Posted by Last year, Atul Gawande wrote an interesting New Yorker piece that compares present-day efforts to control healthcare costs with early 20th-century efforts to increase US farming productivity. The quest for more farming productivity succeeded not because of any grand, sweeping reform, he explains, but because the government, through the USDA, invested in pilot programs, scientific extensions, and provision of information to farmers. Gawande summarizes the recipe for success:
The government never took over agriculture, but the government didn’t leave it alone, either. It shaped a feedback loop of experiment and learning and encouragement for farmers across the country.
Like farming in the early 1900s, healthcare delivery in the US today involves millions of providers with different ways of doing millions of different complex tasks. But Gawande seems optimistic that healthcare can become more cost-effective. He lists some of the many demonstration programs contained in the healthcare legislation and compares these efforts to what the USDA did for farming. It’ll take a lot of changes to add up to big healthcare savings, and these programs will play the important role of helping us figure out which changes work and are worth pursuing.
Ever since reading this article, I’ve been keeping an eye out for the kinds of changes that may be relatively small but can add up to cost-effective improvements. The aim is not just to save money, but to improve patient outcomes by preventing problems – everything from stopping hospital-acquired infections to helping diabetics manage their conditions to avoid complications. An article by Mariah Blake in the Washington Monthly focuses on one area where hospitals could potentially save money and provide safer care – but it’s clear that changing the status quo will be an uphill struggle.
Blake writes about entrepreneurs who’ve developed promising and potentially lifesaving medical supplies only the find themselves unexpectedly stonewalled in their efforts to sell them to hospitals. Thomas Shaw, an engineer by training, developed the first retractable syringe in the 1990s after learning of a doctor who contracted HIV from a needlestick injury, and a few years ago he designed an IV catheter that reduces the transfer of bacteria into the catheter and hence the patient’s bloodstream. Garrett Bolks, who has decades of experience in the medical-supply industry, brought to market the first X-ray detectable surgical towel (so surgical teams can see when they’ve accidentally left something inside a patient). Despite winning initial praise and backing, they found themselves unable to make sales, except to buyers like the Veterans Administration that didn’t work through GPOs.
What would make hospitals so reluctant to purchase cost-effective products that could save the lives? It’s possible that these two men are terrible salesmen or their products are flawed, but from this article’s descriptions, that doesn’t seem to be the case. Blake points to a force of whose existence was news to me: group purchasing organizations.
Blake reports on how an originally well intentioned attempt to help hospitals get better prices for supplies has become a system that can stifle innovation. The hospital supply market has long been dominated by a few large players, and such a shortage of competition can lead to prices being higher than they would be otherwise. In 1970 hospitals started banding together into GPOs to negotiate for better prices. GPOs were initially run as nonprofit collectives funded by hospitals’ membership fees, but then some hospitals started spinning them off into for-profit subsidiaries. Then the GPOs started collecting fees from suppliers in the form of a share of sales revenue — something Blake points out “might be called kickbacks or bribes” in other industries. Consolidation among GPOs eventually led to a situation where “five GPOs controlled purchasing for 90 percent of the nation’s hospitals.” Blake explains how this has led to hospitals having very little leeway on their supply purchasing:
Most importantly, it turned the incentives for GPOs upside down. Instead of being tied to the dues paid by members, GPOs’ revenues were now tied to the profits of the suppliers they were supposed to be pressing for lower prices. This created an incentive to cater to the sellers rather than to the buyers–to big companies like Becton Dickinson rather than to member hospitals. Before long, large suppliers began using “fees”–sometimes very generous ones–along with tiered pricing to secure deals that locked GPO members into buying their products. 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. Hospitals went along because they got price breaks, usually in the form of rebates if they met buying quotas.
GPOs’ dominance over hospital supply purchasing wouldn’t have possible without two important exemptions GPOs won from the federal government. Blake explains that In 1986, Congress passed legislation that exempted GPOs from Medicare law’s anti-kickback provision; this allowed GPOs to collect fees from suppliers. In 1996, the Justice Department and Federal Trade Commission granted GPOs protection from antitrust actions (except when the circumstances are “extraordinary”).
Blake investigates whether GPOs do what they’re supposed to, which is to save hospitals money on supplies. Industry-funded studies say they do, and hospital administrators seem to think they do – but administrators may be basing their assessments on price comparisons supplied by the GPOs. A pilot study by the Government Accountability Office found that hospitals using GPOs to purchase safety needles and most models of pacemakers paid more for these products than hospitals that negotiated their own prices. A company that helps hospitals process their equipment bids analyzed seven years’ worth of data from 500 hospitals and found that GPO prices are an average of 22% higher than what hospitals could get on their own. Two hospital chains that started purchasing outside of their GPO contracts realized impressive savings.
After a 2002 New York Times investigative series and a series of Congressional hearings into their business practices, the GPO industry developed a voluntary code of conduct and an oversight body. The president of the GPO trade association Health Industry Group Purchasing Association tells Blake that most GPOs adhere to the code of conduct, which assures openness and competition. [Update: Also see comment below from HIGPA's Curtis Rooney.] Nonetheless, Blake seems to have encountered many hospital-supply entrepreneurs who’ve been unable to break into the market and think the GPO system is to blame:
Stories like these abound among small suppliers, a number of whom have filed suit against GPOs. But most are wary of speaking out. Several talked to me off the record. At least a half dozen more agreed to speak, only to back out at the last minute or retract their statements after we had spoken. “Most people who know this world wouldn’t speak to you under threat of subpoena,” one former GPO executive told me. “They are terrified.”
Blake’s article delves into how this system arose and specifics about major players and some of their contracts – the whole piece is well worth a read.
Our national rhetoric tends to emphasize the importance of small business owners and the promise of entrepreneurial solutions. If you only read the parts of Blake’s story that deal with Shaw’s invention and business-creation processes, it sounds like the Great American Success Story. But unlike the stereotypical successful entrepreneur who wins big after working 90-hour weeks and maxing out credit cards in pursuit of the dream, Shaw doesn’t triumph.
Whether or not Shaw and Bolks’ products would have saved lives and money, Blake makes it clear that Congress and the Justice Department enabled a competition-unfriendly system to evolve in hospital purchasing. It might be possible for hospitals to revamp their purchasing strategies in ways that would save money and improve care – but even if pilot studies show that such changes work, GPOs are unlikely to relinquish their market share willingly.
Atul Gawande may be right to suggest that the healthcare legislation (now law) will help us identify multiple improvements that, taken together, will make healthcare more cost-effective. But some of these improvements will require revamping deeply entrenched systems that will resist change. The GPO-dominated hospital purchasing system is one example: a few large companies are currently flourishing, with the backing of Congressional and Executive decisions that won’t be easy to undo, and many hospitals are locked into multi-year contracts and probably lack the infrastructure to suddenly start handling their own purchases.
Such challenges don’t mean we should give up on achieving healthcare cost-effectiveness. We do have to understand that it’ll mean making some choices that will harm beneficiaries of the current system.
July 20, 2010
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