The Healthcare Value Chain: Demystifying the Role of GPOs and PBMs

Preface and Acknowledgments
Contents
List of Figures
List of Tables
Part I Introduction
1 Caution: Entering Dark Territory
	Dark Territory
	Welcome to Healthcare’s Dark Territory
	Dark Territory for Academics, Too
	Time for Some Critical Thinking
	Sources of Evidence
	Overview of Volume
	Notes
2 The Challenge of Complexity: Chains, Channels, Customers (and Value Too)
	The Challenge: Too Much Stuff?
	Multiple Chains
		The Vertical Chain
		The Value Chain
		The Supply Chain
	Multiple Channels
		The Retail Channel
		The Institutional Channel
	Multiple Customers
	Multiple Takes on Value
		Intermediaries in the Chain
		Value-Added Benefits
		What is Value?
		Two Other Value Frameworks
			The Iron Triangle
			The Triple Aim
	Value Chains and Value Chain Alliances
		Do Value Chains Exist in the U.S. Healthcare Ecosystem?
		Centrifugal Versus Centripetal Forces
	Agency Theory: A Way Out of the Wilderness?
	Conclusion
	Notes
Part II Group Purchasing Organizations (GPOs)
3 Group Purchasing Organizations (GPOs): An Overview
	Introduction
	GPO Functions and Services
		Contracting
		Products and Services
	Classifying the Types of GPOs
		GPO Ownership
		GPO Geographic Focus
		GPO Customers Served
	GPO Market Structure: Numbers, Consolidation, and Concentration
		GPO Numbers
		GPO Consolidation
			Historical Combinations
			Rationale for Consolidation
			Consolidation Impacts
			GPO Concentration
			The “Local” Issue
			National GPO Market Shares
			Limits to GPO Concentration
	Revenues and Revenue Models
		Premier’s Revenue Model49
			Sale of Contract Manufactured Products
			Performance Services
		Vizient’s Revenue Model50
		HealthTrust Purchasing Group’s Model
	GPO Contract Portfolios
		Overview of Portfolios
		Contract Portfolio Variations and Strategic Considerations
			Sole-Source Contracts
			Dual-Source and Multi-Source Contracts
		Pre-commitment Versus No Commitment Contracts
			Pre-commitment Contract Terms and Mechanisms
			Premier’s Pre-commitment Program
			Issues with Pre-commitment Programs
		Bundled Versus Unbundled Contracts
		Demystifying GPO-Mediated Contracts Between Suppliers and Buyers (Hospitals)
	GPOs and Downstream Buyers: Hospital Systems and IDNs
		Who’s Who
		Competitive Issues
		Upside to Hospital Consolidation and Regionalization of GPOs
		The GPO’s Value Proposition for Systems/IDNs
	GPOs and Upstream Suppliers
	Product Standardization
		What Is Standardization
		Avenues to Standardization
		Factors that Foster Success with Standardization
		Headwinds to Standardization
			Standardization of PPIs
			Commodity Items that Mimic PPIs
			Plurality of Decision-Makers and Influencers
			GPO Limitations
			Vendor Resistance to Standardization
			Constraints on Standardization Imposed by “All Healthcare Is Local”
		Standardization: An Uphill Climb
	Notes
4 The GPO Chronicle, Part I: 1910–2000— The Players, Market Structure, and Market Conduct
	Introduction
		A Challenging Chronicle
	The Players
		GPO Proliferation Over Time
		Group Purchasing: An Old Concept
		The Mesopotamia of Group Purchasing: The Hospital Bureau
			Other Early Entrants: 1916–1940
		The Rise of Shared Service Organizations (SSOs): 1940s–1970s
			Legislative and Networking Tailwinds
			The Demise of the Hospital Bureau and Ascendance of the SSOs: 1970s–1980s
		Multi-hospital Systems: The Forerunner of Regional and National GPOs
			The Late 1960s and 1970s: Investor-Owned Systems16
			The 1970s: Nonprofit Hospital Systems
		The Early GPO Powerhouses
			Voluntary Hospitals of America (VHA)
			Premier
			University Hospital Consortium (UHC)
			American HealthCare Systems (AmHS)
			Summary: The Fuel Powering Multi-hospital Systems
		The 1980s: Regulatory, Reimbursement, and Competitive Pressures
			The 1980s: More Competitors Join the GPO Party
	Changes in the GPO Playing Field and Market Structure: 1990s Disruption
		Competitive Threat Posed by Columbia/HCA
		IDNs: Yet Another Competitor
			The Threat Posed by IDNs
			The View from the GPOs
		National GPO Mergers in the 1990s
			Consorta
			The New Premier
			VHA/Novation
			BuyPower/Broadlane
			MedAssets
		GPO Merger Impacts
			Competitive and Institutional Isomorphism
		Aftermath: Whole Lotta Shakin’ Going On
			Falling Product Prices
			Growing Ties and Cohesion Between GPOs and Hospitals
			Growing Ties Between GPOs and Manufacturers
			Bigger GPOs, Bigger IDNs … Bigger Vendors
			Vendor Choice and PPIs
			Vendor Partnerships
			Some Disquieting Issues Regarding Small Manufacturers
	The New Playbook and Market Conduct: GPO Contracting Strategies
		The Emergence of Contract Compliance
			1970s/1980s
			1990s
		Standardization and Sole-Source Contracting
			1970s/1980s
			1990s
		Contract Administration Fees (CAFs)
			1970s/1980s
			1990s
		The Emergence of Product Portfolios and Bundles
			1970s/1980s
			VHA
			AHS and Hospital Corporation of America (HCA)
			Non-AHS Vendor Efforts in Portfolio Contracting
			SunHealth and Other Nonprofit GPOs
			1990s
			Evaluation of Bundles/Portfolios
		Long-Term Agreements in the 1990s
		New Types of Contracts
			Distributor and Prime Vendor Contracting in the 1980s
			New Vendor Contracts in the 1990s
		Looking Back: View from the End of the Twentieth Century
	Conclusion
	Notes
5 The GPO Chronicle, Part II: 2000–2010— New Judges of GPOs: The Press, the Senate, and the Courts
	Performance and Value Challenges in the New Millennium
	Press Reports
		Articles in the New York Times
			Rebutting Charges of Conflicts of Interest
			Rebutting Charges That GPOs Lobbied for Safe Harbors
	Senate Hearings
		Senate Hearings April 2002
		Senate Hearings July 2003
		Senate Hearings September 2004
		Senate Hearings March 2006
	GAO and OIG Reports
	Court Actions
		Commonalities in Case Arguments
			Illustration: Applied Medical Resources (AMR) v. Johnson & Johnson
		Some Inconvenient Truths from the Court Cases
			Product Quality and Brand Reputation
			Sales and Marketing Support
			Some Bigger Lessons
		Other Inconvenient Truths
			Hospitals (Not GPOs) Purchase Products and Not Based on CAFs
			GPO Contracts Do Not Guarantee Product Sales
			The “Real” Problem at New Start-Up Manufacturers
			Difficult Markets for Small Vendors
			Increasing Difficulty of These Markets for Small Vendors
	Summary
	Appendix A: 2002 HIGPA Code of Conduct Principles
	Appendix B: 2005 HGPII Code of Conduct60
	Notes
6 GPO Performance: A Review of the Literature
	Overview
	GPO Operations and Strategy
	Supply Prices
	Value of Group Purchasing
		Favorable Evidence
			Arizona State University (ASU) Studies
			Muse & Associates Studies
			Lewin Group Studies
			Other Studies
		Unfavorable Evidence
	GPO Contract Fees
	GPO Contracting Practices
	GPO Customer Service
	GPO Clinical Review Processes
	GPO Oversight, Codes of Conduct, and Self-Regulation
	Competitive Market for National GPOs
	Growing Competition from Regional GPOs, Local GPOs, Virtual GPOs, & IDNs
	GPOs’ Alleged Exclusionary Agreements and Anticompetitive Practices
	Access to Innovative Technology
	Continued Hospital Use of and Satisfaction with GPO Services
	GPOs and Drug Shortages
	Group Purchasing in International Contexts
	Summary of the Evidence on GPO Performance: What Have We Learned?
	Notes
7 Summary: GPOs’ Pro-competitive and Welfare-Generating Benefits
	Introduction
	GPOs’ Historical Role in Pooling Hospital Purchases
	GPOs Are Powerful Intermediaries That Confront Suppliers4
		GPOs Seek to Neutralize Suppliers and Product Differentiation
		Groups Serve as a Countervailing Force to Suppliers
		Groups’ Consolidation Augments Their Countervailing Power
		Purchasing Groups Wield Influence Upstream over Product Suppliers
		Historical Evidence of Groups’ Influence over Suppliers
		Common Group Objective: Lower Product Prices
	Groups Respond and Are Accountable to Their Hospital Members
		Group Strategic Objectives Reflect Hospital Member Needs and Demands
		Groups Accommodate Interests of Their Diverse Membership
		Group Contracting Strategies Reflect Member Needs and Demands
		Group Contracts Benefit Hospitals
		Hospital Participation in Most Groups and Group Contracts Is Voluntary
		Groups Sign Supplier Contracts That Hospital Members Want
		Groups Are Unlikely to Sign Deals That Do Not Serve Hospitals
		Large Suppliers’ Failure to Coerce Hospitals into Accepting Anti-competitive Contracts
		Hospitals Hold Groups Accountable
		Groups Do Not Sanction Hospital Members
	Group Contracts with Suppliers Are Pro-competitive and Welfare-Enhancing
		Sole-Source Contracts with Suppliers Have Pro-competitive Effects
		Packaged Discount Contracts with Suppliers Have Pro-competitive Effects
	Purchasing Groups and Supplier Competition Are Compatible
		Groups Want Competitive Supplier Markets
		Loss of Group Contracts Can Spur Supplier Competition
	Low Levels of Compliance Allow Supplier Competition for Market Share
		Low Compliance
		Compliance Problems
		IDN Exceptionalism
		License to Sell
		Measurement Issues
		Off-Contract Buying
		Absence of Coercion and Control
	GPOS Are Not Inimical to New Technology or Small Suppliers
		Purchasing Groups Have Not Blocked Hospital Access to New Technology
		Groups Historically Allied with Small Suppliers to Serve Hospital Members
		Groups Do Not See Themselves as the Protector of Small Suppliers
	Clinicians Select the Technologies They Use (Not the GPOs)
		Criteria Used by Providers in Selecting Suppliers
		Hospital and Physician Roles in Supplier and Technology Selection
	Conclusion: Groups Balance Access to Technology with Cost Reduction
	Notes
8 GPOs: Differentiated or Commoditized?
	Introduction
	Comparative Effectiveness
	Commoditization: Reality or Fiction?
		Group Purchasing Organizations
		Background on Healthcare Intermediaries
	Empirical Methods
		Study Population
		GPO Performance Measures
		Analytic Approach
	Results
		Purchasing Alliance Memberships
		GPO Utilization
		Sources of Savings from the National GPO
		Sources of Value from Other GPO Services
		Satisfaction with GPO Services
	Discussion
	Notes
Part III Pharmacy Benefit Managers (PBMs)
9 PBMs and the Ecosystem of  Prescription Drug Benefit Contracting
	Introduction
	Variation Reigns
	Understanding Employer Health Coverage
		Variation in Employer Financing of Health Plan Coverage
	Medical and Pharmacy Benefit Contracting by Employers
	The Flow of Products and Payments for Branded Drugs in the Retail Channel
		Product Flow
		Money Flow
		Complexity in the Money Flow
	Prescription Drug Benefit Design in ERISA Health Plans
		Drug Benefit Design
		Prescription Drug Formulary Overview
		Variation in Formulary Decision-Making
	ERISA Plan Sponsors’ Management of Drug Rebates
		Retail Pharmacy Contracts and Reimbursement
	Cost-Sharing for Drugs
		Cost-Sharing Data from Kaiser
		Cost-Sharing Data from PBMI
	The Brouhaha over the Gross-to-Net Price Disparity
	The Pharma Manufacturers Strike Back
		Cooptation of the PBMs via Ownership
		Disease Management
		Use of Coupons and Patient Assistance Programs
	Summary
	Notes
10 The PBM Chronicle in the Twentieth Century
	Chapter Introduction and Overview
		Rise of Prescription Drug Benefits
		Rise of the Pharmacy Benefit Managers (PBMs)
	The Five Forces
	The Rise of Pharmacy Benefit Managers: 1960s–1980s
		Building on the HMO/MCO Foundation
		Administrative Solutions
		1st Generation PBM Benefits: Identification Cards, Claims Processing & Pharmacy Networks
		Early Spread of Card Plan PBMs as Outside Contractors to Payers
		Calls for Integrated Care and Managed Care Discounts
		Mail-Order Benefit
		Generic Substitution
		Summary: 1st Generation PBM Benefits
	Subsequent PBM Growth and Success: The Early 1990s
		Pharmacy Networks and Use of Generics
		Formularies for Branded Drugs
		Manufacturer Discounts
			Introduction
			Following in the GPOs’ Footsteps
			PBM Replication of GPO Traction
			Shift to Discounting
			Discounting Dynamics
			Public Payers and Discounting
	Shift to 2nd Generation of PBM Services: Mid-1990s
		Demise of Discounting
		Shift to Utilization Management
		Disease Management
		Total Cost, Pharmaceutical Care Management, and Big Data
		Vertical Integration with Manufacturers
			Background: Playing Defense
			PBM Cooptation
			A New Path to Disease Management?
			The Government Kibosh on Manufacturer-PBM Combinations
	Back to the Future in the Late 1990s
		Weakening of MCO/PBM Efforts
		The Empire Strikes Back
		In Search of Relief
		Antitrust Issues
		The Safe Harbor Comes to the Retail Channel
	Aftermath
	Notes
11 PBM Tailwinds in the New Millennium: Specialty Drugs, Specialty Pharmacies, and Insurance Expansion
	Introduction
	PBM Tailwind #1: Rising Prescription Volumes & Revenues
	PBM Tailwind #2: Specialty Pharmaceuticals and Specialty Pharmacies
		Specialty Drugs
		Specialty Drug Utilization
		Specialty Pharmacies and PBMs
		Cost Containment
		Drug and Medical Benefit
	PBM Tailwind #3: Insurance Changes in the Private Sector
		MCO Consolidation
		High Deductible Health Plans
		Cost-Sharing
	PBM Tailwind #4: Insurance and Service Expansions in the Public Sector
		Medicare Modernization Act of 2003
		Tiers, Rebates, and PBMs
		Medicaid Enrollment and Program Expansions
		The 340B Drug Pricing Program
			Background19
	PBM Tailwind #5: PBM Mergers
		Setting the Stage for Consolidation: Slowdown in Growth
		Caremark & AdvancePCS
		Express Scripts and Medco
		Horizontal Mergers: 2013–2015
		Vertical Mergers: 2018–
	PBM Tailwind #6: PBMs Meet GPOs
	Joint Impact of Tailwinds on PBM Value Chain and Revenue Model
		The Value Chain of Services
		PBM Business Model and Sources of Revenues (Circa 2005)
		Revisiting the PBM Business Model and Sources of Revenues (2015–2021)
	Conclusion
	Notes
12 PBM Headwinds in the New Millennium: Court Challenges, Merger Scrutiny, and Congressional Hearings
	Introduction
	New Rules of Behavior for PBMs
		Are PBMs Fiduciaries?
		Gold Standard of Behavior
	PBM Competition in the Early 2000s
	PBM Consolidation and Antitrust
		Caremark and AdvancePCS (2003)
		Other Uncontested Mergers (2007–2009)
		Express Scripts and Medco 2011–2012
			Congressional Hearings
			FTC Review
		2015 Hearings in the U.S. House of Representatives
		2018–2019 Hearings
		Additional Evidence
		The Conundrum
	A Host of Continuing, Contentious Issues
		Issue #1: Rebates
			Prevalence of Rebates
			Large, Growing Amount of Rebate Dollars
			Drivers of Rising Rebates
			Distribution of Rebate Dollars
			The Complexity of Rebates
			Rebate Benefits
			Rebates vs. PBM Profits
			The Issue Lingers on
		Issue #2: Drug Spending, Drug Prices, and Rebates
		Issue #3: PBMs and Pharmacies
		Issue #4: Safe Harbor Redux
		Issue #5: Transparency
		Other Issues
	Other Possible Headwinds: Employer and Health Plan Purchasing Consortia64
		The Promise
		Prior Employer Strategies and Current Dilemmas
		Prior Employer Consortia in Healthcare
		Limited Success of and Impediments to Employer Consortia
		Employer Consortia for Drug Purchasing
	From the Sublime to the Ridiculous
		The Brouhaha over Epi-Pens
	Conclusion
	Notes
13 Looking Under the Hood: PBM Contracts
	Introduction
	Case Example of a Manufacturer-PBM Contract
		The Initial Contract
		Subsequent Amendments
		Contract Analysis
			Formulation of the Formulary
			Variability in Formularies and Tiers
			Contract Evolution
			Contracting Friction
			Confidentiality
			PBM View of Rebates
	Case Example of a PBM-Health Plan Contract
		PBM Services
		PBM Compensation
		Enrollee Out-Of-Pocket Costs
	Vertical Integration of PBMs With Health Plans
		Adversarial Relationships: Anthem—Express Scripts Litigation
		Downstream Effects of the Litigation
		Historical Rationales for Vertical Integration
		Current Rationales for Vertical Integration
		Challenges to Vertical Integration
		Consequences of Vertical Integration
		Ride into the Danger Zone?
	Outcomes-Based Contracting
		Rationale
		Prevalence
		Background Issue in OBC: What is Quality?
		Questionable Success in Using VBC in PBM Contracts
		Shaky Track Record of VBC in Healthcare Delivery
	PBM Value Proposition for Payers
		Health Plans’ Return on Investment
		Employer and Health Plan Satisfaction with PBMs
		Are PBMs Commodities?
	Notes
Part IV Summary and Conclusion
14 Conclusion
	Revisiting Chapter 1 and the Volume’s Purpose
	Lessons of History
		GPOs and PBMs Have Historically Served the Interests of Local Providers
		GPOs and PBMs Seek Leverage Over Product Suppliers
		GPOs and PBMs Serve as the Agents of Providers and Health Plans, Respectively
		GPOs and PBMs Have Been Subject to Considerable Federal Oversight
		GPOs and PBMs Have Utilized Many of the Same Contracting Tools for Decades
		GPO and PBM Business Models Have Changed Over Time
	Static vs. Allocative Efficiency: Winners and Losers
	Tradeoffs: The Name of the Game
	Consolidation
	Existential Threats
		Safe Harbors
		Disintermediation
		The Empire (Always) Strikes Back: Supplier Consolidation, Concentration, & Pricing
	Summary
	Notes
Index