Yet Another Source of Oncology Profit Loss: Drug Distribution

ABSTRACT: Where is all the money in the drug distribution system going? To find out, look at the four types of costs that determine drug pricing.

As oncology drug costs to payers continue to soar-almost $200 billion annually and growing-new market forces are combining to allow health plans to aggressively manage oncology drug costs, which means less profit for community doctors.

But where is all the money in the drug distribution system going?

To identify who is making what portion of the profit in oncology drug distribution, there are four parts to consider in pricing:

1. Manufacturer’s cost: The technological cost to produce, shop, or otherwise bring the drug to market. Their profit margin should be transparent-they know the end user’s profit margin is, at a maximum, 6%.

2. Distributor’s cost: Includes acquisition costs, storage costs, and a reasonable profit margin. This margin is 2%, considering their cost is only 1% above the manufacturer’s cost. ASP (average sales price) does not include this 2% shipping, and distribution cost, and this is a permitted cost added on to the ASP.

3. GPO (group purchasing organization) cost: Commissioned to help medical oncologists in the community purchase drugs at their lowest possible price. The GPO secures a 0.25% to 0.75% discount from the distributor, who would negotiate an even better cost with higher volume. The manufacturer does need to know the demand to appropriately staff and manage production.

4. Acquisition cost (or oncologist’s cost): It should be ASP less 2% as an industry standard, but, in reality, it is typically 4% above ASP.

The Million Dollar Questions

The million dollar questions we should be asking:

• Who is taking the 2% to 4% profit margin? • Are all these costs necessary?

In the end, community oncologist practices are suffering profit loss from the drug distribution process because, for one, it is way too complicated.

Your thoughts?

CCP&P would like to hear your thoughts on what process the oncology community should engage in to eliminate both the GPO and distributor overhead factors. Please send your comments to: Ronald.Piana@cmpmedica.com.