Audit Notes: GPOs, Broadcom Injustice, The Upside of BP

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.

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Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at Follow him on Twitter at @ryanchittum.