Connecting the Dots: How Anticompetitive Contracting Practices, Kickbacks, and Self-dealing by Hospital Group Purchasing Organizations (GPOs) Caused the U. S. Drug Shortage

By Patricia Earl, Principal/CEO, Secure Pharma Distributor Network
and Phillip L. Zweig, Financial Journalist, Author, & Independent Consultant

Authors Note: Because of widespread misinformation on the causes of this public health emergency and the extreme urgency of resolving it, we have written this paper in a timeline format. Kindly cite the authors and report if you use this material. We thank Bill Bandy, retired CEO and founder of United Medical Supply, a Dallas-based medical supplies distribution firm, for his invaluable research assistance.

COPYRIGHT © 2012 by Patricia Earl and Phillip L. Zweig

Abstract:

Recent reports by the Department of Health and Human Services (HHS) Office of Planning and Evaluation (ASPE)1, the Food and Drug Administration (FDA)2 and other sources on the acute shortage of generic drugs have attributed the shortages to everything from raw materials shortages and manufacturing problems to the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, and FDA drug approval delays. Based on these analyses, President Obama on October 31 issued an Executive Order instructing the FDA to require manufacturers to notify the agency of impending shortages, to expedite regulatory reviews, and to increase staff in its drug shortages program.

In this white paper, the authors argue that these explanations, and President Obama’s Executive Order, miss the point entirely. These reasons are ancillary to the root causes of this crisis. In fact, it is the direct result of the anticompetitive, exclusionary contracting practices, self-dealing, collusion, kickbacks and conflicts of interests of giant hospital group purchasing organizations (GPOs), which have undermined free market competition in drugs, medical devices, and supplies in the U. S. These purchasing cartels, which contract for $200 billion+ in hospital goods each year for about 5,000 non-profit, acute care hospitals, have rigged this market in favor of a handful of dominant suppliers and distributors, thereby making it unprofitable for other companies to make or sell these inexpensive, hard-to-manufacture drugs.

These practices have eroded manufacturing capacity for these products to the point where the U. S. is the only developed country with such critical shortages. Incredibly, the HHS and FDA reports neglect to mention GPOs as a contributing factor, much less the primary cause, of this crisis. Further, contrary to GPO claims that they obtain the lowest prices for drugs and other hospital supplies, the opposite is in fact the case. The evidence shows that they inflate healthcare costs by tens of billions a year.

Accordingly, President Obama’s order will do nothing to alleviate the shortages in the long-term. The only viable solution is to restore integrity and free market competition to this corrupt marketplace. And that, the authors argue, can only be accomplished by repealing an obscure 1987 statute called the Medicare anti-kickback “safe harbor” provision, which gave rise to this debacle in the first place. Enacted ostensibly to give small hospitals more bargaining leverage with suppliers, the safe harbor exempted GPOs from criminal
prosecution for receiving kickbacks from vendors. The result is a massive pay-to-play scheme that benefits only healthcare executives and other insiders.

Highlighting the questionable ties between Premier Inc., the second largest GPO, and APP Pharmaceuticals, the authors describe in detail the origin and evolution of the current crisis. They conclude by urging Congress to repeal the anti-kickback safe harbor with deliberate haste and call on the appropriate federal and state law enforcement agencies to use their subpoena power to thoroughly investigate the business and financial dealings of GPOs and executives of GPOs, manufacturers and member hospitals. Finally, these agencies should prosecute those suspected of violating the law in connection with this unpardonable national scandal.

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