The Mechanisms of Group Purchasing Organizations and Their Contribution to Drug Price Inflation in the Pharmaceutical Supply Chain

Group Purchasing Organizations are third parties that make deals with drug makers and wholesalers for hospitals and other health centers. They try to use the buying power of many groups to get lower drug and supply prices. Many hospitals in the U.S. depend on GPOs to buy drugs in bulk to save money.

But GPOs add another step in the drug supply chain, making money flow more complicated and raising drug costs. They earn fees from drug makers based on how much and how expensive the drugs are, which creates a reason to make more money instead of lowering prices. For example, Pharmacy Benefit Managers, who often work with GPOs, made about $60.6 billion in 2022, with a 31.2% profit margin. This is much higher than what wholesalers and pharmacies make. This raises questions about how GPOs and PBMs really affect drug prices for doctors and patients.

Pharmacy Benefit Managers (PBMs) and Their Relationship to GPOs

PBMs act as middlemen between drug makers, pharmacies, and health insurers. They run drug plans and negotiate rebates, discounts, and fees with drug makers. The top three PBMs in the U.S.—Caremark (CVS Health), Express Scripts (Cigna), and OptumRx (UnitedHealth Group)—control about 80% of the drug market. These PBMs often work closely with GPOs, making a strong supply chain connection.

The Federal Trade Commission (FTC) recently filed a complaint against these three PBMs and their GPO partners for unfair business practices. The FTC says PBMs made insulin prices higher by pushing for bigger rebates that raise list prices. For instance, the price of Humalog insulin went up more than 1,200%, from $21 in 1999 to over $274 in 2017. This price jump is linked to PBMs creating drug lists that exclude cheaper insulins unless drug makers give bigger rebates.

This rebate system makes drug makers increase list prices because higher prices lead to bigger rebates and fees for PBMs and GPOs. Patients who pay a lot out-of-pocket suffer the most. The FTC found that patients with high deductibles or coinsurance don’t benefit from rebates and end up paying the full high price. In 2019, one out of four insulin patients said they could not afford their medicine because of these high costs.

The Profit Motive and Conflicts of Interest

The money reasons inside the drug supply chain, especially for PBMs and GPOs, cause conflicts that affect drug prices. PBMs get money based on the list price of drugs through rebates and fees, even though they may not give extra services that make these payments fair. The FTC says PBMs collect billions in rebates and fees, but patients often pay more than the real cost of insulin after rebates.

A vice president from Novo Nordisk, a big insulin maker, once said PBMs were “addicted to rebates,” showing that PBMs pressure drug makers to raise prices to get bigger rebates. These deals are not clear, hiding the true drug costs and the profits PBMs and GPOs keep.

In 2022, PBMs kept about 12.4% of the total rebates and fees paid by drug makers and pharmacies. Wholesalers and pharmacies made much less compared to them. The biggest PBMs control almost 79% of the U.S. market. This gives them power to demand big rebates and exclusive deals. This hurts competition and makes prices higher, which goes against the goal of making healthcare cheaper.

The Increased Complexity of the Pharmaceutical Supply Chain

Adding GPOs and PBMs creates more layers in the drug supply chain. This not only raises costs but also can cause problems between drug makers, health centers, and patients. For example, China runs a centralized drug buying program using GPOs. This program cut drug prices by 54% on average and saved over 53 billion yuan each year. This helped hundreds of millions of patients by lowering medical insurance costs.

But the Chinese program also showed problems between GPOs wanting profits and hospitals focusing on public good. The study found that when GPOs tried to make money, hospitals resisted deals that hurt public health goals. This caused drug shortages during the COVID-19 outbreak because GPOs did not want to buy drugs at a loss.

The U.S. system is less centralized and different, but these examples show that balancing money goals of GPOs with the public good of hospitals is important. Right now, the U.S. system is not very clear and has weak rules. This lets PBMs and GPOs keep large amounts of drug payments, which pushes up costs without helping patients or providers much.

Implications for Medical Practice Administrators, Owners, and IT Managers

Healthcare administrators, owners, and IT managers play a key role in handling drug price problems. Rising drug prices, partly caused by PBMs and GPOs, put money pressure on medical offices and patients. Knowing how these groups work helps healthcare leaders make better choices about pharmacy contracts, reimbursements, and cost control.

Administrators should push for price transparency and look for other ways to buy drugs. Some hospitals try buying directly from drug makers or use smaller, independent GPOs that focus more on clear prices rather than big rebates.

IT managers also have an important job managing systems that handle pharmacy benefits and prescriptions. Using technology that shows real-time cost data, tracks rebate flows, and manages drug lists better can reduce paperwork and help avoid high drug costs.

AI and Automation in Pharmaceutical Supply Chain Management

Technology like artificial intelligence (AI) and automation can help with some problems in drug supply chains led by PBMs and GPOs. AI can study lots of price and rebate data to find price inflation and suggest cheaper choices in real time.

For medical offices, AI-based phone automation and answering services can improve patient talks about drug costs, insurance approvals, and coverage. This saves time spent on insurance questions and prescription details. Staff can then focus more on patient care and cost control.

AI tools can also help with managing drug lists by quickly processing price updates, rebate rules, and patient insurance info. This lets managers and pharmacists find cheaper drug options without lowering care quality. AI can spot very high drug prices caused by rebate setups, helping administrators ask for better deals or choose other buying options.

By using AI with health IT systems, medical practices can build ways to find and reduce the financial effects of high drug prices caused by PBMs and GPOs.

Summary of Key Points for U.S. Healthcare Providers

• GPOs help group drug buying but also create profit motives that may raise drug prices.
• PBMs, linked with GPOs, control most U.S. prescriptions and are accused of using rebates to increase insulin and drug prices.
• The FTC has filed complaints against major PBMs for unfair practices and blocking cheaper drugs.
• Patients with high deductibles or coinsurance pay the most because they pay the full high list price.
• The drug supply chain has many middlemen who each keep part of the payments, raising costs without helping patients much.
• In other countries, GPOs have helped cut prices, but profit goals can clash with public health goals and cause supply problems.
• Healthcare leaders need to push for clear drug pricing and use technology like AI and automation to manage costs better.

Knowing how GPOs and PBMs work and their effect on drug prices is important for managing healthcare money in the U.S. Using AI, automation, and clear contracts can help medical practices lower needless drug price increases and keep focus on patient care.