Considering going direct from manufacturers to providers?

Sept. 16, 2019
Cutting out the middleman will mean redesigning the supply chain and increasing costs

What if the entire pharmaceutical supply chain went directly from manufacturers to providers? Prepare for healthcare costs to increase $33-53 billion per year.

According to a new report from The Healthcare Distribution Alliance (HDA), this is the annual value pharmaceutical distributors create in the U.S. supply chain. We connect more than 1,300 manufacturers to 180,000+ dispensing partners and provide not only the logistical but also financial backing that enables the entire supply chain. It’s a role no one else in the industry could fill or do more efficiently. In the last 10 years, distributors have reduced operating expenses from $7.5 billion to $4.6 billion — an almost 40 percent cut that moved operating expenses per prescription from $2.44 to $1.11. Yet, debate continues around whether it would be better and more cost-effective to “cut out the middlemen” and have manufacturers contract and distribute their products directly with pharmacies and providers.

I can tell you definitively it would not. But, let me provide more context.

If the supply chain did not include distributors, manufacturers would need to absorb significant financial risk while incurring new costs, managing inventory and staying efficient. Distributors are the “investors” in the supply chain — we deploy our capital strategically, taking both possession and title of manufacturers’ products, so that manufacturers and downstream customers are able to manage their respective cash flows. We mitigate substantial risk for manufacturers by providing a return on investment before a single pharmacy or provider places an order. Without a distributor, manufacturers must maintain ownership, bear the risk of holding, transporting, and selling the inventory, as well as obtaining payment from providers. Instead of a consolidated agreement with a distributor, manufacturers would need to manage thousands of individual contracts and customer payments, and could run the risk of not getting paid at all.

Manufacturers would have to divert investments from critical functions, such as R&D, to establish a number of new capabilities. Administrative expenses would rise as manufacturers build more infrastructure. According to the HDA’s report, delivery expenses would increase by a factor of 20 as warehouse-to-pharmacist bulk shipments are replaced by individual manufacturer-to-provider overnight deliveries. Warehouse operations, as well as packaging costs, would grow, and expertise in maintaining temperature precision throughout delivery would have to be added. Manufacturers would also assume responsibility for end-to-end product traceability, suspicious order monitoring programs and working with government agencies to secure controlled substances.

Additionally, manufacturers would be forced to provide inventory management services. Pharmacies do not have the capacity to warehouse large quantities of products, nor do they have the space to stock rarely needed, yet patient-critical, medicines. They rely on their distributors to manage those inventories and to deliver almost any product, for any patient, anywhere, within 24 hours. Not only would these new demands complicate manufacturers’ processes but also put immense burden on points of care. Pharmacies, health systems and physicians would be forced to dedicate resources to coordinating multiple product deliveries, returns, payments, data exchanges, and more with hundreds of manufacturers.

We know the current North American pharma supply chain is highly cost-effective. We know it provides the greatest value for manufacturers, providers, payers and patients. And, we know other large logistics providers could only provide a fraction of the services supported by our supply chain and at higher costs. But, now we need others to know it too.

We must work together, as manufacturers and distributors, to provide others in and outside our industry with more information on how each member of our supply chain operates and how, without even one us, patients would be negatively impacted. We are all working diligently as an industry to keep costs as low as possible and increase efficiency. However, there is still more that can be done and benefit design and access issues need to be addressed. If we embrace each other’s roles in the supply chain, we can find ways of working together to drive the best collective value for patients everywhere. 

About the Author

Robert Mauch | Executive Vice President and Group President