive down these gross margins, the very high gross margins for the manufacturers would be a better starting point. Just saying.