Pharmaceutical Commerce Finds Premier Report Inaccurate in Reporting Drug Price Profit Margins of Small Distributors

Pharmaceutical Commerce Finds Premier Report Inaccurate in Reporting Drug Price Profit Margins of Small Distributors

-NCPD Says Incorrect Information Has Been Detrimental to Small Distributors-

November 15, 2011 10:09 AM Eastern Time
MIAMI--(BUSINESS WIRE)--A report by Premier healthcare alliance incorrectly calculated the percent markup charged by small distributors, overstating the high-end by 3,804 percentage points or 521 percent, according to an exclusive update obtained by Pharmaceutical Commerce, a trade publication that provides news about the pharmaceutical industry. The reported error comes on the heels of the White House stating it was going to look into the profits made by small companies in the industry based on the Premier report.

The report, "Buyer beware: Drug shortages and the gray market," originally stated that markups averaged 650 percent and were as high as 4,533 percent. Pharmaceutical Commerce reported that the revised numbers in fact ranged from 29 to 729 percent and furthermore noted that the original and even the revised numbers are not necessarily representative of anything at all because the sample base consisted of solicitations that Premier member hospitals chose to send in rather than a true scientific sample of invoices.

"This report is not just inaccurate, it's actually been detrimental to many small distributors out there who are focused only on meeting the needs of patients, hospitals and other providers," said Andy Ataras, secretary for the National Coalition of Pharmaceutical Distributors, which represents the interests of small and independent distributors nationwide. "The report made gross generalizations by taking information provided about a handful of distributors and using it to cast doubt on the entire industry. We knew that when someone followed the dollars, he or she would find that the numbers were overstated."

The inaccurate percentage range is not the only issue that has been raised in conjunction with the Premier report.

"A couple of methodological issues stand out when you read this report," said Kaveh Katebian of nD Insight, a consulting firm that provides market research and price analysis for health care companies. "The first is around the weighting of the sample. It's not clear whether we're looking at all drugs in the market or a subset. If we don't have the complete picture, the results could be biased in a way that claims there is a higher markup than is actually the case. The second issue concerns the range of markups and how the average is calculated. In a case like this one, it's important to not only know what the lowest and highest markups were, but also how many drugs we had at each level. If most of the drugs are near the low end of the range, then we can't just calculate a simple average. There are more complex statistical methodologies we have to use. If this isn't accounted for, then we would again end up claiming the average is higher than it actually is. In short, we're missing a lot of critical information that we need to make sense of these numbers and test their validity."

The numbers in the report, as well as the revised numbers provided to Pharmaceutical Commerce, compared the cost a hospital would normally pay for a drug under contracts negotiated by group purchasing organizations (GPOs) to the price of a drug that is bought from a small, local distributor. The comparison inaccurately reflects market realities, where GPO-negotiated prices are generally 40 to 50 percent lower than what a small distributor pays for a drug. Some manufacturers discount their drug prices by as much as 91 percent to secure a GPO contract.

"Many people mistakenly believe that distributors that deal in medicines have greater negotiating power than they really do," said Pat Earl, CEO and president of Secure Pharma Distributor Network. "This isn't like a car dealership, where people generally don't have to pay MSRP because of dealer incentives and rebates. In health care, small distributors must pay what's called a Wholesale Acquisition Cost that is many times greater than what the GPOs have negotiated. When you compare the cost a small distributor must pay for a medicine to the final price it charges a hospital, you find that the gross profit margin is often in a very reasonable range. It is not the 1,400 percent markup you find when you compare to GPO numbers - a practice that is misleading and doesn't represent the complexities of the health care market."

GPOs represent large numbers of hospitals and physicians, and became more prominent in the United States after 1986 when Congress passed a bill exempting the organizations from anti-kickback provisions in Medicare laws to allow them to collect a portion of the sales revenues from manufacturers who do business with their members. The organizations leverage the collective buying power of their members to negotiate contracts with drug manufacturers. A drug manufacturer that is willing to push the price of its medicine low enough to secure long-term contracts with the nation's three largest GPOs can lock out other manufacturers from the market, making it economically unfeasible for competitors to produce the medicine. Premier is one of the largest GPOs in the United States, representing 2,500 hospitals.

"GPOs have created a market that is anticompetitive and exclusionary, which actually leads to shortages and higher prices on alternative products in times of market disruptions," Earl said. "The fact that the numbers in the original report were so drastically miscalculated indicates that it is another unjustified attack on the business integrity of small distributors. It is rather disingenuous for Premier Purchasing Partners and the other large GPOs, in general, to point their fingers at small distributors, which must pay significantly higher prices for the same products to serve health care providers."

Ataras echoed Earl's statement, saying, "The reality is that the reports and numbers that have been shared only tell half of the story. The numbers have been used to mislead an entire nation and misdirect the real issue that should be of concern to everyone out there - the ongoing shortage of critical medicines and how we solve this problem."

About NCPD

The National Coalition of Pharmaceutical Distributors is a national trade association representing the wellbeing and interests of the independent and specialty pharmaceutical distribution industry. NCPD is dedicated to securing the pharmaceutical supply chain and is aggressively working to help enact federal legislation to revamp the nation's chain of custody laws for prescription pharmaceutical products.

Bliss PR, Inc.
Julie A. Johnson, 503-883-9103
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