Cost Effective Approaches to Biologics Procurement

February 2011 : Biologics - Vol. 8 No. 2 - Page #14

The term biologics covers a wide range of products including vaccines, blood and blood components, allergenics, somatic cells, gene therapy, tissues, monoclonal antibodies, and recombinant therapeutic proteins. Unlike most conventional drugs that are chemically synthesized and have a known structure, most biologics are complex mixtures that are not easily identified or characterized.1 Despite their complex and volatile nature, there are many biologics that are in common usage today (see Table 1).

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In the last decade, biologics as a class of medications (especially monoclonal antibodies) have had a profound impact on the practice of medicine, particularly in oncology and the treatment of chronic disease states. These products also have become the fastest growing segment of the branded prescription drug market with an estimated market share approaching 30% annually (approximately $166 billion) by 2014.2 As such, the procurement and use of biologics is becoming more mainstream, yet require a different approach than their conventional counterparts. The high cost and sensitive nature of these products must be attended to with a sound understanding of who the providers are, how the products should be acquired, and how they should be used without creating excessive waste. This process begins with the unique nature of contracting for the provision of these products.

In general, there are three approaches to establishing contracts for hospitals to consider when deciding the most cost effective way to purchase biologics. Even though biologics are very unique compared to traditional pharmaceuticals, establishing contracts for them is a similar process. Depending on the size of the facility, the quantity of biologics used, and the structure of the purchasing department, among other factors, contracts for biologics can be negotiated via a group purchasing organization (GPO), directly with the manufacturer, or with a specialty distributor.

Group Purchasing Organizations
Popular among many hospitals and health systems, group purchasing organizations (GPOs) help providers realize drug purchasing savings and create procurement efficiencies by aggregating purchasing volume and using that leverage to negotiate discounts with manufacturers, distributors, and other vendors. One of the biggest advantages for hospitals that use a GPO is that they take the responsibility of establishing and administering contracts for the selection and pricing of pharmaceuticals, including biologics. The average hospital that uses a GPO purchases 88% of its pharmaceuticals through that GPO, which results in an average savings of 15% compared to contracts made directly with manufacturers.3 GPOs receive funding through administrative fees that are charged to suppliers. Smaller hospitals within a GPO especially benefit from pricing since purchasing volume is aggregated. However, if a hospital purchases high quantities of a product, it may be able to negotiate better pricing outside of the GPO contract. This is one disadvantage for larger health-systems, as smaller hospitals within the GPO may affect their pricing as well.

Direct from Manufacturer
As an alternative to GPOs, hospitals or health-systems may contract individually with manufacturers for the acquisition of biologics. In this case, the products are shipped directly to the hospital, which is also directly billed. Compared to pricing through a GPO, there are times when equal or better pricing may be obtained directly from the manufacturer, though this is more likely for large or specialized health systems. While negotiating directly with the manufacturer can offer the hospital greater individual control over the acquisition process, that may actually be seen as a disadvantage. Unlike with GPOs, the onus is on the hospital to review and validate the legality of any contracts that are agreed upon. The hospital must take accountability for negotiating those contracts and recognize any and all labor costs associated with the direct ordering of products, as well as reconciling those orders through accounts payable and receivable.

Specialty Distributors
Some pharmaceuticals are unavailable to GPOs or for direct purchase because they are distributed solely through specialty distributors. These specialty markets allow manufacturers of pharmaceutical products to limit the distribution channels of their drugs, which in turn tightens control on inventory and helps ensure product integrity to the end user. Important elements to discuss when negotiating with specialty distributors include product shipment during weekends and/or holidays, delivery turnaround time in extreme weather, and, for some products, sole source pricing considerations. See Table 2 for some examples of different specialty distributors.

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Contract Bundling
While contracts are often made between hospitals and suppliers for single products, there are times when contracts can be bundled spanning multiple products. For example, if you are interested in contracting with a supplier for factor products, you may be required by contract to also use the same supplier for other products, such as albumin and intravenous immune globulin (IVIG). In order to obtain the negotiated prices for all products, the organization must commit to purchasing all the products in the bundle from the same supplier. When comparing contract bundles, it is important to compare the products within each bundle to avoid overlapping products. In most cases, contract bundles are favorable for hospitals and will result in cost savings compared to contracting for each line item individually. However, it is important to conduct a thorough analysis based on your specific utilization and the needs of your organization when considering a contract bundle.

Consignment Contracts
Some specialty distributors provide hospitals with the option of contracts that are executed using a consignment approach. That is, medication inventory is sent to and stored in the hospital, but the hospital does not have financial liability for the product unless it is actually used. Tracking consignment inventory is traditionally a manual—and therefore time consuming—process, but in recent years, technological advancements such as electronic RFID tagging has allowed for real-time usage data to assist automatic invoicing exactly when products are accessed for patient care. It is important to keep in mind that hospitals often pay an upcharge for medications used under consignment, usually on a per-unit or per-vial basis. Because of this, consignment contracts should generally only be considered for high-cost/low-use medications, such as factor products. In any case, a utilization analysis should be conducted, taking into account the upcharge, before a consignment contract is pursued to ensure the hospital would not lose money on such an agreement. A simple utilization analysis can be conducted by looking at a product’s usage history over a 12-month period that includes time spent managing the inventory manually, upcharge implications, and costs for emergency shipments. If the utilization analysis appears favorable, this type of contract can be quite beneficial, as it provides instant access to medications without waiting for delivery. Additionally, inventory control is maximized since the risk of medication expiration or waste is reduced. Some examples of specialty distributors that offer consignment contracts include ASD Healthcare and Cardinal Health.

Once the type of contract has been established for biologics acquisition, the actual purchasing of the products will depend on your chosen method and these all differ based on the contract. With the GPO method, purchasing is done at an aggregate level amongst all members of the GPO in order to realize savings. Based on pre-established contracts between GPOs and suppliers, member hospitals are obligated to maintain a certain order rate (also referred to as contract compliance) from the GPO in order to avoid penalty.

When purchasing directly from the manufacturer or through a specialty distributor, hospitals must contact the supplier independently to order products requiring accurate need forecasting and proactive interaction with the manufacturer or distributor. As well, more work is involved on the hospital side when purchasing directly because of the need to keep track of invoices and submit timely payment to the supplier.

Distribution of Products
While contracting for and purchasing biologics are the two main considerations in the acquisition process, there are also two unique distribution channels worth mentioning—specialty distribution networks and the so-called gray market. Most should be aware that even though the use of the gray market for acquisition of pharmaceuticals of any kind is not recommended, it nevertheless exists, and is particularly tempting during periods of shortages.

Specialty Distribution Network
Aside from the specialty distributors previously mentioned, there are also specialty distribution networks that enable suppliers to provide additional services aside from the simple distribution of medications to hospitals. The intent of specialty distribution networks is to ensure that medications with very high attendant risks are prescribed, dispensed, and administered safely. Some examples of the services provided include reimbursement services, patient assistance programs, and the implementation of FDA-mandated risk evaluation and mitigation strategies (REMS). Depending on your facility’s workload and work distribution, specialty distribution networks can be particularly helpful when dealing with products such as IVIG, albumin, and oncology drugs due to their dangerous and/or costly nature. Examples of specialty distribution networks include Amerisource Bergen, FFF Enterprises, McKesson Specialty Care Solutions, and CuraScript.

Gray Market
One need not have spent a great deal of time in institutional pharmacy practice to be aware of the concept of procuring pharmaceuticals from the gray market. Also referred to as a parallel market, the gray market refers to the sale of pharmaceuticals outside of their authorized channels of trade. Expensive medications, such as biologics, are prone to gray market distribution because they can be purchased in a different market, such as a foreign market, and resold for a profit in the US. A prime example of a gray market is the United States/Canadian border. Since Canadians often pay lower prices for pharmaceuticals than their US counterparts, medications are often purchased in Canada and resold in the US for a profit. The gray market also flourishes during drug shortages when hospitals run out of options to procure medications for patients. Hospitals should use the gray market with extreme caution. If drugs are procured through this channel, it is important to verify the drug’s pedigree to avoid the use of counterfeit products. Under the Prescription Drug Marketing Act (PDMA), a drug pedigree is a statement of origin that identifies each prior sale, purchase, or trade of a drug. Pedigrees include dates of transactions and the names and addresses of all parties involved in the distribution of the drug. They also establish that a drug has been properly produced, is not counterfeit, and has been maintained under proper conditions. Ultimately, if the pedigree of the medication cannot be verified, the integrity of the product cannot be confirmed, and such products should not be used.

Negotiating for biologics acquisition is a complex process and the costs and handling requirements for these products necessitates considerable understanding of the process. As more biologic products become available and usage rates continue to climb, understanding not just the way in which they are used, but also understanding how to manage and create efficiencies in the supply chain process is paramount. Biologics represent the leading edge of biomedical research and development, and therefore should be carefully examined across the entire medication use spectrum.


Jason Lovero, PharmD, graduated from the University of Houston College of Pharmacy in May 2008. He recently completed a two-year residency in health-system pharmacy administration at The Ohio State University Medical Center (OSUMC) and is currently completing a pharmacy fellowship with an emphasis on financial management at OSUMC. Upon completion of his fellowship, Jason has plans to practice pharmacy management at an academic medical center.

The author would like to acknowledge David Smeenk, MS, RPh, for his mentorship and contributions to this article. David is the assistant director of pharmacy at OSUMC.


  1. What Are “Biologics” Questions and Answers. US Food and Drug Administration. Available from:
  2. Fanneau de La Horie, GC. Making Biologic Drugs More Affordable. Drug Discovery & Development. July 12, 2010. Available from:
  3. Schneller, E. The Value of Group Purchasing—2009: Meeting the Needs for Strategic Savings. Health Industry Group Purchasing Association. Available from:


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