Deborah Abrams Kaplan

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When Andrew Shadid talks with orthopedic surgeons, “they kind of laugh” at his practice’s approach of focusing on Medicaid patients. “Most people don’t want to get involved in the Medicaid space, especially in Illinois,” says Shadid, CEO of Genesis Orthopedics & Sports Medicine in the Chicago area. That’s because these patients are, as a group, more complex, and the payment is lower. “Most say, ‘You’re crazy to be accepting this. There’s no way to make it work,’ ” Shadid says. He acknowledges it can be stressful and difficult, but “we view it as morally obligatory,” as well as exciting and challenging.

They make it work financially by applying principles of reverse innovation, a concept Shadid learned about in a 2015 lecture by Vijay Govindarajan, Ph.D., MBA, a professor at Dartmouth College’s Tuck School of Business, while attending a three-week Business Bridge certificate program at the businessschool.

Shadid, who doesn’t have a medical degree, hadn’t planned to go into the family business. But after he repeatedly told his father how reverse innovation could change the family orthopedic surgery practice, Hythem Shadid, M.D., agreed to the concept, but only if his son spearheaded the project.

The United States is, by far, the biggest spender on healthcare in the world. The country’s healthcare expenditures accounted for 19.7% of gross domestic product (GDP) in 2020. According to one study, 25% of that spending is wasted on failures of care coordination, overtreatment, needless administration complexity and the like. A Commonwealth Fund ranking of the U.S. and 10 other high-income countries put the U.S. dead last in four of five categories (access to care, administrative efficiency, equity and healthcare outcomes).

Value-based care is supposed to address these issues by rewarding providers who do well on cost and quality metrics, but that’s only one approach and most of the results of the value-based programs conducted by CMS have been underwhelming.

Govindarajan has proposed a bolder approach that flips the traditional model of where and why technological innovation occurs by looking to developing nations.

Govindarajan grew up in India in a family with resource constraints. During his early years he realized problems had to be solved through innovation, as “you can’t throw money at a problem if you don’t have money.” After earning his MBA and Ph.D. in the U.S., he returned to India years later to create new medical devices for General Electric. One successful result of his effort was an ultra-low-cost portable electrocardiogram (ECG) machine. With a price tag of $400, the machine was one-third the cost of traditional ECG machines and small enough to be used in ambulances.

Although initially made for the Indian market, GE sold most units outside the country because of the low price and small size. “Usually you think of innovations starting in a rich country and going to the poor country,” says Govindarajan. “With reverse innovation, it’s the opposite.”

Govindarajan, with Chris Trimble, wrote the book, “Reverse Innovation: Create Far From Home, Win Everywhere,” which was published in 2012. He wrote a follow-up book with Ravi Ramamurti titled “Reverse Innovation in Health Care: How to Make Value-Based Delivery Work.”

What Shadid took from Govindarajan’s lecture was the overarching concept of providing care for all. He and his father knew that people on Medicaid lacked good access to orthopedic care in Illinois. But “we didn’t know how bad it was,” Shadid says. Few orthopedic surgery practices take Medicaid managed care plans in the state, comments Shadid. One-quarter of Illinois residents are Medicaid enrollees, and Illinois spending per Medicaid enrollee is 49th in the nation. Shadid asked the Genesis Orthopedics front desk staff how many potential patients were turned away due to their practice not accepting Medicaid insurance. The numbers were high.

Shadid says he and his father wanted to live according to their values and beliefs that all people are created equal and are deserving of care. “When looking at our practice, we weren’t doing that,” Shadid says. Instead, they prioritized patients with better insurance. They decided to change their practice, and went from a patient mix of 1% Medicaid patients to one that is 80% people covered by Medicaid.

“We had to figure out how to deliver the care for half or a third of the cost. That pushed us hard into reverse innovation,” Shadid says.

It has not been an easy transition. This is how they did it.

Everything an orthopedic surgeon does in the office setting, a physician assistant (PA) or nurse practitioner (NP) can do, especially if they are well-trained, Shadid says. An orthopedic surgery practice is 70% to 80% office-based with 20% in the operating room. “Just through the use of APPs (advanced practice practitioners), we can quickly become three to four times more efficient in the way we deliver care,” Shadid says.

Genesis Orthopedics’ staff ratio goal is four to six APPs per physician, whereas in the U.S., most ratios are 1-to-1, he says. This model prioritizes conservative care first.

Understand the patient population needs are different

The practice must factor in social determinants of health with the Medicaid population. Patients sometimes miss appointments because they don’t have transportation and a ride service is too expensive. The state provides transportation to Medicaid patients, but it must be scheduled four to five days in advance, which is not always feasible. One patient rented a U-Haul because it was cheaper to rent for two hours than taking a ride service, though the patient had trouble finding parking. “Stuff like this happens all the time,” Shadid says.

The Medicaid population has a high rate of mental health issues. For that reason, they may not be the best patients for surgery and follow-up, he says. “There’s a lot of complexity to working in this environment,” says Shadid, who adds that poor population actually needs better overall quality care, since there are so many impacts on their outcomes.

The margin in providing care to the Medicaid population is much slimmer than with other payers, Shadid says. He likens the circumstance to Amazon, which has a lower per-book margin than other retailers that is offset by volume. “That’s true of us, too,” he says. Without much fat built into their financial model, “we try to make up for it in efficiency,” which has led to levels of revenue and profitability similar to what they had before they changed the patient mix. “It takes two to three times RVU (relative value unit) to get to that level of profitability, but it is spread out over more providers.” RVUs, used by CMS to determine provider compensation, measure value based on the “inputs” of expertise, physician involvement, and clinical and nonclinical resources needed to provide patient care.

The practice has 16 providers, including physical therapists, APPs and physicians. “We found that PAs and NPs love our model,” Shadid says. A practice following their example needs to recruit APPs who want to do more and reach their potential, according to Shadid. Some don’t want the pressure of making diagnoses and prefer to only assist the doctor. Shadid says they are not a good fit for a practice that depends on APPs to be independent.

It takes a strong partnership between the APPs and surgeons to make it work. After bringing on a new doctor, they add APPs to the team for maximum efficiency. “One of the keys in doing so is finding the right surgeon alignment, since they’re the top of the food pyramid,” he says. The surgeons need to be passionate about this style of care delivery and be willing to work as a team.

It’s not just state regulations that can stand in the way of efficiency. Hospitals also have rules that may limit an APP’s scope of practice. In some operating rooms, a surgically trained APP might be allowed to perform “noncritical” parts of an operation, such as an initial incision or closing superficial layers of skin. The supervising surgeon would perform the “critical” parts of the surgery. “Some hospitals say surgeons must be present the entire time,” Shadid says. For their reverse innovation model to work, Genesis Orthopedics chooses hospitals with fewer APP regulations.

One reason reverse innovation has not been adopted en masse is partly because of prevailing thinking. “You associate cost with quality,” Govindarajan says. But at some point, there will be systemic pressure for fundamental transformation as healthcare costs increase.

The greatest opportunity, in Govindarajan’s opinion, lies in preventive care, as the bulk of healthcare dollars are spent in secondary and tertiary care. By focusing on prevention and better primary care, fewer health problems will get to the later and more expensive stages. “Smart entrepreneurs should pick up on this as a big opportunity,” he says.


 writes about medical and practice management topics.

Articles

Andrew Shadid and Genesis Orthopedics & Sports Medicine applied some of the principles of reverse innovation to make the practice successful.

How a Chicago-area Orthopedics Practice Went From 1% Medicaid Patients to 80%, and Remained Profitable

A few years ago, healthcare economist Genevieve Kanter, Ph.D., saw a slew of ads in trade magazines targeted at physicians. They promoted a new model of oncology treatment. Practices, especially community oncology practices, were directly dispensing oral medications rather than using specialty pharmacies. Kanter, a research assistant professor of medical ethics and health policy at the University of Pennsylvania’s Perelman School of Medicine was curious. She wanted to understand this trend, so she spearheaded a study of the phenomenon.

The fruits of Kanter’s research were published online in 

in July. Her findings showed that in 2019 approximately one-third of oncologists were in practices offering “medically integrated dispensing” — another name for direct dispensing. Usage of that model had expanded significantly since 2010.

“What really impressed me were the trends,” she says. From 2010 to 2019, there was a 151% increase in model use among all practices and a 272% increase among community-based practices. “The trends don’t look like they are attenuating at all,” Kanter says. “It looks like it’s continuing on its way.”

The study focused on six cancers with both oral and IV therapeutic alternatives. Kanter collaborated with researchers at the University of Southern California, Anthem, HealthCore, and others to determine the model’s prevalence. They created a novel data set linking pharmacies to oncologists and their practices, and they analyzed national and state trend in direct dispensing by community and hospital-based oncologists.

Researchers found that these community-based practices treat 55% of patients with cancer, and that the share of community oncologists in medically integrated dispensing practices increased from 7.6% in 2010 to 28.3% in 2019. They also introduced questions about whether this model improves patient outcomes and access, and whether it affects prescribing patterns and overall healthcare costs.

Kanter says the move toward direct dispensing occurred because cancer therapy’s delivery methods have significantly changed in recent decades. Previously, someone with advanced cancer would likely be treated at the practice with physician-administered IV drugs. Compensation includes an administration fee and a percentage of the drug cost. “Most practices made a lot of their revenue from the (IV) drug reimbursement and fee,” she says.

Now an increasing number of cancer treatments come in pill form that patients can take at home on their own. Oral administration is much more convenient for patients, but oral oncology medications traditionally have been dispensed by specialty pharmacies, not oncology practices. That means oncologists are losing revenue by not being reimbursedfor the oral cancer drugs. Medically integrated dispensing can bring that revenue from oral cancer drugs back to oncologists.

Although the study showed that the biggest growth was in community oncology practices, Jeff Gordon, M.D., has seen large hospital systems move in this direction. Gordon, medical director of hematology-oncology at UMass Memorial Health-Harrington in Southbridge, Massachusetts, notes that major hospital systems already have built-in pharmacies for dispensing medications, making it easier to offer specialty oral oncology treatments.

Direct dispensing by oncologists may have some benefits for patients, including getting treatment started sooner, in Kanter’s view. Proponents see the opportunities for better medication adherence and closer monitoring of patients. Drug-related toxicities might be avoided because oncologists are more directly involved. “There are a lot of potential benefits, but we need to systematically evaluate them,” Kanter notes, adding, though, that her research hasn’t yet documented these findings. As for prior authorization, Kanter says the process would likely be the same for direct dispensing as it is would be for getting drugs through a specialty pharmacy.

Gordon says it can be an advantage to keep more care internal to coordinate overall patient care and follow-through. This could help speed up the process of getting drugs to patients after insurance approval, rather than waiting for the drugs to be shipped to patients. Another potential advantage to health systems is financial. “Big hospital systems that do it find it to have favorable economics,” Gordon says. Direct dispensing can help them consolidate some of their operations, decreasing the bureaucracy layers and red tape of dealing with an outside specialty pharmacy.

As for patients, from what Kanter has seen, out-of-pocket costs are no different. “Patients on the whole have been protected,” she says.

Introducing more competition could improve specialty pharma pricing, Gordon says, with a potential opportunity to save money on overall U.S. healthcare delivery. But even if the larger healthcare systems realize savings, there’s no guarantee that they will pass on those savings to patients or payers. “There’s always a concern that big hospital systems taking over different aspects of patient care might result in fewer competing against them, which can lead to higher costs,” Gordon notes. Direct dispensing by large healthcare systems also could lead to those systems locking in patients, he says, especially in areas where large healthcare systems dominate all aspects of care.

Another concern is whether direct dispensing creates incentives for inappropriate prescribing. “It’s a possibility,” Gordon says, but “I don’t see it as a major issue.”

Kanter says preliminary research suggests there are no big therapeutic changes in decision-making as a result of direct dispensing, although she has seen some signs of oncologists tending to prescribe higher-priced drugs with larger profit margins instead of generic medications or lower-priced brand- name drugs.

The 340B Drug Pricing Program may be a factor in direct dispensing. The program allows some hospitals to buy drugs at a steep discount and then get reimbursed at normal levels. The difference is supposed to go toward programs that improve access to care for underserved populations. The 340B program has become controversial because, according to critics and some independent reporting, hospitals have taken advantage of the program and used the revenue they realize from the discounted prices for other purposes.

“Once you have an outpatient practice and 340B designation, your pharmacy becomes very profitable in the health system,” Kanter says. “I imagine that we will see this model being adopted widely in hospitals.”

Given that the 340B program is set up to help care for underserved populations, Gordon says, “one would hope that the savings would be passed on to what the patient pays.”

If it can be shown that direct dispensing does, in fact, improve care coordination and result in more cost-effective care, it may be incorporated into value-based payment models, Gordon observes. But that is a major “if” there, and it may take positive findings from studies by researchers such as Kanter before direct dispensing becomes part of the value-based care playbook.

Gordon says large private groups of oncologists are getting into direct dispensing “but it can be difficult for small groups.” Facilities need a pharmacy system to make medically integrated dispensing work. 

“That’s why you see large systems do it,” Gordon says. It requires having the space, licensing, regulatory permits, drug cabinets, inventory management system, negotiation and billing capabilities, and a trained pharmacist. Plus acquiring pills may require a large outlay of funds and assurance that reimbursement will make it worthwhile. “It can be extremely prohibitive for small entities to do it. They don’t have that type of money and logistical setup to make it work, to make that big investment,” Gordon says.

The other challenge is legal. Some states do not permit prescribers to own a pharmacy.

“This is a new model that has the potential to really help patients but may also be challenging to other aspects of the healthcare system in terms of reimbursement and payments. It is something that warrants closer scrutiny,” Kanter says.

More practices are directly dispensing oral cancer drugs, bypassing specialty pharmacies. What does this trend mean for patients and healthcare?

Oncologist, Dispense it Thyself

bout 18 million people in the United States, or about 7% of adults, reported that they were not able to pay for at least one prescription medication in their household during the previous three months, according to a 2021 West Health and Gallup survey. The proportion doubled for households with an adult younger than 65 years compared with those older than
65 years.

In July, UnitedHealth Group made a move that could help some of its members facing high drug bills. The health insurer, the largest in the country by several measures, announced that starting January 2023 it will eliminate cost sharing for insulin and four medications that tend to be used in emergencies: albuterol, epinephrine, glucagon and naloxone. The new policy will affect about 8 million people in its fully insured group plans, including 688,000 who currently use the medications. Employees of larger companies that self-insure are not included.

Patients with asthma use albuterol for acute asthma attacks. Epinephrine is used on an as-needed basis for severe allergic reactions, while glucagon is administered in emergencies for low blood sugar. Naloxone is an emergency treatment for opioid overdose.

Its members will benefit from the absence of cost sharing, but so will UnitedHealthcare, the health insurance division of UnitedHealth, says Doug Behrens, CEO of MyFreePharmacy, a monthly subscription service for generic prescription drugs. Adherence should improve and reduce expensive interventions, including hospitalizations, notes Behrens. “It saves (UnitedHealthcare) millions by making sure that their (patients’) $200 vial of insulin is paid for,” he says. There is no argument with that from UnitedHealthcare, which said in a prepared statement that the absence of out-of-pocket expenses “would encourage better medication adherence, reducing the risk of complications and expensive hospitalizations.”

High out-of-pocket costs for insulin are very much part of the political discussion these days. One provision of the Inflation Reduction Act caps insulin out-of-pockets at $35 a month for people covered by Medicare, although the cap does not extend to those with commercial insurance. Other legislation has been introduced that would cap insulin out-of-pocket expenditures for people with commercial insurance, and those bills might be voted on this fall.

UnitedHealth did not answer questions from 

® that would fill in some details about anticipated patient savings and savings the company might realize from lower healthcare utilization.

UnitedHealth and other insurers have been reporting strong financial results lately. Executives said in UnitedHealth’s second-quarter earnings call in July that profit levels exceeded analyst expectations, with revenue up 13% that quarter, to $80.3 billion. Although Behrens believes in low-cost access to medications, he is critical of UnitedHealth’s approach. Aside from the insulin, “they are mostly drugs used for emergency care,” he said. Behrens would rather see no cost sharing for drugs taken daily, such as those taken by many people to lower high cholesterol levels or keep blood pressure in the healthy range. “If they were daily drugs, I would think it’d be more powerful in assisting the members,” says Behrens. “It’s great to get the headlines saying ‘Hey, we’re sharing the cost.’ But it’s grandstanding. It’s not health care.”

Deborah Abrams Kaplan is a freelance writer who covers medical and practice management topics.

Insulin, albuterol, epinephrine, glucagon and naloxone are on the list.

UnitedHealth Eliminates Cost Sharing for 5 Treatments 

In summer 2020, hospitals were reeling from the COVID-19 pandemic. Personal protective equipment was in short supply. Revenues cratered with the cancellation of elective surgeries. Frontline workers tried not to get sick as they treated waves of infected patients.

Also during that tough summer, five drug manufacturers announced they were potentially ending 340B Drug Pricing Program discounts to hospitals and other types of providers — “covered entities,” in the parlance of the program — for any medications dispensed by contracted pharmacies. Now the number of manufacturers actually or considering restricting discounts has grown to 17, including big names like Johnson & Johnson, Merck, Bristol Myers Squibb, AstraZeneca and Pfizer.

The restrictions have spawned a flurry of lawsuits, 16 so far, mostly manufacturers suing the federal government to vacate its order to comply with 340B discounts.

The program has so many lawsuits that Emily Cook, a partner at McDermott Will & Emery started a 340B litigation tracker. The contract pharmacy issue makes up almost half of the 37 340B lawsuits.

As these legal issues slowly get resolved, hospitals and other providers participating in the program have seen a significant source of funds vanish. 340B Health, a membership group and lobbying organization for more than 1,400 participating hospitals and health systems, conducted a survey of 500 hospitals in March 2022. It showed that larger, mostly urban hospitals anticipate an annual median loss of $2.2 million due to the missing 340B discounts and that 10% of the health systems expect at least a $21 million loss in savings each year. Smaller, mostly rural hospitals expect a median $448,000 loss in savings annually, with 10% of them anticipating at least $1.3 million in losses annually.

Hospitals participating in the 340B program provide 60% of the country’s uncompensated care and 75% of the hospital care for those with Medicaid, according to 340B Health. “These are some of the largest drug companies in the world,” and the restrictions include some of the most important drugs patients rely on, including chemotherapy drugs, says Bharath Krishnamurthy, senior associate director of health policy and analytics at the American Hospital Association (AHA). “Hospitals rely on these relationships they have with community pharmacies to ensure that their patients have access to these drugs.”

Proponents of retaining the discounts say that the loss is harmful to hospitals’ abilities to provide services to individuals with lower incomes and to even keep the health system’s doors open. Critics of the program, most of whom are drug manufacturers, say the program has grown too large, with for-profit pharmacies and health systems reaping profits and not sharing evidence of whether the funds are used to help the intended patients.

The 340B program was created in 1992 to replace the voluntary discounts manufacturers provided to some safety-net clinics. Pharmaceutical companies that want their medications covered by Medicaid or Medicare Part B must offer 340B discounts, usually 25% to 50% — and sometimes higher — to organizations that participate in the program. Healthcare providers receiving the discount are then reimbursed by payers at normal prices. They pocket the difference, with the understanding that the funds should be used to provide that charitable care for people who are uninsured or underinsured.

In 1996, hospitals and clinics without their own pharmacies were allowed to designate one contracted pharmacy. In 2010, the Affordable Care Act (ACA) allowed entities covered by 340B to contract with an unlimited number of pharmacies to dispense outpatient medications. The thinking was that additional pharmacies would mean greater access for patients in socioeconomically disadvantaged communities. But that change led to rapid growth in contracting pharmacy arrangements under the 340B program and, say the critics, a distortion of what the ACA and the 340B program were trying to accomplish. 

The University of Michigan Health System had three pharmacy contracts in 2011. By 2021, that number had grown to 598 contracts. The Cambridge Health Alliance in Massachusetts went from 77 contracts in 2012 to 563 in 2021. Rush University Medical Center in Chicago went from four in 2012 to 468 in 2021.

According to the Government Accountability Office, about one-third of the 12,000-plus covered entities in 2018 had agreements with contracted pharmacies. In 2010, there were 1,300 contract pharmacies. Over the next decade, the number skyrocketed, and by 2021, there were 31,000, according to Kaiser Health News.

The program mushroomed for other reasons. In its early years, not all healthcare organizations knew about 340B, Cook says Also, in addition to allowing an unlimited number of contract pharmacies, the ACA made critical access hospitals eligible to participate, expanding the number of participants. Critical access hospitals, a CMS designation, are smaller hospitals in rural areas.

“This program was really envisioned as a small safety net program, but now more than half of all hospitals in the United States participate,” says Karyn Schwartz, vice president of policy and research for PhRMA, a trade organization representing the pharmaceutical industry.

Although the loosening of the rules to allow for an unlimited number of contract pharmacies in the 340B program began in 2010, it took a decade for pharmaceutical companies to decide to restrict the discounts. Why the delay?

“The very short answer as to ‘Why now?’ is that the drug manufacturers are likely to get a more favorable outcome now than they would have if they (had) litigated this probably five years ago,” says Cook. Several recent Supreme Court cases resulted in regulated entities gaining opportunities to challenge federal interpretation of statutes, including a ruling in June in favor of the AHA, which challenged cuts to drug reimbursement to hospitals in the 340B program.

With 340B, “we have a statute that does not have defined terms in it, and it is open to a very wide range of interpretations that have not previously been litigated. And so the parties are now having to turn to the courts to interpret that statute,” Cook says.

The statue’s lack of clear definitions, such as the role of the contract pharmacy and how the funds are spent, is causing many of the problems leading to the current issues. “There are 15 entities listed in the statute that manufacturers are required to provide discounts to, and contract pharmacies are not listed,” says Nicole Longo, senior director of public affairs for PhRMA.

Not everyone agrees. “We think the statute is clear,” says Aimee Kuhlman, vice president of advocacy and grassroots at AHA, adding that it was concerning — and wrong — for the drug companies to eliminate payment discounts for drugs dispensed at contracted pharmacies. The 340B statute doesn’t specifically mention contract pharmacies, but it does say that pharmaceutical companies must provide these discounts to eligible hospitals through pharmacies, says the AHA’s Krishnamurthy. The statute is necessarily broad because when creating the program, Congress recognized that each participating hospital’s situation was unique, so it gave the hospital flexibility to use the savings as they saw fit, he says.

The government does not require covered entities to share how they use the 340B funds. “It’s certainly possible they’re spending it investing in more care for low-income communities, but we’ve seen no real evidence of that,” Schwartz says. “I think that the biopharmaceutical industry’s main concern is that we provide tens of billions of dollars in discounts every year with no way of knowing how that money is being used to help patients, and we just have to take hospitals at their word.”

In 2018, the AHA issued 340B good stewardship principles recommending that participating hospitals annually share the estimated savings amount and the services funded with the savings. “As far as any additional calls for mandatory transparency, I think that there is some concern about cherry-picking information that doesn’t necessarily tell the full picture of what hospitals are doing to serve their communities,” Kuhlman says.

Some manufacturers are offering the discount for drugs dispensed at contract pharmacies if the healthcare organization provides additional information not required by the government. “Each manufacturer has its own requirements in terms of what they’re allowing and not allowing and what types of data they want and need,” says Krishnamurthy of the AHA. That might be detailed claims-level data. “For hospitals, the biggest concern is burden. They have to aggregate the data from different vendors that they contract with, (put the data) all together in a format that is different for each manufacturer and then submit (the) data, and then wait to see if there are any issues with the data they’ve submitted and correct that.”

Some manufacturers — Novartis, for example — are offering the discount only for contract pharmacies located within a 40-mile radius of a covered entity, which can be difficult if a patient in a rural area needs specialty drugs. Others have reverted to allowing only one contracted pharmacy to be included, Krishnamurthy says.

The swarm of controversy and litigation surrounding the 340B program isn’t going away any time soon. At a minimum, the lawsuits are putting a fresh spotlight on the program and raising questions about whether it benefits patients, says PhRMA’s Longo. When measured by the amount of money paid by payers and patients, the 340B program is the second-largest federal prescription drug program after Medicare Part D, and by 2026, it is anticipated to be the largest drug program in the country.

In addition to mandatory transparency requirements, Schwartz would like to see regulatory requirements allowing patients accessing drugs through a covered entity to have access to a sliding scale for purchases, so they don’t have to pay list prices. Not all medication discounts are directly passed on to patients. “As we’re having a broader discussion in the United States about addressing health inequities, it’s even more important to make sure our safety-net programs are working,” says Longo. “We hope that all the stakeholders can come together and find ways to fix the program because the industry continues to be committed to this program. But it needs to work for patients.”

The AHA says that these actions are hurting hospitals and affecting their ability to care for patients. “It’s just a very poor decision of manufacturers to enact these policies and hurt the providers and patients that needed the most,” says Krishnamurthy.

The contract pharmacies are not directly covered by the 340B program and do not receive the discounts from the manufacturers themselves. The discounts are given to “covered entities,” such as hospitals and federally qualified health clinics. These pharmacies have contracted with the covered entities. They can dispense the medications for these covered entities and get paid for doing so. If the drug manufacturer does not provide the discount for these pharmacies to dispense, the covered entity receives no financial benefit from the 340B program to use for its charitable care. Pharmacies receive payment for dispensing the medications.

Drug manufacturers are rejecting the program’s blanket discounts involving contract pharmacies. A flurry of litigation has ensued.

The 340B Program is at a Crossroads

In 2019, Express Scripts PBM (pharmacy benefit manager) formed Ascent Health Services GPO (group purchasing organization), based in Switzerland. In 2020, CVS Caremark formed Zinc GPO. And in 2021, OptumRx formed Emisar Pharma Services, based in Ireland. With pharmacy benefits for approximately 75% of U.S.-covered lives under their control, why would these PBMs need GPOs — to capitalize on their scale to get better drug prices?

“In each case, there’s what the PBM said, and then you have to do your best to fill in the blanks of what could possibly be going on,” says Howard Deutsch, principal at ZS Associates, a global professional services firm with offices in Boston. “They haven’t said a heck of a lot. They’ll say things about serving customer needs, but nowhere will you find some particular customer need that is better being served by the existence of this new entity.”

With the Big Three PBMs already covering a majority of prescription claims, “the idea that they needed to create some sort of new entities so they can have some bargaining power is kind of ludicrous,” Deutsch says. “They already had plenty of bargaining power and were using that quite effectively. It’s unclear from what they’ve publicly said what the value proposition is to the rest of the healthcare system. The value proposition to the PBM is somewhat clear.”

Pricing is one reason Ken Paulus, president and CEO of Prime Therapeutics, gave in an interview last year with 

. Prime entered into an agreement with Express Scripts three years ago whereby Express Scripts handles some of the negotiations with pharmaceutical manufacturers. As a minority owner of Ascent GPO, Prime has direct access to all the GPO contracts and received savings it would not have gotten otherwise, Paulus said in the interview. Prime still processes its own claims and performs utilization management, Paulus said, but the GPO was “a fairly elegant solution for us to save significant dollars for clients and members and employers, but do so without giving up our strategic optionality, which is continuing to run our own business.”

Alan Lotvin, president of CVS Caremark, CVS Health’s PBM, said in a recent interview with 

 that the GPO was a way for CVS Caremark to “separate out all the different lines of business onto separate contracts” and gain some bargaining power.

“It wasn’t, at least in our minds, so much about regulation,” Lotvin said. “I thought about more that if we have a single rebate contract that covers multiple lines of business, if one line of business is impacted by a decision, if I have to go back to pharma and renegotiate, I am renegotiating from a position of weakness. So, if I disaggregate proactively, now I’ve taken a tool away from the manufacturers.”

With the consolidation in the PBM industry and with large payers now integrated with PBMs, “the payer value proposition is pretty important,” observes Ashraf Shehata, national sector leader for healthcare and life sciences for KPMG, a consulting and accounting firm. Over the years, PBMs have moved into a shared services role within their health plan owner systems. The PBM would typically be the largest single entity in the shared services business. But Shehata anticipates seeing other capabilities like care management, IT services and data analytics moving into various shared services buckets as these frameworks for large multientity payer enterprises mature.

GPOs negotiate prices of drugs, medical products and devices for members. In healthcare, the members have traditionally been hospitals and nursing homes. The idea is to lower prices and reduce transaction costs by increasing the purchasing power of a larger group. The GPOs are often member-owned and funded by administrative fees.

The spate of GPO launches by PBMs came as Congress was debating legislation that would establish new transparency requirements for PBMs, notes James Gelfand, executive vice president, public affairs, of the ERISA Industry Committee, a trade association representing large employers. Transparency language was included in the Lower Health Care Costs Act in 2019, which the PBMs lobbied against, according to Gelfand. PBM transparency provisions are also included in the now-defunct Build Back Better bill.

Gelfand finds the timing for forming GPOs suspicious. “Are you creating another intermediary in the supply chain to prepare for transparency requirements that are going to be specific to the PBM?” he asks. Many have worked to bring more transparency to the drug supply chain and healthcare system in recent years. With so many entities involved in the drug supply chain, such as insurance companies, PBMs and vendors that set up and run the plans, adding another intermediary — the GPO — risks losing some of the progress made, Gelfand believes.

Employers want to know whether the new GPO entity will retain rebates or discounts instead of them going back to plan sponsors, Gelfand says. Will this new layer add costs? Will GPOs be able to negotiate better than the PBMs? Will the PBM use the excuse that it cannot provide the requested data or information because the GPO has it and there is a firewall?

“We have moved pretty far ahead in terms of making sure that the plan sponsor owns the plan and the data in the plan. But this could be a setback depending on how it’s implemented,” Gelfand says.

Vendors will always say they are performing better and overall savings have improved. But plan sponsors need to do complex data reconstruction and analysis to be sure. “Vendors are going to guarantee us that we’re reaping the benefits of lower prices, but it’s a trust-but-verify situation. I haven’t had time to verify,” Gelfand says.

Deutsch suspects that the new GPO layer will keep some of the rebates and only pass through a percentage to the PBMs. With PBMs, “almost every single penny on the dollar is passed through to the plan sponsors now,” so PBMs do not have that revenue stream. The GPO can take a cut through an administrative or data-use fee to retain some of the rebate, he said.

Ultimately, many experts anticipate prices going up. “I don’t see how you can add another middleman and not add more cost to the system,” says Kevin Young, co-founder and chief product officer of Prescryptive, a prescription data platform with a PBM product.

“It’s going to be up to the plan sponsor to evaluate the benefits and the value they’re getting from the PBM relationship,” says Shehata. If the overall benefit is good, they will not care about individual fees, he says. “Most buyers of PBM services and most consultants that evaluate (PBM contracts) look at the total value rather than separating individual fees.”

Outside experts also have questions about why Express Scripts located its GPO in Switzerland and OptumRx did so in Ireland. “They stand to lose a lot if they get regulated on rebates,” notes Young. “Creating another organization that’s offshore, they can protect their interests, protect their shareholders’ interests.” Europe does not make much sense as a location for U.S. healthcare entities, says Deutsch: “Switzerland is not exactly a hotbed of U.S. pharmaceutical activity.”

But Shehata thinks placing the GPOs outside the U.S. makes sense: “Going back to that shared services model, the belief is that many organizations build shared services structures at a global scale to actually optimize their ability to work at scale.” He says many payers run organizations in multiple countries and have global businesses ranging from infrastructure to call centers. “I think of this as consistent with their global delivery model and less of a short-term move to try to reduce liabilities.”

No matter where a vendor is located, Gelfand wants to make sure it is still subject to transparency and accountability rules. “I don’t know that basing your company in another country gets you out of any of that,” he says. “If being based in Ireland or Switzerland gives you a better tax rate, that’s not our business as customers. We don’t care about that. We care about what effect will it have on patients and our ability to provide the best benefits for the patients.”

GPO creation “could be a really good thing or it could be a really bad thing. And … it’s too early for us to tell,” Gelfand says.

The Big Three all set up group purchasing organizations recently, but some industry observers question the timing of the move and who will benefit.


PBMs are Creating GPOs, and Stirring Debate as to Why

Difficulty gaining access to behavioral healthcare is nothing new, but the COVID-19 pandemic threw the imbalance between need and access even more askew. The pandemic has led to more people experiencing mental health conditions such as anxiety and depression disorders (or a combination of the two). In 2019, 11% of adults screened positive for anxiety or depression symptoms. 

In April and May of 2020, during the first few months of the pandemic, that proportion tripled to about 33%, according to U.S. Census Bureau data. Barriers to access include the ability to reach and travel to providers; provider availability; social factors, such as a reluctance to get help; and, most importantly, cast.

Access to services is especially important to Medicaid enrollees, who have also experienced increased levels of behavioral health problems during the pandemic, according to a Kaiser Family Foundation (KFF) report on Medicaid expansion of behavioral health services. The foundation’s annual budget survey of state Medicaid officials showed that all the states responding to the survey reported implementing at least one behavioral health initiative to expand access during the past couple of years by, among other things, offering crisis service and expanding telehealth. “You really see so clearly that every single state that we surveyed reported at least one initiative to expand behavioral healthcare initiatives,” says Madeline Guth, a policy analyst on the KFF and author of the Medicaid behavioral health report.

This isn’t the first time the government has stepped in and attempted to improve access to mental health services. The 2008 Mental Health Parity and Addiction Equity Act banned payers from making mental health coverage more restrictive than physical health coverage, although there are still plenty of parity gaps. A 1996 law with the same name ensured that large group health plans could not impose less favorable lifetime or annual mental health benefit limits compared with medical/surgical benefits. The Affordable Care Act required all health plans to categorize mental health and substance abuse disorder services as essential health benefits.

Medicaid coverage is a critical piece of behavioral health coverage in the U.S. because the programs cover a disproportionate share of the people with behavioral health issues. As of July 1, 2021, Medicaid programs in 44 states and the District of Columbia covered telehealth services for mental health issues, including audio-only services, according to Guth’s report. In the past, behavioral health services have often been carved out of Medicaid managed care contracts, which, in some cases, undercut parity. Guth’s report shows that about three-quarters of the 41 states that have Medicaid managed care programs have carved in behavioral health services.

Newer government initiatives are also addressing access to behavioral health. The American Rescue Plan Act provided expanded Medicaid funding for some behavioral health providers and crisis centers, and the Build Back Better Act, if enacted, would provide additional community mental health services funding.

One way to provide better access is through care integration. Nearly half the states in the KFF survey reported integrated services initiatives whether by allowing for behavioral health and medical service payments on the same day or providing these services in the same location.“We may be seeing elevated behavior health needs for some time to come,” notes Guth. 

Deborah Abrams Kaplan writes about medical and practice management topics.

A Kaiser Family Foundation survey found that all the responding programs had at least one initiative to expand behavioral health services. 