Middlemen Running Amok

Reduced competition, shortages, and unaffordable options are symptoms of middlemen running amok. Administrators—who rarely ever touch the product or interface with patients—hide in the shadows while controlling significant health care dollars.

A bipartisan effort in a divided congress to address a root cause in the inflation of drug prices is gaining momentum. A recent press release from Sen. Chuck Grassley, R-Iowa, announcing an effort to promote more transparency, outlines a proposal that elected lawmakers should be eager to adopt.

Sen. Grassley said, “Pharmacy benefit managers and other intermediaries in the pharmaceutical supply chain must be held accountable for increasing the cost of health care in the United States.” As cosponsor of the bill, Sen. Maria Cantwell, D-Washington, adds, “The increasing cost of prescription drugs has a devastating effect on the pocketbooks of American consumers.”

Although not mentioned by name, these “other intermediaries or middlemen” are rightly cited by the senators. Another group often unmentioned when discussing the increasing costs of health care are group purchasing organizations. Sen. Grassley is no stranger to these types of organizations. In a 2010 Minority Staff Report from the Senate Finance Committee on GPOs, it was concluded that “Congress established the safe harbor provision for GPOs in 1986 on the presumption that these organizations would reduce costs for the health care system. Almost 25 years later, however, Congress and the American public do not have the data evaluating the success or failure of this provision.”

As a result of the inquiry, the United States Government Accountability Office (GAO) produced a report in October of 2014 entitled “Group Purchasing Organizations: Funding Structure Has Potential Implications for Medicare Costs.” The GAO recommended that there be appropriate reporting and HHS also responded to the report with recommendations to add steps to the audit process so administrative fee revenues, rebates, allowances, and refunds of expenses become reported properly and in accordance with the law.

Middlemen with the kind of influence that GPOs and PBMs have are able to manipulate supply and demand by favoring one manufacturer over another through sole-source or dual-source agreements. These types of agreements are also behind many of the shortages we have seen for both medications and supplies throughout the supply chain. This was highlighted in a highly acclaimed episode of “60 Minutes” titled “Medical Middlemen: Broken system making it harder for hospitals and patients to get some life-saving drugs.”

As we look at the reports and anecdotes presented, it is important to also examine peer-reviewed studies on the matter. In the 2011 research focused on the impact of GPOs in the marketplace, the authors concluded that, “GPOs have been poor bargaining agents because they are compensated not by their principals, the member hospitals, but instead by medical suppliers. The greater the compensation to the GPOs, the greater the exclusivity concession received by dominant firms, and a diminished market access for new market entrants.”

As PBMs are now utilizing GPOs as a way to shield themselves from scrutiny and accountability, it is incumbent upon anyone who is concerned about the increasing costs of health care to look into increasing transparency and accountability of the middlemen in the health care supply chain. A 2005 audit by the Office of Inspector General for the U.S. Department of Health and Human Services discovered that six major GPOs charged over $2.3 billion in fees, of which $1.6 billion exceeded their operating expenses. The audits confirmed concerns that excessive administrative fees existed.

It has been nearly 20 years since the last audit, and it should be a priority for HHS and Congress to resume regular audits and hearings for middlemen in health care.