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