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December 1, 2021
David Burda
Economics Policy System Dynamics

Why Cutting Out the Middleman Can Reduce Healthcare Spending

As I’ve said too many times to count, I’m not much for healthcare middlemen—distributors, benefits managers, wholesalers and group purchasing organizations—as I believe they add costs to the system rather than take costs out of the system as they profess in their value propositions. These middlemen have both hands out along the entire supply chain and grab as much cash as they can for themselves, their executives, their shareholders and their owners. 

A great example of this, courtesy of a recent study in JAMA Health Forum, helps explain why prices for insulin to treat diabetes are so high. So high that a provision in the Build Back Better bill passed by the House and pending in the Senate would cap patients’ out-of-pocket costs for a 30-day supply of insulin at $35, according to a recent article in Healio.    

In the recent study, four researchers from the University of Southern California used a variety of publicly available sources to build a database on the price changes of 32 different insulin products over a five-year period from 2014 through 2018.  Interestingly, they found that the average list prices for the insulin products rose by more than 40 percent over five years, but the average net prices received by the manufacturers of the same insulin products dropped by nearly 31 percent over the same period.

Where did all the money go if it didn’t go to the drug makers?

Using the same database, the researchers constructed a model of a hypothetical $100 expenditure on insulin and broke down where the $100 went in 2014 and 2018. The five pockets were: manufacturers, who make the insulin; pharmacies, who dispense the insulin; pharmacy benefits managers, who manage prescription drug benefits and formularies; drug wholesalers, who purchase and distribute the insulin; and health plans, who pay for the insulin via prescription drug claims.

Here’s how the money shifted over that five-year period:

  • Manufacturers’ cut of the $100 plummeted to $47 from $70
  • Pharmacies’ cut of the $100 jumped to $20 from $6
  • PBMs’ cut of the $100 jumped to $14 from $6
  • Wholesalers’ cut of the $100 rose to $8 from $5
  • And health plans’ cut of the $100 slipped to $10 from $14

In short, the ones who made the insulin and the ones who paid for the insulin took a hit. But everyone else in the middle padded their wallets.  

“Although manufacturers have been receiving less, the savings from manufacturers taking less are not flowing to patients,” the researchers said in a press statement. Further, “These data suggest increasing profits to intermediaries in the system are playing a key role in keeping net expenditures high.”

That pretty much says it all. And if you think the same thing isn’t happening with other pharmaceutical products, prescription meds, medical devices and medical supplies and equipment, I’ve got a homemade glucose monitor I’d like to sell you. 

If you want to reduce healthcare costs, cut out the middleman just like you would in any other business in any other industry. 

Thanks for reading.  

About the Author

David Burda

David Burda began covering healthcare in 1983 and hasn’t stopped since. Dave writes this monthly column “Burda on Healthcare,” contributes weekly blog posts, manages our weekly newsletter 4sight Friday, and hosts our weekly Roundup podcast. Dave believes that healthcare is a business like any other business, and customers — patients — are king. If you do what’s right for patients, good business results will follow.

Dave’s personnel experiences with the healthcare system both as a patient and family caregiver have shaped his point of view. It’s also been shaped by covering the industry for 40 years as a reporter and editor. He worked at Modern Healthcare for 25 years, the last 11 as editor.

Prior to Modern Healthcare, he did stints at the American Medical Record Association (now AHIMA) and the American Hospital Association. After Modern Healthcare, he wrote a monthly column for Twin Cities Business explaining healthcare trends to a business audience, and he developed and executed content marketing plans for leading healthcare corporations as the editorial director for healthcare strategies at MSP Communications.

When he’s not reading and writing about healthcare, Dave spends his time riding the trails of DuPage County, IL, on his bike, tending his vegetable garden and daydreaming about being a lobster fisherman in Maine. He lives in Wheaton, IL, with his lovely wife of 40 years and his three children, none of whom want to be journalists or lobster fishermen.

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