Payola in Health Care Purchasing

Today’s Managing Health Care Costs Indicator is
$37.5 billion

What if you joined a buying club, and instead of getting a lower rate, you paid higher prices?  What if, in fact, you paid $37.5 billion extra per year?  Would you  join the buying club next year?

Let’s bring this back to health care.   Hospitals band together to form “group purchasing organizations” to obtain the best rates on medical devices – things like pacemakers and artificial hips.  These GPOs have a specific antitrust exemption, since competing hospitals participate in them. The idea is that the GPOs push manufacturers for the best prices. The reality is more complicated than that..

The New York Times has been on this case since 2002.  The Times documented astounding practices including awards of company stock to those making purchasing decisions, favoritism toward former employees of the purchasing group,  and fees representing a percent of revenue if certain targets for revenue were met.

The Medical Device Manufacturer’s association just published an academic-style study examining circumstances when hospitals had rebid contracts after a GPO had used an auctdion to establish a price.  There were 8100 such aftermarket transactions, and savings ranged from 10-14%. 

This is an imperfect study – because it’s likely that hospitals made aftermarket transactions selectively when they felt the GPO didn’t get a good enough price.  BUT – we clearly should not allow a group purchasing organization to be paid a kickback from vendors.  It’s just too obvious that this is a bad idea likely to drive up costs

The medical device companies would be happy to eliminate middlemen, but it is also pretty interested in maintaining high prices, and that industry is not nearly as interested in promoting effective competition as you might think from its press release. 

There’s no need to ban GPOs.  Medicare should insist that they are subject to anti-kickback rules, and hospitals would have to pay for their services (rather than suppliers paying fees as a portion of total revenue.)  We won’t save $37.5 billion –but we would be remove a pernicious influence on health care purchasing.