(2010-07-14) Dirty Medicine

The HealthCare GPO (Group Purchasing) industry was created for good reasons, but the Incentive-s were badly designed. Now it serves largely to reduce competition (esp Innovative new entrants), because the GPO organizations (Middle Man) are serving their own finances rather than their purchasing customers.

(Thomas Shaw) has spent the last fifteen years watching his potentially game-changing inventions collect dust on warehouse shelves. And the same is true of countless other small medical suppliers. 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, which consumes nearly a fifth of our gross domestic product.

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. (This reminds me of the Debt Credit Rating agencies.)

In many cases, hospitals were obliged to buy virtually all of their bandages or scalpels or heart monitors from one company. GPOs also began offering package deals that bundled products together. To get the best price on stethoscopes, a hospital might have to agree to buy everything from pacemakers to cotton balls from the GPO’s preferred vendors. (Bundl Ing)

This situation only grew thornier in 1996, when the Justice Department and the Federal Trade Commission overhauled Anti-Trust rules and granted the organizations protection from antitrust actions... Within a few years, five GPOs controlled purchasing for 90 percent of the nation’s hospitals.

The experience of hospitals and clinics that have struck out on their own seems to confirm Yancy’s findings. When Iowa Health System, a chain of ten Midwest hospitals, cut ties with Premier some years ago, it immediately shaved $7 million a year off its supply costs, a savings of more than 12 percent, according to the Ny Times.