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U.S. Department of Health and Human Services

Regulatory Information

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Prescription Drug Marketing Act Report to Congress (2001): Back to Table of Contents 

Previous Section: 2.4 The Influence of Pharmacy Benefit Management Companies (PBMs) and Health Maintenance Organizations (HMOs) on Prescription Drug Prices

Authorized distributor (or authorized distributor of record). Any distributor of a prescription drug that has a written agreement with the manufacturer of the prescription drug and conducts at least two transactions with the manufacturer of the prescription drug within any 24-month period.

Average wholesale price (AWP). The AWP is a published wholesale price or "list price" suggested by the manufacturer of the drug. Although the AWP does not capture the actual transaction prices, it serves as a reference for pricing, negotiations, and reimbursements.

Brokerage. The combination of drop-ship and dock-to-dock delivery services provided by wholesalers. In brokerage services, wholesalers do not bring the products into their warehouses.

Buy-side margin. The term refers to the early payment discounts and other earned or negotiated rebates and discounts received by wholesalers from drug manufacturers. Further, increases in the value of wholesalers' inventories as manufacturers' prices rise are also considered buy-side margins.

Chain drug store. A company that owns and operates four or more pharmacies. Food store and mass merchandiser pharmacies are also considered chain drug stores. Examples include Shaw's, Wal-Mart, Rite-Aid, and CVS.

Dock-to-dock delivery. In dock-to-dock delivery, a wholesaler obtains the drugs from the manufacturer and delivers them to a dispenser's own warehouse without taking the drugs into its own inventory. Thus, dock-to-dock sales are also referred to as non-stock sales.

Drop shipment. In drop shipments, a drug manufacturer directly delivers the drugs to a dispenser, but the order and payment is made through a wholesaler.

Drug formulary. A list of drugs compiled by a government body, third-party insurer or health plan, or another institution that may or may not be dispensed or reimbursed. Some institutions or health plans develop closed (i.e., restricted) formularies where only those drug products listed can be dispensed in that institution or reimbursed by the health plan. Other formularies may have no restrictions (open formularies) or may have limited restrictions such as higher patient co-payments for non-formulary drugs.

Float. The time differential between when a wholesaler receives payment from its customer (i.e., retail dispenser, health care organization, etc.) and when the payment is due to its supplier (i.e., pharmaceutical manufacturer or other wholesaler).

Group purchasing organization (GPO). An entity consisting of two or more hospitals or other health care entities that is formed to offer its members access to purchasing contracts for health supplies (i.e., pharmaceuticals, biologics, medical/surgical equipment, laboratory supplies, and other capital equipment). GPOs actively negotiate contracts with manufacturers on behalf of their members, provide their members access to the purchasing contracts of other GPOs, and/or have central purchasing supply sites which are utilized by their members.

In-state wholesaler. A wholesaler that distributes drug products in a given state and is physically located in that state.

Independent drug store. A company that owns and operates three or fewer pharmacies. These are also referred to as community or neighborhood pharmacies.

Integrated delivery network (IDN). Also known as integrated healthcare delivery network (IHDN), integrated delivery system (IDS), or integrated health/healthcare system (IHS). A financial and management structure that unites hospitals, physicians, ambulatory care sites, and managed care plans through ownership or exclusive formal agreements to provide a system to deliver a continuum of healthcare services. The IDN appears totally integrated to the patient, provider, and payer throughout the healthcare system. Increasingly, a shared financial information system and optimization of resources connect the structural components of the IDN.

Mail-order pharmacy. A pharmacy that dispenses prescriptions to patients who submit their prescriptions by mail or fax. The pharmacy then mails the filled prescription to the patient. Mail-order pharmacies generally serve patients on long-term drug therapies and those without immediate drug needs. The average size of prescriptions (i.e., the number of capsules or tablets) dispensed by mail-order pharmacies is usually 3 times larger than those dispensed by retail pharmacies (NACDS, 2000).

Manufacturer-direct sale. The type of sale that bypasses the need for any intermediary distributor. The product is sold and shipped directly by the manufacturer to the dispenser.

Mass merchandiser. An establishment, also known as a department store, that is primarily engaged in retailing a wide range of merchandise, including apparel, furniture, appliances, paint, hardware, toiletries, cosmetics, and prescription drugs. Prescription drugs are dispensed through an on-site pharmacy. Examples of mass merchandisers include Wal-Mart, K-Mart, and ShopKo.

National Wholesale Druggists' Association (NWDA). The national trade association that represents pharmaceutical and related healthcare product distributors throughout North America.

Non-stock sales. Brokerage sales, dock-to-dock delivery sales, drop shipments, and any other form of sales not placed in inventory. These generally have a significantly lower margin than stock sales.

Out-of-state wholesaler. A wholesaler that distributes drug products in a given state but is physically located in another state.

Pharmaceutical Distributors Association (PDA). An industry trade association that represents secondary and smaller wholesalers. The association's membership includes Supreme-Purity Distributors Company, Quality King Distributors, Inc., and Victory Wholesale Grocers Company.

Pharmacy benefit management company (PBM). An entity that administers the prescription drug part of health insurance plans on behalf of plan sponsors, such as self-insured employers, insurance companies, and health maintenance organizations (HMOs). PBMs provide pharmacy claims processing and mail-order pharmacy services in addition to other services, such as rebate negotiations with pharmaceutical manufacturers, development of pharmacy networks, formulary management, drug utilization reviews, generic drug substitution, and disease management programs.

Rebate. The amount that the manufacturer of the drug pays to an insurer or health plan for each unit of drug dispensed. Rebate arrangements exist between drug manufacturers and Medicaid agencies, HMOs, and other insurers or drug plans, and generally bypass the pharmacy. Rebates are also referred to as "after market" arrangements because they do not affect the prices paid at the time of service, but are implemented later, ultimately reducing the payer's expenditures or program costs (Kaiser Family Foundation, 1999)

Self-warehousing. A type of distribution system where the retail or the institutional dispenser take on the task of distribution itself. Instead of relying on an outside distributor, the retailer or the institutional dispenser buys direct from the manufacturer, stores the drugs in one or more of its own warehouses, and then delivers them to its retail stores or hospitals as needed. Self-warehousing is most prominent among the chain drug stores.

Sell-side margin. Wholesaler revenues that are generated from fees and other charges obtained from dispensers. During the 1980 to 1998 period, sell-side margins have declined from 5.5 percent to 0.35 percent (U.S. District Court for the District of Columbia, 1998).

Upcharge. The percentage fee that is paid by the dispenser to the wholesaler for the cost of distribution.

Prescription Drug Marketing Act Report to Congress (2001): Back to Table of Contents 

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