Rent Extraction + For-Profit Healthcare = Sepsis

Imagine someone had designed a device that would essentially eliminate bloodstream infections (sepsis) caused by contamination of needleless injection ports. Great news right? Well, guess what happens next:

Unlike some of the solutions floated by big medical device makers, such as coating the ports with silver, Shaw's innovation added only a few pennies to the cost of production. And it seemed to be remarkably effective: a 2007 clinical study funded by Shaw's company and conducted by the independent SGS Laboratories found the device prevented germs from being transferred to catheters nearly 100 percent of the time.

Given these facts, you might expect that hospitals would be lining up to buy Shaw's product. But that is not the case, even though his company is offering to match whatever price medical facilities are paying for their current, infection-prone IV catheter syringes.

Why not? Because of middlemen known as group purchasing organizations (GPOs; italics mine):

Originally, these purchasing groups were nonprofit collectives and were managed and funded by the hospitals themselves. But in the mid-1970s, the model began to shift. Some large hospital chains started to spin off for-profit GPO subsidiaries, which other hospitals could join by paying membership dues, much the way members of buying clubs like Costco pay dues to get bulk-buying discounts. By decade's end, virtually every hospital in America belonged to a GPO.

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.

What would possibly go wrong? Well:

As for independent assessment of GPOs' effect on costs, they are hard to come by. But the little information that is available suggests that they may actually drive up the price of supplies. A 2002 pilot study by the Government Accountability Office found, for instance, that hospitals that went through GPOs paid more for safety needles and most models of pacemakers than those that negotiated prices on their own--for some pacemakers the median gap was as wide as 39 percent.

Even more unsettling are the findings of MEMdata, a Texas-based company that helps hospitals process their bids for new equipment and captures the quotes in a database, so that administrators can compare the prices they are offered to what others have paid. Shortly after the company opened for business, founder Bob Yancy says he discovered that bids hospitals got through their GPO contracts were substantially higher than the ones he or medical centers that weren't locked into GPO pricing could get by negotiating directly with vendors for the same equipment. Yancy later had his staff add a field to their database to track just how GPO bids stacked up. Over the last seven years, his company, which serves more than 500 medical facilities, has collected tens of thousands of bids. On average, Yancy says, the GPOs' prices are 22 percent higher than the ones that hospitals can get on their own. "The bottom line is that hospitals are being systematically overcharged," he told me, when I met him at a Washington, D.C., restaurant. "GPOs are inflating the pricing."

Thanks to GPOs, we are getting worse healthcare at higher costs. And Obama/Romneycare does nothing to stop the kickbacks--the topic wasn't even addressed. This is rent extraction at its finest.

But single-payer healthcare was TEH SOCIALISMZ!!

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Off course it is socialism. There's no chance to extract massive profits through kick-backs. Greed is good and profit is the bottom line!!!

By Silent Service (not verified) on 23 Jul 2010 #permalink

This is ridiculous, when the administration talks about "getting rid of things that don't work," stuff like this should be at the top of the list.

I wonder what the lobbying arm of these GPO's claim the benefit is, and how much money they donate to congress.

Why would the hospitals continue to use GPOs (or the current ones) when they know that they are paying more than they "should"? You'd think the hospitals would attempt to minimize cost.

What's preventing them from doing so? Did I miss something?

Oh, wait. I see it.

FTA:

Their plight is just the most visible outgrowth of the tangled system hospitals use to purchase their suppliesâa system built on a seemingly minor provision in Medicare law that few people even know about. Itâs a system that has stifled innovation and kept lifesaving medical devices off the market.

It's the result of Medicare law.

So, yes, this is a result of socialism. Thanks, government. You screwed up the market again.

Juice: "It's the result of Medicare law.
So, yes, this is a result of socialism. Thanks, government. You screwed up the market again."

Indeed. :)

Can you spell WELFARE CAPITALISM, boys and girls?

Juice, I can't be sure but I think the 'little-known provision' the article refers to is the exemption from kickbacks. At least, that's the only bit of medicare law that's discussed.

The article says that hospitals began using GPOs to counter anticompetitive practices by big distributors 'as early as 1960' (ie before medicare - tho wiki notes the first GPO was actually 1910); and the for-profit GPO model is said to have started Ãn the 1970s, ie well after medicare got established. So the phenomena seem independent, other than that tricky little 1986 exemption... and that smells more like pork than socialism. I wonder why it was passed?

Allowing GPOs to take kickbacks is only 'socialist' in the sense that it's reminiscent of practices in communist Eastern Europe - it's certainly not ideologically socialist (corruption is the practice that bridges ideology).

As to why hospitals seem to collude... I'd be interested to see where the money goes. I wouldn't be surprised to see a revolving door between hospital purchasing depts and/or management and the GPOs. That exemption hasta smell might sweet...

It's the result of Medicare law.

So, yes, this is a result of socialism. Thanks, government. You screwed up the market again.

Posted by: Juice | July 23, 2010 12:28 PM

People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices. -- Adam Smith...

One of the things I like about the Capitalism Is Perfect crowd is how damn ignorant they are of how capitalism actually works. Sure, they'll quote mine Adam Smith to death, usually through some cherry-picking and with decided twisting of his words to mean what they want them to mean.

But when they get a plain and fair warning from Smith it is ignored... As are the lessons of history, like Hoover's whining about how he let the "budget and austerity advice" keep him from plunging us into the great depression (yes, Hoover wanted to spend us out, the answer is obvious and it works, but his Sec. of Treasury convinced him to not... We know the results of that failure...)

And, of course, they forget the hell of the gilded age, which was Libertarianism economics at its finest. Where most of America was terribly poor, but a few were ever so rich...

But back to the point, the ignorance of the Church of Capitalism be damned, the real answer is: it is the result of anti-competitive practices adopted by the GPOs as they consolidate into an oligopolistic market. Lack of price competition can be a major feature when markets consolidate into oligopolies and monopolies.

In many oligopolies, market shares and price fixing becomes the norm. OPEC is a classic cartel oligopoly. They fix prices and production quotas and that is that.

However, if you've studied economics you'd also know that not all oligopolies are greedy and inefficient like the GPO (or OPEC) oligopoly has become. Many times oligopolies enter close to the economic ideal of "perfect competition" where the intense competition in the market lowers the prices to point possible.

But these GPO's don't do that. They do it the OPEC way.

And without the government to stop these anti-competitive prices... Well, we see what happens... Those that are stuck to the oligopoly pay far more for goods and services than they should.

And it has NOTHING to do with Medicare. Or socialized medicine. This is a COMPLETELY UNREGULATED MARKET.

Sorry, as I am very sympathetic to the idea of socialized medicine, but you have not proved your contention that hospitals are paying more than they should be for their contract purchases.

No doubt there will be line items where GPO pricing is higher than what might be procured independently, but that does not address the issue of the hospitals total bottom line at fiscal year end. Your post does not appear to address that issue.

By Gingerbaker (not verified) on 24 Jul 2010 #permalink

It's the result of Medicare law.
So, yes, this is a result of socialism. Thanks, government. You screwed up the market again.