HCM 5010 Module 1 Value Chain Overview Written Assignment Example

Following $4.9 Trillion Through the Chain: How Money Moves From Payers to Producers in U.S. Health Care

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Master of Science in Healthcare Management, Thomas Edison State University

HCM-5010: Organization of the Healthcare Value Chain

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Month Day, Year

Following $4.9 Trillion Through the Chain: How Money Moves From Payers to Producers in U.S. Health Care

The United States spent $4.9 trillion on health care in 2023, 17.6 percent of its economy, after spending grew 7.5 percent in a single year (Martin et al., 2025). Numbers of that size are hard to reason about unless the system is broken into parts. Burns (2002) offers a way to do so: the health care value chain, in which payers finance care, intermediaries purchase and distribute products and services, manufacturers produce drugs, devices and supplies, and providers deliver care to patients. This assignment uses that framework to describe the U.S. system, follows two transactions through the chain, and identifies where costs and bargaining power accumulate.

The Value Chain Framework

Burns (2002) describes the chain as running from upstream producers to downstream providers, with intermediaries in between. Manufacturers include pharmaceutical, biotechnology, medical device and medical-surgical supply companies. Product intermediaries include wholesalers and distributors, group purchasing organizations (GPOs) that negotiate supply contracts for hospitals, and pharmacy benefit managers (PBMs) that manage drug benefits for insurers and employers. Fiscal intermediaries are the insurers and health plans that collect premiums and pay claims on behalf of employers and government. Providers include hospitals, physicians, clinics, nursing homes and pharmacies. Payers sit at the end of the chain that funds everything: employers, households and government.

The framework's value is that it shows relationships, not just players. Each link negotiates with the next, and each tries to capture value from those around it. A drug's price, for example, is shaped by the manufacturer, the PBM, the insurer and the pharmacy, each with its own incentives.

Who Pays

In the national health expenditure accounts, the federal government, households, private businesses and state and local governments are the main sponsors of health spending. In 2023, 92.5 percent of Americans had insurance, the highest share on record in the accounts, as private enrollment grew strongly for a second year, while Medicaid enrollment and spending growth slowed as the COVID-19 public health emergency ended (Martin et al., 2025). Most money, whatever its source, reaches providers through fiscal intermediaries: private insurers administer employer plans, and many also run Medicare Advantage and Medicaid managed care plans for government. Insurers therefore sit at a central point in the chain, collecting most of the system's revenue and deciding how much to pay providers.

Two Transactions Through the Chain

Consider a hip replacement at a community hospital. The implant is made by a device manufacturer, which sells it to the hospital, often under a contract negotiated by the hospital's GPO, though many implants are physician preference items chosen by the surgeon. The hospital bills the patient's insurer for the episode, and the insurer pays a negotiated rate, under Medicare a fixed payment by diagnosis-related group. The hospital's margin depends on the difference between that payment and its costs, including the implant, so the hospital has a strong incentive to negotiate implant prices, while the surgeon's preferences and the manufacturer's relationships with surgeons push the other way.

Now consider a prescription for a brand-name drug filled at a retail pharmacy. The manufacturer sets a list price and negotiates rebates with the PBM in exchange for favorable placement on the formulary. The PBM, working for the insurer or employer, sets the patient's copayment and reimburses the pharmacy, keeping part of the spread and part of the rebate. The patient's cost may be based on the list price rather than the net price after rebates. Each of four parties shapes what the drug costs, and the patient sees only one number.

These examples show how prices emerge from negotiation between links rather than from a single market, and why the textbook treats the chain as a set of power relationships.

Where Costs Build Up

Among spending categories, hospitals take the biggest share, with physician and clinical services next and retail prescription drugs after them. Burns (2002) argues that the chain's inefficiencies arise largely in its links: duplicated administration among many insurers, purchasing that is fragmented across thousands of providers, and intermediaries whose revenue rises with prices. International comparisons point the same way. Comparisons of American spending with that of ten other wealthy nations have found that higher prices, more than greater use of services, explain most of the American spending gap (Papanicolas et al., 2018), and prices are set in exactly these negotiations between the chain's links.

Bargaining power is therefore the key variable. Large health systems can negotiate higher prices from insurers; large insurers and PBMs can negotiate lower prices from smaller providers and manufacturers; and manufacturers of drugs and devices without close substitutes can set prices that others must pay. Consolidation at any link shifts value toward that link.

Implications for Managers

For a healthcare manager, the value chain view has practical uses. A hospital's supply costs depend on its GPO contracts and on how well it manages physician preference items. A health system's revenue depends on its negotiating position with insurers. A pharmacy's survival depends on PBM reimbursement terms. Understanding who sits upstream and downstream, and what each wants, helps managers identify where they can gain value and where they are exposed. The modules that follow analyze intermediaries, manufacturers and providers in turn.

Conclusion

Mapping the U.S. health system onto Burns's value chain turns $4.9 trillion of spending into a set of relationships among payers, intermediaries, manufacturers and providers. Following a hip implant and a prescription through the chain shows that prices result from negotiations in which each link seeks value, and that costs build up where bargaining power concentrates. That insight frames the sector analyses in the rest of the course.

References

Burns, L. R., & Wharton School Colleagues. (2002). The health care value chain: Producers, purchasers, and providers. Jossey-Bass.

Martin, A. B., Hartman, M., Washington, B., Catlin, A., & National Health Expenditure Accounts Team. (2025). National health expenditures in 2023: Faster growth as insurance coverage and utilization increased. Health Affairs, 44(1), 12-22. https://doi.org/10.1377/hlthaff.2024.01375

Papanicolas, I., Woskie, L. R., & Jha, A. K. (2018). Health care spending in the United States and other high-income countries. JAMA, 319(10), 1024-1039. https://doi.org/10.1001/jama.2018.1150