Hidden Engines in Healthcare Part 1 -- A Startup View On The Pharmacy System

The pharmacy system is an essential component of healthcare delivery, providing access to medications that are critical for the treatment and management of various health conditions. It encompasses a range of functions, including drug procurement, inventory management, and dispensing. However, the system is often opaque and confusing for patients and even healthcare professionals alike, making it a less popular topic of conversation in the general discourse surrounding healthtech innovation. In this article, we will delve deeper into the pharmacy system in healthcare and explore its players, challenges, and areas for future disruption.

Hidden Players

Pharmacies play a crucial role in providing patients with access to the medications they need. They are responsible for ensuring that medications are safe, effective, and of high quality, where huge organizations monopolize large parts of the cycle. We take a brief look at the main players at this table:?

1.Group Purchasing Organizations (GPOs)- the supply chain middlemen, more here:?

GPOs are entities that negotiate discounts on medical supplies, equipment, and services on behalf of healthcare providers such as hospitals, clinics, and long-term care facilities. By leveraging their collective buying power, GPOs can negotiate better prices and terms with suppliers, which can result in significant cost savings for their members. These organizations typically charge their members a fee or a percentage of the savings they generate, but the savings they offer often far outweigh these costs. In addition to cost savings, GPOs also provide their members with access to a wider range of products and services, as well as expertise and support in purchasing and supply chain management.

2. Pharmacy Benefits Management (PBM)- the contract middlemen, more here:?

PBMs negotiate contracts between pharmaceuticals and the pharmacies to meet patient demand, between health systems and pharmacies for reimbursement of medication, as well as formulary rebates for pharma manufacturers. They are the most regulated of the players listed here, which is not much to say. GPOs and PSAOs are completely untouched by any legislation.

3. Pharmacy Services Administrative Organizations (PSAOs)- the middlemen for the middlemen, more here:?

These organizations are the middlemen for the middlemen, who negotiate contracts between pharmacy back offices and pharmacy benefits management

4. Wholesalers (RX) - the last mile:

Dispensing medications is perhaps the most visible function of the pharmacy system. Wholesalers ensure movement of drug and products reach from the pharmaceutical manufacturers to the pharmacies

Disruption Opportunities in the Pharmacy System

We believe that the pharmacy systems are seeing the beginnings of legislative tailwind (Medicaid driven shift in subscription based business models, ?FTC audit back in Nov 2022 on PBMs) and openness to new business models that enable pockets of opportunities, some example may be:?

1. The pharmacy system is fraught with paperwork and still at times rely on traditional methods of communication/contract negotiations that slow efficiency. Full stack software with data tracking and algorithms such as large language models can be leveraged to increase efficiency in these spaces

1. Business models:?

• Pharmacy focus- There’s a shift towards specialty pharmacies as they are less stretched thin and can provide specific longitudinal services for complex treatments for patients with chronic diseases (ex. Alto Pharmacy, Fullscripts)
• Delivery methods- The at home care trend has driven a small wave of companies to build business around door delivery (ex. Pillpack, Capsule, Amazon Pharmacy)
• Care modalities- subscription based services are becoming more in line with at home care modalities encouraged by increase in aging population and high-value care (ex. HouseRX)

We at Tau are excited about this space, so if you’re building in this space or looking to, please reach out!

Primary author of this article is Sharon Huang. Originally published on “Data Driven Investor.” ? Article co-written by ChatGPT-4 and headline image generated by DALL-E. These are purposely short articles focused on practical insights (we call it gl;dr — good length; did read). See here for other such articles. If this article had useful insights for you, comment away and/or give a like on the article and on the Tau Ventures’ LinkedIn page, with due thanks for supporting our work. All opinions expressed here are from the author(s).