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Introduction To US Healthcare System
Introduction To US Healthcare System
Introduction To US Healthcare System
The US Healthcare systems is complex with multiple inter-connected systems. This blog is aimed at
simplifying and answering some of the rudimentary questions.
Before we start answering, lets us understand the different players in the health care system and some
quick facts.
Drug Manufacturers
Quick facts
• Successfully taking a new drug from invention to market requires, on average, about 10 years and
almost USD $2 billion.
• Drug manufacturers spend twice as much money on research and development than they do on
marketing.
Source: https://www.marketresearchreports.com/blog/2019/03/11/us-top-10-pharmaceutical-
companies-market-turnover
Wholesalers
Wholesalers are logistics and supply chain experts. They buy drugs from drug manufacturers at wholesale
acquisition cost and store them in their warehouse(s) across the country. Subsequently, they deliver
drugs as requested to pharmacies, hospitals and healthcare providers.
Who are the biggest players in the U.S. drug market according to revenue?
1. McKesson Corporation
2. AmerisourceBergen Corporation
3. Cardinal Health
Quick facts
The above three companies are responsible for 90% of revenue from drug distribution in the United
States.
Source: https://www.mdm.com/2018-top-pharmaceuticals-distributors
Retail & Independent Pharmacies
Prescription drugs are sold in retail pharmacies. Below are the top retail chain pharmacies by number of
stores in the United States.
1. CVS — 9,900 (Reference : https://cvshealth.com/about/our-offerings/retail-pharmacy)
2. Walgreens — 7,713
3. Rite Aid Corp — 2,500 (Reference : https://www.riteaid.com/about-us/our-story)
4. Walmart — 4,403
Chain and independent pharmacies account for 40% of drug sales in the U.S.
These institutions are usually defined by the number of beds and services provided.
Integrated Delivery Network
An IDN is a collaboration bringing healthcare facilities — including hospitals, outpatient surgery centers,
long-term care facilities, doctors and other providers — under a single management system. The aim of
the IDN is to streamline the delivery of care and help patients avoid fragmented experiences to increase
the likelihood of favorable care outcomes. IDNs vary widely in size, operation style and specialty.
There are nearly 1,100 IDNs in the United States and nearly 75% of hospitals are affiliated with an IDN
(Reference : https://www.iqvia.com/-/media/iqvia/pdfs/us/us-location-site/market-access/integrated-delivery-
networks.pdf )
Reference : https://blog.definitivehc.com/top-us-health-systems-total-beds
Pharmacy Benefit Manager
A pharmacy benefit manager acts as an intermediary between a health insurance company, a supplier
and a pharmaceutical company. The common goal is to leverage volume-based purchasing advantages to
secure lower costs for prescription drugs and pass the savings directly to patients.
Role of PBMs
PBMs negotiate with drug manufacturers to set the prices they will pay for drugs. The difference between
the manufacturer’s list price and the negotiated price the PBM pays is referred to as a "rebate." PBMs
also negotiate the “dispensing fee” paid to pharmacies to store and dispense drugs.
Based on negotiated prices and fees, each PBM maintains a formulary, a continually updated list of
prescription drugs approved for reimbursement by the PBM’s payer client. PBMs and other payers use
formularies to compare prices.
• Tier 1: Tier 1 drugs are the cheapest drugs a plan will cover. They’re usually generic, but
occasionally you may find an inexpensive brand-name drug in Tier 1. The antibiotic amoxicillin is
an example of a generic Tier 1 drug.
• Tier 2: Tier 2 drugs include more expensive generics and some brand-name medications.
Synthroid, a thyroid hormone replacement drug, is usually in Tier 2.
• Tier 3: Tier 3 drugs are brand-name drugs that cost more than Tier 1 and Tier 2 medications, like
Symbicort for asthma and COPD.
• Tier 4: Tier 4 drugs are the most expensive prescription drugs. They are typically newer, specialty
medications, like QTERN, a non-insulin diabetes drug.
GPOs serve healthcare providers by working across the entire healthcare supply chain to aggregate the
collective purchases of hospital systems, nursing homes, long-term care pharmacies, clinics, assisted living
centers, infusion pharmacies, home healthcare providers, and surgery centers to negotiate discounts for
member providers. In doing so, GPOs reduce the costs of products and services their members purchase.
Provider use of GPO contracts is voluntary.
HealthTrust Purchasing Group, Intalere (formerly Amerinet), Premier and Vizient are top GPOs.
A GPO is primarily a buying organization designed to reduce the cost of drugs via negotiation and
volume purchasing. An IDN is a collection of hospitals leased, operated or owned by the IDN for the
purpose of streamlining delivery systems and patients’ fragmented healthcare journeys.
There are around 600 GPOs in the United States and nearly 75% of IDNs is affiliated with a GPO.
After adoption of the Affordable Care Act in 2010, the Centers for Medicare & Medicaid Services
launched the Accountable Care Organizations program in 2012, primarily for Medicare patients. ACOs are
groups of doctors, hospitals and other healthcare providers who come together voluntarily to give
coordinated high-quality care to the Medicare patients they serve. Coordinated care helps ensure that
patients, especially the chronically ill, get the right care at the right time, with the goal of avoiding
unnecessary duplication of services and preventing medical errors. When an ACO succeeds in both
delivering high-quality care and spending healthcare dollars more wisely, it will share in the savings it
achieves for the Medicare program.
I recommend watching this YouTube video about Accountable Care Organizations (explained below) for
its discussion of the fragmented patient experience beginning 2½ minutes in.
Payers (Insurance Providers)
Payers provide medical care coverage through insurance plans that provide healthcare benefits and/or
assistance with prescription drug costs.
• Medicaid is a combined federal and state benefit available to low-income families and individuals
and people with disabilities. The eligibility criteria and benefits vary among the U.S. states.
Reference : https://www.medicare.gov/what-medicare-covers/your-medicare-coverage-choices/how-original-
medicare-works
• Medicare Advantage plans are provided by commercial payers but are regulated by the federal
government. They must provide all Medicare Part A and Part B benefits, but the point is their
added features. For example, Aetna may offer a Medicare Advantage plan that includes vision
and dental benefits, which are not available from Medicare. Most Medicare Advantage plans also
offer prescription drug coverage.
Reference : https://www.medicare.gov/sign-up-change-plans/types-of-medicare-health-plans/medicare-advantage-
plans
Payers and PBMs consolidation
As described above, a PBM would operate only through a pharmacy and not provide medical/hospital
services. It makes sense that payers and PBMs would consolidate and move in a unified direction under a
single entity to reduce patient costs.
This shift in the business model has started; we see a lot of mergers and acquisitions in this space.
Reference: https://www.drugchannels.net/2019/05/cvs-express-scripts-and-evolution-of.html
The Interconnected Supply Chain
The participating stakeholders and their roles are depicted in the above diagram. The complexity wasn’t
in the supply chain, but how the prices of drugs are negotiated and passed on to the consumer.
• The manufacturer listed his "branded" drug to be sold to the wholesaler for $100 (WAC –
Wholesaler Acquisition Cost).
• The PBM negotiated a price of $40, which translates to a $60 “rebate.” The PBM will also retain
15% of the rebate (0.15 * $60) = $9 as a fee.
• The patient copay for the plan is $50, then the payer (insurance provider) is paying nothing and
patient pays the entire $40.
Instead if there is a generic alternative available and listed at $30?
• The manufacturer listed his "generic" drug to be sold to the wholesaler for $30 (WAC –
Wholesaler Acquisition Cost).
• The PBM negotiated a price of $20, which translates to a $10 “rebate.” The PBM will also retain
15% of the rebate (0.15 * $10) = $1.5 as a fee.
• The patient copay for the plan is $10, then the payer (insurance provider) is paying 10$ and
patient pays the remaining $10.
Rebates are granted in return for the PBM granting favored formulary status to the manufacturer’s drugs,
which results in higher sales.
For example, if a PBM places Manufacturer Z’s Drug X in Tier 3 alongside more expensive medications
because the manufacturer’s rebate was small, then there is a possibility that the doctor would prescribe a
generic biosimilar available in Tier 1 or Tier 2, a loss in sales for the Manufacturer Z.
A GPO operates by using volume-based negotiations for the affiliated hospitals in an IDN. When a
medication is purchased in bulk, the discount is larger. Hence, the rebate/discount is directly passed on to
the patient. When considering the supply chain, we hear the term "chargeback," which is effectively the
difference between what the wholesaler paid the manufacturer (WAC) and the price charged to hospitals
(contracted price via GPO affiliation).
Plans that provide fewer choices for the patient usually have lower premiums and copays. A flexible plan
will probably cost more. There are three types of managed care plans:
• Health Maintenance Organizations (HMOs) usually only pay for care within the network. You
choose a primary care doctor who coordinates most of your care.
• Preferred Provider Organizations (PPOs) usually pay more if you get care within the network.
They still pay part of the cost if you go outside the network.
• Point of Service (POS) plans let you choose between an HMO or a PPO each time you need care.
Payers use the number of people covered in the plan to negotiate prices with hospitals.
Payers also negotiate various aspects of the plan, including claims handling, patient experience,
procedure fees, provider fees, etc. To learn how procedure fees are negotiated, read about Current
Procedural Terminology, or CPT, codes. CPT codes are used to describe tests, surgeries, evaluations, and
any other medical procedure performed by a healthcare provider on a patient. Providers use CPT codes
to tell the insurance payer what procedures the healthcare provider would like to be reimbursed for.
Payers use CPT codes to compare fees.
External Reference:
https://morningconsult.com/opinions/perverse-incentives-created-pbm-rebate-arrangements/
https://www.medicalbillingandcoding.org/intro-to-cpt/
https://www.goodrx.com/blog/medication-insurance-brand-vs-generic-drug
https://medlineplus.gov/managedcare.html
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