Channels of Distribution Learning Objectives Define and give

Channels of Distribution

Learning Objectives Define and give examples of a channel of distribution for pharmacy products and services. Define and give examples of members of channels of distribution for pharmacy products and services. Define the term intermediary, give examples of intermediaries, and list and describe the functions intermediaries fulfill in channels of distribution.

Learning Objectives (continued) Discuss the effects of customer, product, and manufacturer characteristics on channel structure and explain why different types of pharmacy products and services require different channel structures. Define and give examples of channel conflict and cooperation. List and explain the types of vertical marketing systems and discuss the need for them.

Learning Objectives (continued) Explain the functions and services offered by pharmacy benefit managers and the effects these organizations have had on community pharmacy. Explain how the growth of managed care has led to increasing cooperation and consolidation among pharmacy retailers and increasing conflict between retailers and other channel members.

Traditional Channels MANUFACTURER WHOLESALER PHARMACY (Retailer) CONSUMER

Why have intermediaries? MANF RETAILER

Efficiency MANF RETAILER WHLSER RETAILER

Additional functions of intermediaries Product information - safe, effective use Convenience - place and time Variety / assortment Services Repackaging Reimbursement Repair Credit

Traditional Channels MANUFACTURER WHOLESALER PHARMACY (Retailer) CONSUMER

Why long channels for pharmaceuticals? Customer characteristics Product characteristics Manufacturer characteristics Legal restrictions What about new types of medicines?

Channel conflict - Discriminatory pricing - Limited distribution Channel cooperation - Buying groups - Prime vendors - Charge-back system

NO CHARGE-BACK MANUFACTURER AWP - 20% WHOLESALER AWP - 15% PHARMACY RETAIL

CHARGE-BACK SYSTEM MANUFACTURER AWP - 20% WHOLESALER AWP - 40% HMO PHARMACY AWP x 25%

Vertical Marketing Systems Administered - based on power Corporate - based on ownership Contractual - license / franchise - wholesaler voluntary chains

MANF Merck WHOLESALER RETAILER CONSUMER Cardinal Medco / PAID Medicine Shoppe

PHYSICIANS HOSPITAL PHARMACY CONSUMER Staff Model HMO

Number of Community Pharmacies Source: IMS DDD Class of Trade Analysis

Managed Care Enrollment (000) Aventis MCD Source: Managed Care Digest HMO-PPO

3 rd Party Payment for Rx Drugs IMS DDD Class of Trade Analysis

Sales of Mail Order Pharmacies Source: IMS DDD Class of Trade Analysis

PLAN SPONSOR Commonwealth of Virginia PBM PHARMACY COVERED LIFE/BENEFICIARY Medco Rite Aid D. Holdford

Why PBMs? Growth of third-party payment Increase efficiency of payment and information flows Intermediary for payment and info

Plan Sponsors General Motors BCBS Aetna Teamsters PBM Buford Rd. Pharmacy Benefit Manager Wal-Mart Eckerd Rite Aid

PBM Services - early Claims processing Retail pharmacy network Drug cards for beneficiaries DUR and use management Utilization reports to sponsors Electronic processing On-line adjudication

PBM Services - later “managing the drug benefit” Why – control drug costs What – Discount pharmacy reimbursement Mail order – the three big PBMs each own one Drug benefit design – co-pay, quantity limits, exclusions, three-tier designs Formulary Drug product rebates

What is a rebate? Payment made by a manufacturer to a PBM or other entity that does NOT TAKE PHYSICAL POSSESSION OF THE DRUG Usually on patented branded products Based on use of the manufacturer’s drug Given to encourage greater use Substantial

Rebate Manf Goods Wholesaler PBM Payment Pharmacy Plan Sponsor Patient Rebates

PBM revenue sources Administrative fees - per claim Clear to sponsor, specified in contract Competitive Easy audit by sponsor Services - like disease management Relatively small revenues

PBM revenue sources Rebates – old Somewhat hidden from sponsor Not clear in contract Difficult for sponsor to audit Mail order generics – new Retail – MAC Mail – AWP – 50% For generics AWP-50% >> MAC

Effects of PBM rebates PBM incentive - maximize rebates Which products do they favor? Low cost or high rebate? Help consumer? Help plan sponsor? Pharmacists’ image?

Retail Pharmacies - Efficiency Higher-volume outlets Economies of scale Technology Phone systems Electronic links with prescribers Robotics and automated dispensing Centralized dispensing (fill) and adjudication Web and phone-based refill services