Mariah Blake has a must-read investigation in The Washington Monthly on the for-profit group purchasing organizations that dominate the medical supplies business and how they stymie small companies with inventions that could save lives and cut costs.
She tells the story through a Texan and a Tulsan who have run up against the system and lost despite having superior products and comparable or cheaper prices.
Their plight is just the most visible outgrowth of the tangled system hospitals use to purchase their supplies—a system built on a seemingly minor provision in Medicare law that few people even know about. It’s a system that has stifled innovation and kept lifesaving medical devices off the market. And while it’s supposed to curb prices, it may actually be driving up the cost of medical supplies, the second largest expenditure for our nation’s hospitals and clinics and a major contributor to the ballooning cost of health care…
That “seemingly minor provision”:
Then, in 1986 Congress passed a bill exempting GPOs from the anti-kickback provisions embedded in Medicare law. This meant that instead of collecting membership dues, GPOs could collect “fees”—in other industries they might be called kickbacks or bribes—from suppliers in the form of a share of sales revenue.
And the GPOs got anitrust exemptions that allowed them to consolidate control over the business, which Blake reports resulted in five companies quickly cornering 90 percent of the market.
The GPOs get a percentage of suppliers’ revenue, so the problem is they are incentivized not to cut costs.
Read the whole thing. Excellent stuff.
— Michael Hiltzik of the Los Angeles Times looks at how prosecutorial failures have not just violated white-collar criminal defendants, but the country’s right to have these people face trial.
He zeroes in on Broadcom’s fast-living (“allegations of his purchases of illegal drugs and his hiring of prostitutes on a heroic scale, his construction of an underground drug den,” etc.) billionaire founder, who got his backdating fraud case thrown out because of prosecutorial misconduct:
That hints at the real miscarriage in the Broadcom cases: Due to the prosecutors’ behavior, the American people were deprived of their full day in court. And while the defendants are no doubt relieved at the outcome, I wonder if there’s not something bittersweet about their relief. Wouldn’t it have been even better to have been explicitly declared innocent by 12 men and women, good and true?
— Kyle Thompson-Westra has a smart piece over at The Big Money noting how lucky we are that BP is a Western multinational and not, say, Gazprom or CNOOC—companies owned by states that are, if not quite, enemies, certainly not friends.
Humor me and picture what would happen if BP were owned by the British government. We would be facing a situation where a foreign government would be directly responsible for the ever-worsening spill on our domestic shores. The United States and U.K. have had arguments before, and the nationalistic vitriol coming from both sides would be 10 times worse as issues of blame, recovery costs, national pride, domestic security, and economic competition were endlessly debated between leaders, economists, and cable pundits.
And that’s still the rosy scenario. Because at least Britain is an ally. There are plenty of countries who are not, and they happen to own their own oil companies. Venezuela, China, Iran, and Russia being among the biggest.
For example:
Already, we’re seeing potential hotspots, and the United States isn’t the only country that should be worried. Chevron and Rosneft (owned by the Russian government) will begin drilling in the Shatsky Ridge of the Black Sea at the end of 2011. The Black Sea is bordered by Russia, Georgia, Turkey, Bulgaria, Romania, and Ukraine, countries that, to put it lightly, don’t always get along. Any substantial accident would be seen as a Russian oil company contaminating its oft-slighted neighbors. Cue the international crisis.
This is excellent stuff. I’d like to see more on this thread.
The amazing thing about the GPO story is that Modern Healthcare, supposedly the healthcare industry's primary journalistic periodical, has not said a word. They get significant advertising revenue from GPOs.....yet another failure of journalism that I believe is a story within the story...
#1 Posted by Tom T, CJR on Tue 20 Jul 2010 at 05:46 PM
Ryan, unfortunately the Washington Monthly piece leaves a lot to be desired from a journalism perspective, as Blake failed to investigate or disclose quite a bit.
Blake fails to disclose that Thomas Shaw, the focus of the story, has contracts with most of the major GPOs for the exact product mentioned. The one hospital system quoted in the story said that they didn’t buy this product because they experienced safety concerns. Shaw has placed more than 40 products on contract with numerous GPOs since 2003.
For balance it would have been nice to have heard from a small supplier that has increased the number of employees because they have found success by teaming up the GPOs. There are many. Many small suppliers have flourished under GPOs because GPOs help provide the access and visibility necessary to break into the market dominated by big device manufacturers.
Group purchasing organizations do not “dominate” the medical device landscape, as you indicate. GPOs, at $1B in revenues, in no way have the power to thwart competition in the $200B medical device market. Medical device suppliers are the Goliath that controls the marketplace. Hospitals can and frequently do purchase outside of the GPO contract. As Professor Gene Schneller’s research shows, hospitals make purchases “off contract” approximately 72 percent of the time. See, http://www.higpa.org/assets/1/workflow_staging/AssetManager/235.pdf
Manufacturers like Shaw aim to undermine the competitive forces of GPOs. GPOs bring much needed competitive forces to the marketplace and save taxpayers and hospitals billions annually – all of which are reported to the government. In short, GPOs aggregate the purchasing power of hospitals and other health care providers. Medical device companies like the one described in the story, on the other hand, do the opposite. They want to disaggregate the health care system in order to increase their returns by selling their products using “one off” deals in which comparison shopping is discouraged.
Everything GPOs do is in the interests of their hospital members and clients. GPOs foster innovation, bring small suppliers to market and add value to the fragmented health care system. GPOs are the most transparent sector in healthcare.
Contrary to Ms. Blake’s suggestions the GPOs are not in a “privileged” position. The Justice Department and the Federal Trade Commission never “overhauled antitrust rules and granted the organizations protection from antitrust actions, except under “extraordinary circumstances.” There is no GPO antitrust exemption. Rather, the DOJ and FTC issued guidance in 1996 that makes clear the general position that the GPO industry helps save their members money and do not, except in exceptional circumstances, reflect an antitrust threat. In other words, GPOs are subject to the same rules and regulations as every other entity in health care—no exceptions. I am happy to share with you a copy of the guidance issued in 1996.
Also, when Congress passed the GPO Safe Harbor in 1987 it did not mean, as Ms. Blake states, “that instead of collecting membership dues, GPOs could collect “fees”—in other industries they might be called kickbacks or bribes—from suppliers in the form of a share of sales revenue.” GPOs collected fees before 1987, and one of the purposes of the legislation in ’87 was to clarify that Congress never intended for GPOs to be affected by the provisions.
More than 90% of all hospitals voluntarily contract with GPOs. At a time when hospitals across the country are facing budget crises, hospitals would simply not continue to contract with GPOs unless GPOs were providing the best products and the best value – they would simply make purchases elsewhere, either from another GPO or directly from manufacturers.
The GPOs’ vendor-based financing system reli
#2 Posted by Curtis Rooney, CJR on Wed 21 Jul 2010 at 10:29 AM