The Hidden Cost of Healthcare Distribution–What Hospital CFOs Need to Know [PODCAST]

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Highlights of this episode include:

• What the biggest drivers are of declining hospital profitability
• What operational or financial control hospitals gave up and the consequences
• How GPOs and PBMs has changed hospital economics
• What a realistic path forward looks like
• Direct-to-provider and direct-to-patient distribution models
• Where hospital finance teams and supply chain operations teams most often misalign
• What the key supply chain related questions hospitals should be asking in 2026

Kelly Wisness: Hi, this is Kelly Wisness. Welcome back to the award-winning Hospital Finance Podcast.  We’re pleased to welcome Tony Paquin. Tony is a healthcare technology entrepreneur with more than three decades of experience building and scaling companies across healthcare, technology, and regulated markets. Tony currently serves as a co-founder, chairman, and CEO of iRemedy Healthcare, an AI-powered procurement and supply chain platform supporting thousands of healthcare providers nationwide. Their work focuses on improving transparency, efficiency, and resilience across the medical supply chain through technology, logistics, and direct partnerships with manufacturers and distributors. Over the course of his career, he’s founded and led multiple public and private companies, including Agency One, which evolved into Vertifore, and Medinex. He’s a co-inventor on multiple granted U.S. patents focused on artificial intelligence-driven automation, data normalization, and machine learning systems that enable complex platforms to interpret unstructured data, automate multi-step workflows, and operate with greater accuracy and resilience at scale. He’s the author of “The End of Us: A Story of Death, Deception in China’s Deadly Grip on U.S. Healthcare” and hosts The Supply Side Podcast.

In this episode, we’re discussing the hidden costs of healthcare distribution, what hospital CFOs need to know. Welcome, and thank you for joining us, Tony.

Tony Paquin: Hey, Kelly, nice to be on the podcast with you. Thank you.

Kelly: Yeah, well, let’s go ahead and jump in. So, hospitals across the U.S. are seeing sustained margin pressure. From your vantage point in the healthcare supply chain, what are the biggest drivers of declining hospital profitability that financial leaders often underestimate?

Tony: Yeah, it’s a really difficult time right now for hospitals and hospitals’ CFOs, particularly across the country. They’ve been living in the world of shrinking margins for a number of years now, really, maybe starting around COVID and post-COVID. At the end of the day, there’s two main drivers inside of healthcare in terms of costs. The first one is payroll, right? You got nurses, you have doctors, you have the rest of the staff, you have the administration. And there’s a lot of innovation, a lot of work that people are doing in those areas, not an area that I work on, but it’s difficult, right? They have unions, they have restrictions, they don’t want to reduce the number of providers. The second big area of expense on the P&L of any hospital will be medical supply. That’s mostly drugs, but drugs and medical devices. And that’s the one area that, when we look at the modernization of the world, and we’re definitely living at a time right now where the world is changing. So, when you think about how drugs are made and where drugs are made, and how hospitals buy drugs, it’s very different than it was, say 20 years ago, 10 years ago, and even five years ago. So, we look at iRemedy to use technology to really innovate around how to hospitals. And for that matter, by the way, we work with clinics and surgery centers, and government agencies. But how do healthcare providers generally look at ways to drive down the cost of their drugs and supplies, as opposed to just trying to reduce the inflationary amount, there’s actually opportunities to actually reduce cost.

Kelly: Well, yeah, I agree that shrinking margins is definitely a big issue right now for hospitals. Over the past few decades, hospitals outsourced large portions of their supply chain to distributors and group purchasing organizations. What operational or financial control did hospitals give up in that process? And what are the consequences today?

Tony: Well, first off, Kelly, that’s a great observation. Hospitals pretty much completely outsource the management of their supply chain over the past couple of decades. So, when you think about it, right, even a middle market hospital is a multi-billion dollar organization. But if you go to any other multi-billion dollar organization in another industry who has a, say, a billion dollar-plus supply chain supporting their business, they would not outsource the management of that supply chain. They would develop skills and resources and technology and other capabilities to manage it internally because it’s so critical to any business. But just for a variety of reasons, and frankly, had a lot to do with globalization, when drugs and devices started getting manufactured overseas, hospitals needed intermediaries to help manage that expense. And hospitals also, we’re primarily focused on clinical care. They’re kind of more focused on what’s going on in the emergency room in the surgery area versus where are they buying their penicillin from. But as time went by, they became very dependent on these really mega distributors, and then to a certain extent, the GPOs that are related to those distributors. As a result, they lost really control of that part of their budget.

They’re really reliant upon purchasing drugs and supplies based on contracts negotiated by people who don’t work for those hospitals directly. And for contracts that may have been negotiated a year ago, that they really had very little visibility into that process. So, they lost control is essentially the key. And then the other effect of that was resiliency. And we saw that really big in COVID, of course. I mean, everybody in the United States experienced what happens when your supply chain of critical products breaks down. But I think that was an aha moment for a lot of hospitals where they realized, as one friend of mine who was an executive at a major hospital here in the United States, he was one of the top executives in the supply chain area. When COVID came, he said we went to our supply chain closet and realized we didn’t have one, and that they were completely dependent upon an outside distributor, and that distributor was unable to supply the products they needed. So, this dependency on these external organizations means that one of the most critical and expensive parts of your business, you have no direct control over. And that obviously is a problem. And that’s why I think we’re beginning to see change in that area now.

Kelly: Yeah, I mean, it does seem like that hospitals did give up quite a bit of control there. Group purchasing organizations and pharmacy benefit managers were originally created to lower costs through scale, but many critics argue they now contribute to higher costs and less transparency. From your perspective, Tony, how have GPOs and PBMs changed hospital economics and where are incentives no longer aligned with hospital financial health?

Tony: Yeah, so it’s interesting. If you go back 10 or 20 years, the GPO idea, the group purchase organization, seemed to make a lot of sense. Why don’t we get a group of hospitals, combine our purchasing power, and therefore negotiate better pricing. And so, they did that. And it probably added a fair amount of value in those days. But over time, again, when you look at it– and I know I’ve worked with many hospitals and from the very largest to the very smallest. But if you take an average-size hospital, let’s say it’s a 300 or 400-bed hospital in a secondary market, yeah, they probably spend a billion dollars on supply.

Well, you don’t need a group purchase organization if you’re spending a billion dollars. You have a fair amount of your own negotiating ability. But one of the key comments or parts of your question there that you made is actually really interesting, and that is, how do the incentives align? Well, GPOs, generally and simply stated, get paid as a percent of the spend of a hospital. So, if a hospital spends a billion dollars to use a very simplistic way to look at it, and the GPO makes 5% of that, they get a 5% fee, well, that’s $50 million. And the more the hospital spends, the more the GPO makes. So, the incentives aren’t really correct. The incentives are the more the hospital spends, the more the GPO makes. Well, that doesn’t make sense, right? When you think about it, nobody really wants to admit it. But the fact is it’s turned around and the incentives are not aligned in a way that’s productive for most hospitals. It’s just the way it naturally evolved over time. But that’s how it’s ended up.

Kelly: Yeah, that makes a lot of sense. I mean, you and I talked earlier, I am from a GPO, so I understand what you’re saying there. It is a very interesting concept, and it has changed quite a bit over the years. For hospitals that recognize the need to regain control of their supply chain, what does a realistic path forward look like, especially for systems that can’t afford to rebuild logistics infrastructure from scratch?

Tony: Well, the thing is that I think that has a lot to do with the era that we live in. By that, I mean sort of this modern age. So, to manage your own supply chain, for example– and let’s be clear. I think that the GPOs and the large distributors play an important role, and they’re always going to be with us. So, it’s not like they’re going away. Yeah, they help with compliance and readiness and various important tasks. But I also believe that it’s time for every healthcare system, small and large, to begin to mix in to that spend, more direct control, and more direct purchasing of their supplies.

And the thing is, is that modern solutions and technologies enable that. Now, much of the value add provided by a distributor is actually logistics. And much of the value add provided by a distributor and a GPO is actually kind of like purchase management, contract management, supply chain management. Well, in 2026, which I got to get used to saying that, but in 2026, in this world of AI and modern systems, those services are readily available to everybody very affordably. And by using AI and modern tools, any healthcare provider on down to a clinic and a surgery center up to the largest hospitals and government agencies can do more direct purchase, and direct purchase management, and frankly save the cost associated with those middlemen, which probably represent about 25% of the cost. I had an interesting project I was working on with a domestic manufacturer of pharmaceutical drugs. And we do a lot of work with the government. We advise entities within the administration. We’re very focused, by the way, on developing domestic manufacturing. So, we had this one drug as an example that we’re using in an illustration. I was actually testifying in the US Senate committee.

And this drug, this domestic manufacturer manufactures generic drug. They will manufacture a bottle of 100 pills for $1.20. The Medicare reimbursement on that bottle is $14. So, the question is, where’s the other $12-13, right. It’s not really in the cost of the drug. It’s in the cost of getting the drug distributed through the system. We have to recognize if we’re going to modernize healthcare and reduce the cost of healthcare, we have to be willing to reevaluate all these cost layers that are currently systematized and built into the industry.

Kelly: Yeah. It’s a very interesting observation there, Tony. We’re seeing more discussion around direct-to-provider and direct-to-patient distribution models. From a financial and operational perspective, where do these models actually create value and where do they break down, if not done correctly?

Tony: Well, it is very interesting, by the way, when you think of the direct-to-patient activity that’s taking place. I think it’s very important for hospitals to stay ahead of that curve. You mentioned a book that I wrote recently, which is an interesting discussion about the global supply chain. But years ago, I wrote a book called The Retail Healthcare Revolution. And it was the idea of hospitals, for example, getting into telemedicine and operating retail pharmacies. And I think that continues to be very true, is that hospitals need to be innovating in their care delivery systems. Because if they don’t, you’re going to have non-traditional competitors take business away. We saw, for example, Walgreens become kind of like a Minute Clinic. That whole retail clinic and movement that took place. And then surgery centers– I’m sorry, urgent care centers in every corner, right. It’s all competition to that healthcare system. And it’s important that we protect the economic viability of that healthcare system because you can’t leave the healthcare– the hospital with the– call it the financially undesirable business. Well, it’s not fair, but it’s also not practical because you won’t sustain that operation. But telemedicine is another example. And you see pharmaceutical companies now really wanting to own that patient relationship.

And as a result, using telemedicine to do direct-to-patient drug distribution. I think that that’s happening and that’s going to continue to happen. And healthcare systems need to be thinking about their competitive response to that.

Kelly: Most definitely. Yeah. In your experience, Tony, where do hospital finance teams and supply chain operations teams most often misalign? And, you know, what impact does that have on cost control, forecasting, and accountability?

Tony: I think that the misalignment in my experience is that the supply chain team gets pretty aligned with the distributors, kind of a natural effect, right? They work with these large distributors, they know them, they have relationships, it’s multi-year, maybe multi-decade relationships. So, they’re really a believer in that. And then the finance team, the CFO organization, in many hospitals just tends to accept sort of the inflationary profile of the drug and supply segment of their P&L. And they may say, “Gee, what could we do? We got a letter from this distributor. They’re going to raise prices 10% due to tariffs,” or whatever the reason might be. And they’re just kind of managing at a very high level how they might incrementally mitigate some of that increase versus thinking in terms of disruption and major change. One of the places that we’re seeing this happen, frankly, is where younger– well, from my perspective, that’s most everybody, but the 30-year-olds, the 40-year-olds, maybe even the young 50-year-olds, but that generation coming along they’re a little more innovative. They’re a little more modern in their thinking and not married to the status quo. So, they’re a little bit more inclined to innovate and take on new ideas. And that’s probably a very, very good thing.

And I see that happening in the supply chain. So, a lot of the supply chain executives today, they’re younger. They’re supply chain professionals. They’re innovators. They’re open to new ideas. And whereas, frankly, their predecessors, their main job was to manage the GPO and distributor relationship, which in the early 2000s probably made sense. But in 2026, I frankly just don’t think it’s sustainable. When we talk about this shrinking margins thing, I think we’re getting down to a significant part of the hospital network in America is going to go bankrupt. We have more Medicare cuts coming, and the financial viability issue has always been a problem, but we’re in the ballpark of it becoming a crisis. So, innovation is not going to be a nice-to-have. It’s going to be a requirement to succeed.

Kelly: I agree. Yeah, innovation is key in healthcare, and we often fall behind with that. If you were advising a hospital CFO today, what are the key supply chain related questions they should be asking in 2026 that maybe weren’t on the radar five years ago?

Tony: Right. Well, I think the big one is, what are the direct distribution, direct acquisition opportunities available to us? So, to us being in the hospital system, there’s this pricing concept that’s built into the drug distribution business that’s really an artificial pricing mechanism. And if you were a hospital and you said, “Hey, I buy these 20 drugs, and I buy a lot of them every year. And I know I’m buying a lot. I’m going to keep buying a lot.” And yeah, it’s supposed to be this price, and it goes through the GPO, and it’s under this contract and the distributor, and I pay a distribution price and so forth here’s my price. Well, that’s one price. But what if you went to the manufacturer of that drug and said, “I’ll buy $5 million worth of each of these 20 drugs next year. I’d like a better price, or is there a generic equivalent that I can go get competitive pricing on? I think you’d be surprised at the opportunities to do that. So, I think you’ve got to almost have like a zero-based budgeting approach where you just don’t accept the pricing mechanisms of the past. And you’re a little more willing to use your power as a buyer. These hospitals, it’s almost my own mistake. You really shouldn’t call them a hospital. They’re really a healthcare system, right? They’re going to have the hospital. They’re going to have the emergency room. They very likely have urgent care centers. And they very, very likely have many physician offices, either affiliated, but most likely that they own, could be in the hundreds. And so they’re really conglomerates at this point. They’re very powerful purchasing potential. They own pharmacies.

When I wrote my book, the Retail Healthcare Revolution, for many years, I held a number of conferences. We advised on and built many pharmacies. I think, probably close to 100 hospital pharmacies were built during that period. So, these hospitals, they’re consuming a lot of drugs. They’re a very important part of the healthcare delivery network overall, especially when you move into rural and secondary communities, even things like pharmacies. You get better access to a hospital-owned or hospital-based pharmacy in some markets than you do a Walgreens, Rite Aid, CVS situation. Those big retailers are pulling back and pulling out of markets and are heavily tied into PBMs that add cost. I see a number of hospitals now implementing so-called transparent PBMs, which I think is a fantastic idea. It’s good for the market, but it’s really good for the patients and, therefore, good for the hospital.

Kelly: Well, Tony, thank you so much for joining us and for sharing your insights with us on the hidden costs of healthcare distribution, what hospital CFOs need to know. And if a listener wants to learn more or contact you to discuss this topic further, how best can they do that?

Tony: Absolutely. Well, first off, Kelly, thank you for having me. And I always love to talk to people in healthcare. It’s a lifelong learning process, and there’s probably nothing more complex in the world than U.S. healthcare. The best way to reach me, like everybody else, is probably my email. Love to get email from people. And that email is simple. It’s tony@iremedy.com.

Kelly: Great. Thank you for providing that. And thank you all for joining us for this episode of The Hospital Finance Podcast. Until next time…

[music] This concludes today’s episode of The Hospital Finance Podcast. For show notes and additional resources to help you protect and enhance revenue at your hospital, visit besler.holdings/podcasts. The Hospital Finance Podcast is a production of Besler Holdings.

If you have a topic that you’d like us to discuss on The Hospital Finance Podcast or if you’d like to be a guest, drop us a line at contact@besler.holdings.

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