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Man Bites Dog: Medical-Device Makers vs. Corrupt Hospital Purchasing Outfits

A new study supported by the medical device makers' trade association charges that the group purchasing organizations (GPOs) that buy supplies for most hospitals do not save money. Instead, the study says, they inflate healthcare spending by $37.5 billion a year through a rigged system that includes kickbacks of 2 to 18 percent from manufacturers of healthcare supplies.

While there's a lot of truth in this charge, I find it interesting that device makers are behind this latest assault on GPOs, but companies that primarily supply other medical products, such as Johnson & Johnson (JNJ) and Becton Dickinson (BDX), remain quiet. Could it be that the device makers see a business opportunity in free and open competition for hospital business, while other suppliers like the current system and would prefer to shut out smaller or newer firms through single-source contracting?

A recent Washington Monthly article profiled the struggles of an inventor named Thomas Shaw to get hospitals to buy his retractable syringe, which reduces the chance of needle sticks. Becton Dickson owns about 70 percent of the syringe market, and at one point, had exclusive deals with 5 of the 6 largest GPOs, which together own 90 percent of the hospital market. As a result, Shaw's new and improved syringe could not find customers.

The device makers themselves have tried to limit competition from firms that reprocess medical devices. Although the FDA has said the reprocessed devices are safe, the device manufacturers insist that their products must be thrown out after a single use to safeguard patients.

To return to the just-released study on GPOs, the authors looked at 8,000 hospital purchases from 2001 to 2010. They found that hospitals would have saved an average of 10 percent if they'd bought the supplies outside of the GPOs. This year, they would have saved 18 percent.

The problem is not simply that suppliers fund the GPOs, in effect, by paying their "administrative fees," some of which are rebated to hospitals. These middlemen give preference to those suppliers willing to pay their side charges, whether or not their devices or other products are cheaper or better than those of companies that won't pay. Even in cases where the bidders are willing to pay the fees, the GPOs have an incentive to accept higher bids, which raise their take, the study says.

While the GAO recently found that four of the six largest GPOs had switched from "single source" contracts -- in which hospitals can buy a product from only one supplier -- to "multi-source" contracts, it's unclear whether that has resulted in lower prices. The GAO did find that the level of GPOs' administrative fees has declined in recent years. But the basic conflict of interest between the GPOs' desire to rake in maximum kickbacks and their assigned task of getting discounts has not disappeared, according to the device makers' study.

A 1986 law exempts GPOs from the Medicare anti-kickback statute. When the device makers' study was released, the Medical Device Manufacturers Association (MDMA) called on Congress to repeal that exemption. Congress held hearings on the subject several years ago, but a voluntary code adopted by the GPO trade association quelled the repeal movement.

Curtis Rooney, president of the trade group, known as the Health Industry Group Purchasing Association, denied that GPOs increase the cost of hospital supplies.

All independent, empirical, and non-industry studies of GPOs -- including examinations by the GAO, FTC, DOJ, academia, and the 8th Circuit Court of Appeals -- have found that GPOs save hospitals money... No amount of reckless MDMA propaganda can change the fact that the $200 billion medical device industry and its largest manufacturers are the only parties that stand to benefit from changing a working, competitive GPO market.


GPOs are no angels, but Rooney might be right about one thing: the only suppliers that will benefit from more competition are device makers.

Image supplied courtesy of Flickr.
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