Pharmacist Dunehew provides an excellent overview of the current and future pharmaceutical distribution and contracting environment from the perspective of the group purchasing organization (GPO). His charts of the "money trail" in the hospital and health-system pharmaceutical market provide us with a graphic depiction of the current and proposed new pricing and contracting methodologies. I will comment on his article from the perspective of a customer of both a wholesaler and GPO.
Hospitals and health systems have the following expectations of the pharmaceutical marketplace:
- Product integrity is absolutely assured. No counterfeit products should ever pass the threshold of the hospital.
- Supply problems are minimized and, better yet, do not occur on a regular basis. Obviously, a distributor cannot make guarantees on the supply of a drug product, that is the province of the pharmaceutical manufacturer. Wholesalers can represent their hospital customers by providing their perspective and articulating the needs of their patients to the manufacturer.
- Drugs and services should be provided at the lowest and most competitive price over time.
Hospitals are less interested in the organizational arrangement that would achieve the above and more in the ability of the organizations-distributor or GPO (or both)-to consistently meet their expectations.
The GPO industry has been through a great deal of scrutiny in the last few years, resulting in the development of new financial models and ethical standards. Wholesalers have consolidated and, while becoming more efficient, have been saddled with a cost-minus cost model that is not sustainable over time. The result is that they are developing new financial arrangements with pharmaceutical manufacturers that sustain wholesaler's profitability. They will migrate from a banking/arbitrage arrangement to one of supplier and distributor. They are also analyzing whether they should serve as a contracting agent for hospital and health systems. They have been acquiring other related businesses that will give them the margins needed to succeed financially.
It is highly likely that both GPOs and distributors will succeed in the short to medium term. However, it is also likely that we will see the development of a number of different arrangements between hospitals, distributors and GPOs. Some of these models will not include GPOs. None of the models will likely eliminate the distributor. Some large health systems have, for years, done their own contracting for at least the high-volume, high-cost drugs. Some are relying on the use of new electronic tools to gain efficiencies.
Other changes, such as the evolution of specialty pharmaceutical companies and outsourcing opportunities that many hospitals are examining to meet the requirements of USP Chapter 797, also add to the number of parties in the pharmaceutical marketplace. Disproportionate share
pricing is yet another factor in the marketplace. Hospitals and integrated health systems, which for years had but one class of trade, are struggling to maintain all of the legal and regulatory requirements that go along with each class of trade that they have. The effects of the Medicare Modernization Act and Medicare Part D are still to be assimilated into health system products and services.
Ultimately, hospitals, health systems, distributors and GPOs will have to be able to demonstrate the value they bring to a rather fragile and financially stressed health care system.