Chapter 13
Channels of Distribution
Norman V. Carroll, PhD
Professor of Pharmacy Administration
Virginia Commonwealth University School
of Pharmacy
Chapter 13 slides for
Marketing for Pharmacists,
2nd edition
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
MANF
RETAILER
MANF
RETAILER
Efficiency
MANF
MANF
MANF
RETAILER
WHLSER
RETAILER
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
Total
Indeps
Chains
60000
50000
40000
30000
20000
10000
0
1990
1992
1994
1996
1998
2001
2003
Source: IMS DDD Class of Trade Analysis
2005
Managed Care Enrollment (000)
250000
200000
150000
PPOs
HMOs
100000
50000
0
1990
1995
2000
2003
Aventis MCD
Source: Managed Care Digest
HMO-PPO
2004
100
80
60
40
20
0
Govt
Priv3PP
19
90
19
92
19
94
19
96
19
98
20
00
20
02
20
04
% of Rxs
3rd Party Payment for Rx Drugs
IMS DDD Class of Trade Analysis
Sales of Mail Order Pharmacies
45000
40000
35000
30000
Sales in 25000
Millions 20000
15000
10000
5000
0
43929
18512
6053
100
750
1981
1986
2113
1990
1995
Source: IMS DDD Class of Trade Analysis
2000
2005
Growth of PBMs
PLAN SPONSOR
Commonwealth
of Virginia
PBM
Medco
PHARMACY
Rite Aid
COVERED LIFE/BENEFICIARY
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
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?
Major Pharmacy Benefit Managers
PBM
Rx volume
(millions)
Caremark
Medco
Express
432
397
300
Total top-3 PBMs
1,129
Total retail rx volume 3,175
Major Pharmacy Benefit Managers
PBM
Owner
Caremark McKesson (PCS) 
Lilly (PCS)
Rite Aid (PCS)  Advance Paradigm 
Advance/ PCS
Baxter  Indep Caremark 
PCS/Caremark  CVS Caremark
Medco
IndependentMerck
Independent
Express
Independent
Consolidation and Alliances
Corporate chains
- Consolidation (horizontal integration)
- Market power
- Efficiency
- Vertical integration - PBM
Voluntary chains (small chains and indeps)
- Wholesalers
- PBM functions
Consolidation in Chain Pharmacy
Walgreens
1990
1,525
1995
2,085
2005
4,962
Rite Aid
Thrifty
2,352
1,065
2,759
1,040
3,331
(Rite Aid)
CVS
801
1,366
5,400
Revco
1,870
2,169
(CVS)
Hook-SuperX
1,110
(Rev)
(CVS)
Eckerd
1,632
1,716
(CVS/ Coutu)
Thrift Drug
472
640
(CVS/ Coutu)
Jean Coutu
Totals
192
11,019
470
12,245
2,243
15,936
Wholesaler-Sponsored Voluntary
Cooperatives
Name
Health Mart
Valu-rite
AccessHealth
Sponsor No.
McKesson
McKesson
McKesson
Pharmacies
3,000
?
3,000+
Family Pcys
Amerisource- 2,500
Bergen (ABC)
Good Neighbor ABC
2,500
Performance + ABC
3500+
Leader
Cardinal
3,300
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
Summary - Trends
Increasing third-party payment /
managed care
Increasing mail order sales
Increasing importance of PBMs
Consolidation:
PBMs
Chain pharmacies
Sort of – community pharmacies
Increased efficiency