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Price Fixing And Kickbacks Sully Medical Supply Business

With all the provisions in the new health care law to bend the cost curve, it seems that Congress left a couple things out: the price of medical supplies and measuring cost-effectiveness in clinical research. 

Supplies ranging from gloves and gauze to drugs and machinery are the second-largest expense for hospitals. Since the mid-1980s, the purchasing companies that have a near monopoly on providing these supplies have been allowed to take payments from manufacturers. That means that the manufacturers can pay suppliers to pick their products, and that hospitals have little choice but to accept the prices and products they’re offered. The chances for price control have only worsened since 1996, when the suppliers got an exemption from antitrust rules. But fixing this scheme was not part of the health care reform conversation.

A new article in The Washington Monthly lays out the scheme – and its impacts – exhaustively. “It’s a system that has stifled innovation and kept lifesaving medical devices off the market,” writes Editor Mariah Blake.

The suppliers, known as group purchasing organizations, or GPOs, were created in the 1970s to negotiate on hospitals’ behalf. But in 1986 they started charging manufacturers, instead of hospitals, to fund their operations. To deter kickback schemes, payments that made up more than 3 percent of sales were supposed to be reported, but by 2002, “GPOs were collecting upfront payments of up to $3 million from suppliers in return for awarding sales contracts, not to mention a large share of revenues,” Blake writes. One supplier paid a GPO 94 percent of its sales.

GPOs say they save hospitals money by bundling supplies and using their size to negotiate good deals. But the evidence is decidedly mixed. One medical company crunched seven years of data and found that GPO prices were heavily inflated. “The idea of hospitals outsourcing oversight of their supply budgets may seem hard to fathom,” Blake writes. “But the price of medical supplies is not always transparent.”

Another area the law overlooks: cost comparisons in research on clinical effectiveness. Among its many research projects, the new law establishes an institute to conduct and prioritize research that compares clinical effectiveness of various devices and services. But it precludes looking at cost-effectiveness analyses, according to a new paper from Mathematica Policy Research and the Center for Studying Health System Change. The funds, some $600 million a year raised from a fee on insurance that runs from 2013 to 2019, can’t be used to calculate “quality-adjusted life years,” a stat used to judge the value of a procedure. And the results can’t be taken as mandates or guidelines for payment and coverage.

All of this nervousness about what the researchers can and can’t do stems from the controversy over “death panels” and new mammography guidelines that came up last summer during the health care debate. “Such information on marginal cost-effectiveness has proven meaningful in public efforts in which the citizens accept the legitimacy of restricting access because of cost considerations; but the recent debate suggests the U.S. public is not ready,” the authors write. It also serves to remind that the success of the new law now depends on anonymous officials, not politicians and the public. This research institute will be run by a board that includes drug and device makers, raising questions about conflicts of interest. As Ezra Klein wrote in a recent column, “[T]he implementation period brings a dangerous asymmetry: The public quiets down, as people think action has been taken, but the lobbyists mount up.”

Related Topics

Cost and Quality Health Industry The Health Law