GPOs Limit Competition and Raise Healthcare Prices

 

Last post (Transparency Lowers Healthcare Prices) I discussed how patients can shop for the best healthcare deal if prices are transparent. We should be able to pick the best deal for elective surgery just as we do when we purchase a new car.

The lack of transparency is one of the contributing factors to the rising cost of healthcare. Another contributing factor is the near-monopoly of “group purchasing organizations”, known as GPOs.

Industry Kickbacks

Phillip L. Zweig and Frederick C. Blum, writing in The Wall Street Journal, say the greatest harm to lowering healthcare costs is done by GPOs. These GPOs supply hospitals with every thing from saline to anesthetics to antibiotics. Their dominance in the marketplace contributes to higher prices and shortages of supplies.

When Amazon Business signaled last year that it planned to infuse competition into the marketplace for hospital supplies, clinicians were optimistic that scarce items would soon reappear. But they didn’t recognize the power of these GPOs.

Four giant GPOs – Vizient, Premier Inc., HealthTrust and Intalere – control purchasing for most of the supplies used by thousands of hospitals, outpatient clinics and nursing homes. These buying cartels literally sell market share, taking money from drug makers and other vendors in exchange for exclusionary supply contracts.

Zweig and Blum say hospitals sometimes even get a cut of the GPOs’ fees. When Premier was considering an initial public offering (IPO) in 2013, Thomas Finn, an analyst at HCMatters.com, explained: “As a member-driven enterprise, it is common knowledge that Premier and other GPOs ‘share back’ with their members and owners In fact, many hospital executives who are part of the Premier alliance have learned to rely on the share back as an integral part of their annual compensation.”

They say the results of this anticompetitive system are high costs and inevitable supply breakdowns. For example, the GPOs would have the public believe that Hurricane Maria triggered shortage of sterile IV solutions by damaging Baxter International’s Puerto Rican plants. In fact, shortages of saline and other solutions have existed for years, forcing the U.S. to import them from several countries.

The reason for this chronic problem of shortages is that GPOs have relied almost exclusively on Baxter for these products, concentrating production and discouraging potential competitors. Baxter essentially admitted this fact in a 2007 press release when they reported a new deal with Novation (now Vizient) describing the terms as “an extended single source award for IV solutions.”

Zweig and Blum say the fees manufacturers pay to GPOs can be exorbitant. In a 2003 whistleblower case filed by a former employee of Novation, documents showed that Ben Venue laboratories, an Ohio company producing a heart medication diltiazem, paid GPO fees that exceeded half its sales on the drug.

History of GPOs

It wasn’t always this way. The first GPO was founded in 1910 when several New York City hospitals banded together to buy supplies in bulk. Member hospitals paid dues to cover administrative expenses. This “co-op” model worked well for decades.

Then government got involved. In the mid-1980s, Congress gave GPOs a “safe harbor” by exempting them from the laws against taking kickbacks from suppliers. The result of this foolish legislation is the system of kickbacks, shortages, and higher prices we have today.

The premise of these GPOs is that they save hospitals money. That was the original reason they were formed. But a 2010 report by the Senate Finance Committee found no independent empirical evidence that GPOs save hospitals money. On the other hand, a 2002 Government Accountability Office study of purchases of safety needles and pacemakers in one metropolitan area found hospitals that negotiated on their own often obtained lower prices.

Zweig and Blum estimate GPOs inflate costs by 30% or more. Yet most hospital administrators would rather accept the status quo than buck the system.

The same problem is wide-spread in the pharmaceutical business. In 2003 the Department of Health and Human Services (HHS) advised drug makers that the safe harbor would protect rebates paid to pharmacy benefit managers. This has resulted in a rising drug prices sold through these middlemen.

With the pullback of Amazon from the market, it is clear that the only way out of this system of kickbacks, rising prices, and shortages is repeal of the “safe harbor” provisions. This will allow competition back into the marketplace resulting in lower costs and increased supplies of vital medical supplies.

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