HCM 5010 Module 2 Intermediaries Written Assignment Example

Paid by the Price They Negotiate Down: Pharmacy Benefit Managers, Purchasing Groups and Wholesalers in the Middle of the Chain

Student Name

Master of Science in Healthcare Management, Thomas Edison State University

HCM-5010: Organization of the Healthcare Value Chain

Mentor Name

Month Day, Year

Paid by the Price They Negotiate Down: Pharmacy Benefit Managers, Purchasing Groups and Wholesalers in the Middle of the Chain

Intermediaries sit between the companies that make health products and the providers and patients who use them. Burns (2002) distinguishes product intermediaries, which purchase and distribute goods, from fiscal intermediaries such as insurers, which finance care. This assignment analyzes three product intermediaries that shape what Americans pay for drugs and supplies: pharmacy benefit managers (PBMs), group purchasing organizations (GPOs) and pharmaceutical wholesalers. For each, it examines market structure, how the intermediary earns money, the value it adds and the costs or conflicts it introduces, then recommends reforms.

Pharmacy Benefit Managers

PBMs administer prescription drug benefits for insurers, employers and public programs. They build formularies, negotiate rebates from manufacturers in exchange for favorable placement, contract with pharmacy networks, process claims and often run mail-order and specialty pharmacies. The market is highly concentrated. Federal regulators reported that the three largest PBMs processed nearly 80 percent of the roughly 6.6 billion prescriptions dispensed by U.S. pharmacies in 2023, and that each is now part of a vertically integrated company that also owns a major health insurer and its own pharmacies (Federal Trade Commission, 2024).

PBMs add value by pooling the purchasing power of millions of members, which lets them negotiate discounts manufacturers would not give a single employer. But their revenue model creates conflicts. When a PBM's income includes a share of rebates calculated from a drug's list price, it may prefer drugs with high list prices and large rebates over cheaper alternatives. Patients whose coinsurance is based on list price pay more even when the plan's net cost falls. The same interim report also raised concerns that integrated PBMs may steer patients to their own pharmacies and reimburse independent pharmacies at rates that threaten their survival.

Group Purchasing Organizations

GPOs negotiate supply and drug contracts on behalf of hospitals and other providers, aggregating their purchases to win lower prices. A small number of large GPOs account for most hospital purchasing. Burns and Lee (2008), in the first national survey of hospital purchasing alliances, found that alliances reduced costs by lowering prices, particularly for commodity supplies and pharmaceuticals, cut transaction costs through common contracts and returned revenue to hospitals through rebates and dividends. They were less successful in purchasing expensive physician preference items, such as implants, where surgeons' choices limit hospitals' bargaining power, and the authors found little evidence that alliances excluded innovative new suppliers.

The main concern about GPOs is again the revenue model. GPOs are largely funded by administrative fees paid by the suppliers whose prices they negotiate, which federal law permits under a safe harbor from anti-kickback rules. Critics argue that fees tied to sales volume can reward higher-priced contracts; supporters reply that competition among GPOs and hospitals' ability to buy outside them limit that risk.

Pharmaceutical Wholesalers

Wholesalers buy drugs from manufacturers and distribute them to pharmacies, hospitals and clinics, managing a complex logistics network that delivers thousands of products daily. Three companies, McKesson, Cencora and Cardinal Health, handle the great majority of U.S. drug distribution. Their value lies in efficiency and reliability: a single delivery replaces dozens of shipments from individual manufacturers, and wholesalers bear inventory and credit risk. Their margins are thin relative to their revenue. Because their fees are often a percentage of a drug's price, however, they share the incentive of other intermediaries to see list prices rise, and the companies' role in distributing opioids showed that intermediaries can carry public responsibilities their business model does not reward.

What the Three Have in Common

Three patterns appear across the sector. First, concentration: a few firms dominate each intermediary market, which gives them bargaining power over both manufacturers and providers. Second, payment tied to price: PBM rebate shares, GPO administrative fees and wholesaler margins all rise when list prices rise, which weakens their incentive to lower the prices patients and payers see. Third, opacity: rebates, fees and net prices are confidential, so employers and patients cannot easily judge whether the intermediary is delivering value. Burns (2002) describes the value chain as a set of relationships in which each party tries to capture value; intermediaries have been especially successful because they sit at points where information and volume concentrate.

Recommendations

Reform should preserve the real value of pooled purchasing while aligning incentives. First, delink compensation from price: PBMs and GPOs could be paid flat service fees rather than percentages of list prices or rebates, so their income does not grow when prices rise. Second, require transparency to clients: employers and health plans should be able to see rebates, fees and the net cost of each drug or contract. Third, base patients' cost sharing on net prices, so that negotiated rebates lower patients' own coinsurance and copayments. Fourth, scrutinize vertical integration, since a PBM that owns pharmacies and is owned by an insurer may favor its own businesses over lower-cost options.

For a health system manager, the practical implications are to read PBM and GPO contracts carefully, ask for pass-through of rebates and fees, and manage physician preference items through surgeon involvement in contracting, where purchasing groups have the least bargaining power.

Conclusion

PBMs, GPOs and wholesalers add value by pooling volume and managing logistics, but their concentration, price-linked revenue and opacity let them capture value at the expense of payers and patients. Delinking pay from price, requiring transparency and basing patient costs on net prices would preserve what intermediation does well while cutting what it costs.

References

Burns, L. R., & Lee, J. A. (2008). Hospital purchasing alliances: Utilization, services, and performance. Health Care Management Review, 33(3), 203-215. https://doi.org/10.1097/01.HMR.0000324906.04025.33

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

Federal Trade Commission. (2024). Pharmacy benefit managers: The powerful middlemen inflating drug costs and squeezing Main Street pharmacies [Interim staff report]. https://www.ftc.gov/system/files/ftc_gov/pdf/pharmacy-benefit-managers-staff-report.pdf