The corrupt system behind US medical supply shortages
September 27, 2021 1:17 AM   Subscribe

Today, with supply chains tangled in knots and shortages everywhere in the economy, it’s easy to blame what’s gone wrong merely on the disruptions caused by Covid. Indeed, David Frum at the Atlantic is the latest to mock the idea that there is something wrong with our markets that set us up with a fragile system. Frum criticized the new approach to concentration as taking us back to the 1970s. Pursuing ‘resiliency’ translates in “plainer English as higher taxes and higher prices.” Instead, he suggests that we should, in the face of inflation and shortages, “do nothing,” because the immutable laws of supply and demand will work themselves out. There are a couple of reasons that dismissive attitude doesn’t make sense. Matt Stoller's newsletter, Big, explains how a buying cartel has controlled US medical supplies for 25 years.
posted by Bella Donna (17 comments total) 17 users marked this as a favorite
Instead, he suggests that we should, in the face of inflation and shortages, “do nothing,”

You can watch the results of this attitude unfold live in parts of Europe. Intellectual fraud is an apt description.
posted by romanb at 5:24 AM on September 27, 2021 [5 favorites]

Another reason it is hard to reform the healthcare system in America. All those middlemen give campaign contributions and vote.
posted by interogative mood at 6:22 AM on September 27, 2021 [5 favorites]

Well, that's insane
posted by mumimor at 6:35 AM on September 27, 2021 [1 favorite]

I used to work at a GPO, but I think I'm far enough removed that I'm no longer instinctual defensive about this, although keep in mind that it was one of the better places I worked, so I'm probably still biased a bit. Also, one last disclaimer, I worked for the branch of the GPO that did smaller medical offices /unison clinics /nursing homes /etc. Hospitals were another department.

The general attitude at a GOP is that they are defending the members against the medical supply and drug companies. Which is a bit more appealing for smaller medical offices, rather than giant hospital chains. Here's a rundown of how it works for smaller businesses: the GPS gets a list of what the customer has bought over the past year and how much they spent. Sometimes they already have a contract with McKesson or another large supplier for 90% of their supplies. So there are other bottlenecks, even without the GPOs, but that's a digression. Anyway, the GPS has a giant list of products that they can match to what the client is buying, they compare the two and see what the GPO prices for this products are. They then check the contracts that contain those products to see if purchasing all the items on that contract (contacts are all or none) will save the customer money. If they would, the contract gets recommended. If not, it's listed, but not recommended. The list is submitted to the client, they choose which to sign up for, buy their stuff, the GPO gets paid based on total purchases. This works for both medical supplies and pharmaceuticals. There is a perverse incentive, in that the more customers pay for, the more the GPO makes. But at the same time, if they aren't offering discounts, there's no reason for anyone to use them. The GPO I was at seemed to be relentlessly focused on grabbing more doctors's offices, etc to increase profits, rather than increasing prices. And if the client was using products that were not covered, they occasionally had equivalents suggested, but by the time I left, that was basically stopped, as no one ever switched products. This is, as far as I can tell, the ideal way that GPOs work. Not great, something that shouldn't be there, but a defensive reaction against increasing medical and pharmaceutical prices. Something that couldn't work outside of the US.

Something like 98% of hospitals are already in GPOs, so the recruitment processes isn't there. Ideally, switching from one GPO to another for hospitals would be to efficient could offer the best discount. I doubt it's that simple, given that a single GPO covers all hospitals in the New York City metropolitan area. I suspect that the problems pointed out in the article come from this segment. As far as I know, hospitals are not bound to exclusively buy through the GPO, although given discounts for bulk purchases, they won't use more than one. However, it looks like hospitals are are given incentives not to move outside of the GPO framework. Which does strangle smaller supply companies unless they get a giant distributor like McKesson to carry their products into the GPO environment.

The safe harbor provision for kickbacks is not going anywhere. It's to profitable for too many people who want it and not known by enough who would oppose it to get it repealed. Anything removing it from law would get the full force of all the GPOs against it and, most likely, most of the hospitals. After all, on the surface, it does save them money. It's the same reason public insurance options keep dying in congress.

With reasonable price controls on products or even if Medicare was allowed to actually negotiate drug prices (at least for the pharmaceutical side), this would be a non issue. I honestly don't know what could cause that to be implemented given the indifference of the Democrats and active encouragement of regulatory capture by the GOP. Removing the safe harbor kickback provision would get rid of GPOs, but I honestly doubt it would make that big a difference in prices, given just how much of the market is controlled by only a few medical supply companies. For drugs, it's more complicated and I never really saw the entire picture in terms of suppliers, but the same matching exercise with prices and contacts happened there.

I'm not going to argue that GPOs are good. But they are going to form and some bright spark is going to get the idea "what if we charged the vendors instead of the members? We'd get a lot of additional members that way" and then you get the kickback exception placed back into law. We need fundamental price controls (maybe something along the lines of if you still to a hospital that takes Medicare, you cannot charge over X amount) to really get rid of them.
posted by Hactar at 7:15 AM on September 27, 2021 [6 favorites]

I have worked in medicine for 30 years and these shortages are frustrating. Sometimes there is an obvious reason (such as Hurricane Maria taking out the IV fluid production in Puerto Rico as alluded to in the article) but other time a product I use frequently is suddenly on backorder for unknown reasons. Not only does this impact the cost of care, but all too often the quality of care suffers when I can't get the right tool for a job. Kliuless took a deep dive into these middlemen (focused on drugs, but the same concepts apply more broadly) in this FPP.
posted by TedW at 7:54 AM on September 27, 2021 [3 favorites]

Thanks for the link, TedW!
posted by Bella Donna at 11:16 AM on September 27, 2021 [1 favorite]

Fuck these middlemen.

NZ's approach to this is different. There's a purchasing agency for pharmaceuticals, the Pharmaceutical Management Agency (PHARMAC). This is run by the government and has the job of getting cost-effective access. So if there's a licenced drug and a generic drug, then PHARMAC can go to the company making the licenced drug and say "sure, you say your fancy drug is better, but we can go with this other option, so how about you do us a deal?"

The drug companies hate this and lobby against it, pushing lots of negative media, because Pharmac works. It's estimated to save NZ 75% of the costs we'd be paying without Pharmac.

And that's how markets should work - a single buyer has market power. Make sure that single buyer is using that power for the good of your nation, not to make some execs rich.
posted by happyinmotion at 12:35 PM on September 27, 2021 [10 favorites]

Huh, looks like Premier bought out the regional New York GPO (Greater New York Hospital Association seems to now just be an advocacy organization for the poor put on hospitals in the New York City area) a year ago. God I wish we had functional anti-trust measures in the US.
posted by Hactar at 2:07 PM on September 27, 2021 [2 favorites]

New Zealand's approach is sane, and works for its ~5 million people; in the US, that's the population of Brooklyn and Queens.
posted by Iris Gambol at 3:33 PM on September 27, 2021 [1 favorite]


What if the US government could turn to the drug companies and say:

"We are 330 million people and we're going to pay you half of what we are paying you right now, or nothing."

The drug companies won't walk away. You'd save US$200 billion per year. You'd still be spending more than every nation in the EU bar Germany. And would anyone get worse health care?
posted by happyinmotion at 6:12 PM on September 27, 2021

And would anyone get worse health care?

This assumes a fact not in evidence, namely that the purpose of the system is to provide quality healthcare. I would argue that this is quite plainly not the case; based on what it actually does, it's a jobs program.
posted by Kadin2048 at 9:04 PM on September 27, 2021 [1 favorite]

With reasonable price controls on products or even if Medicare was allowed to actually negotiate drug prices (at least for the pharmaceutical side), this would be a non issue.

What if the US government could turn to the drug companies and say: "We are 330 million people and we're going to pay you half of what we are paying you right now, or nothing."

HHS Secretary Xavier Becerra Releases Bold Proposal to Lower Prescription Drug Costs - "One of the key policies in this effort is legislation that would allow the Secretary of HHS to negotiate Medicare Part B and Part D drug prices directly with pharmaceutical companies and make those prices available to other purchasers, an approach that is projected to generate reductions in patient cost-sharing and large savings for patients, government, and commercial payers."

Drug-Prices Measure Blocked in House Committee as Democrats Splinter - "Democratic Reps. Scott Peters of California, Kurt Schrader of Oregon and Kathleen Rice of New York voted against a measure enabling Medicare to negotiate for lower prescription drug costs in a House Energy and Commerce Committee vote Wednesday, preventing it from advancing when the panel deadlocked in a 29-29 tie."

also btw...
States Remain the Drivers of New Drug Pricing Legislation As Washington Weighs In - "State legislatures continue to push forward on drug pricing with legislation designed to reduce the cost of prescription drugs. Recent steps across a number of states include laying the groundwork for effective drug-importation programs and increasing drug-pricing transparency. Change at the federal level may be coming as well, as both the White House and Congress ramp up their attention to drug pricing."
In 2021 alone, states debated more than 650 proposed laws (some carried over from 2020) and passed more than 30 such laws. These new state laws establish novel drug-importation programs, require pricing transparency from pharmaceutical manufacturers, mandate disclosures from pharmaceutical benefit managers (PBMs) and insurers, cap consumer cost-sharing on certain drugs, and curb discriminatory contracting in the 340B program, among other changes.

Notable among state efforts is the development of drug importation programs. For example, New Hampshire recently passed a bill that establishes a wholesale-importation program for prescription drugs from Canada to reduce the cost of prescription drugs. This comes two years after Colorado established its own Canadian prescription drug-importation program and is now eying additional proposals to allow the importation of prescription drugs from other countries. Similarly, Florida submitted its Section 804 Importation Program (SIP) to HHS in connection with its Canadian prescription drug importation program in November 2020. Upon receipt of FDA approval, Florida's Agency for Health Care Administration expects to start importing prescription drugs, completing the required testing, and fulfilling state agency orders. Initiatives like these will inform the legality of permitting the importation and supply of lower-cost prescription drugs from outside the United States. Industry groups, such as the Pharmaceutical Research and Manufacturers of America (PhRMA), have already sued HHS to block such drug imports...
Comprehensive Plan for Addressing High Drug Prices - "FDA is working with states and Indian Tribes that propose to develop Section 804 Importation Programs and has recently invited states that are interested in such programs to partner with the agency throughout the process."

oh and fwiw...
Private equity group reaches deal to buy Medline for $34bn - "A consortium of private equity groups, comprising Blackstone, Carlyle and Hellman & Friedman, has reached a deal to buy a majority stake in US medical supply group Medline for about $34bn, including debt, in what is... the largest buyout involving a club of private equity investors since the 2007 financial crisis."
Illinois-based Medline, founded in 1966 by Jim and John Mills, is one of the largest manufacturers of medical supplies. The family-owned business is now run by Charles Mills... Medline is the largest privately held US manufacturer and distributor of healthcare supplies, with revenue last year of $17.5b, according to the company.

The Mills family company last year ramped up production of supplies including medical masks, biohazard bags, hand sanitiser and surgical gowns year to meet soaring demand during the pandemic. “The volume is off the charts. I get emails and phone calls from acquaintances in the industry, from active customers, non-customers,” Andy Mills, Medline’s president, told Forbes last year.
How Mark Cuban Plans to Dunk on the Drug Industry - "The billionaire owner of the Dallas Mavericks has teamed up with a polymath and put his name on a company that aims to change the high-priced pharmaceutical game."
After pivoting from its original plans to act as a nonprofit, the company is now organized as a public-benefit corporation. That means it’s for-profit—the company plans to charge a standard, 15 percent markup on every drug it sells—but its social mission of improving public health is just as important as the bottom line. “I could make a fortune from this,” Cuban says. “But I won’t. I’ve got enough money. I’d rather f— up the drug industry in every way possible.”
posted by kliuless at 10:49 PM on September 27, 2021 [4 favorites]

NZ's approach to this is different. There's a purchasing agency for pharmaceuticals, the Pharmaceutical Management Agency (PHARMAC). This is run by the government and has the job of getting cost-effective access. So if there's a licenced drug and a generic drug, then PHARMAC can go to the company making the licenced drug and say "sure, you say your fancy drug is better, but we can go with this other option, so how about you do us a deal?"

New Zealand's approach is sane, and works for its ~5 million people; in the US, that's the population of Brooklyn and Queens.

Right, but in this kind of transaction what you need is scale. If it works for a number as small as 5 million it will work for bigger numbers. And in fact it does, as the NHS takes a similar approach to NZ and bargains on drug prices with a population of 60+ million. The US, if so minded, is definitely big enough to have the leverage for this transaction.
posted by plonkee at 1:48 AM on September 28, 2021 [2 favorites]

I would very much like it to work that way for the US; it hasn't for transportation, or education, or non-Medicare welfare systems. (I think the scale is part of the problem, actually. This country has ~330 million people [an undercount] and is about 40 times the size of the UK; the state of Alaska alone could fit seven United Kingdoms within its borders.)

I live in Rep. Peters's district. He keeps sending us crapola about why he's voting wrong on the pricing measure, and the Reduced Costs and Continued Cures Act (RCCCA) 'alternative' he's co-sponsoring with Rep. Schrader. Excerpt: I want to acknowledge the messages I have received regarding my vote on H.R. 3 and my drug pricing proposal, the Reduced Costs and Continued Cures Act, during the past few days. Many callers stated that they were encouraged to call by national organizations. However, these organizations did not provide the callers with complete or accurate information about my position or proposal, the Reduced Costs and Continued Cures Act. [...blah blah bullet points about the RCCCA...]

H.R. 3 has passed the House twice but has never succeeded in the Senate. This means it has not lowered the cost of one drug or helped one patient. This time around, as Congress considers President Biden's $3.5 trillion reconciliation bill, enough senators have signaled they will not support H.R. 3 and I was not willing to watch history repeat itself. That’s why I offered an alternative – one that lowers drug costs for seniors as well as other consumers without stifling investment in future live-saving treatments. More than 50 patient advocacy groups, including the California Access Coalition, have stated strong concerns against H.R.3, and many of them have thanked me for my work to present an alternative. I want to make sure a solution to lower drug prices has the ability to be signed into law.

Maybe let the thing OUT OF COMMITTEE, and let this "signalling" by your colleagues be read by all? But thank you for signalling your belief that your constituents who contacted you are being brainwashed by national organizations. Gee that's swell.

Anyway, Peters supported H.R. 3 two years ago. This year: Pharma CEOs, lobbyists showered [Scott Peters] with cash after his attempt to torpedo Pelosi’s drug pricing bill (STAT, July 20, 2021); Rep. Scott Peters once backed Democrats' price-control bill. Now critics say he's a "paid mercenary" for Big Pharma (Salon, July 29, 2021) In early May, Peters — who has represented California's 52nd district, in and around San Diego, since 2013 and was once named "biotech legislator of the year" [in 2016, by BIO, the largest biotech trade group in the US and "the world’s largest advocacy association"] — assembled a coterie of 10 moderate House Democrats to sign a vaguely-worded letter to House Speaker Nancy Pelosi, urging her to consider a balance between "innovation and affordability."
posted by Iris Gambol at 11:22 AM on September 28, 2021

IMO the scale thing is a real issue. Obviously, the negotiations are scalable and probably an ideal US public option system would be able to negotiate amazing deals, if they were allowed to. The systems already in existence like medicare and veterans care do it at limited measures.
BUT, probably the way to get this to work would be on the state level. States are big enough to get good deals, and small enough for cross-party support for those deals. And if just 10-15 states have good deals on drug costs it will be harder for other states to ignore the option.
So a relatively realistic path would to be to regulate the GPOs at the state level and thus create examples that other states could learn from. Trailblazing states could be both red and blue, since corrupt politicians are on both sides.
posted by mumimor at 1:35 PM on September 28, 2021

@davidshor: "For the record prescription drug price negotiation is the most popular of the 194 policies we’ve tested so far this year, with variants of the basic idea (IE, generic insulin, patent breaking, etc) making up four of the top five."

@jdcmedlock: "Getting Pharma ads about how we need to 'Protect Medicare' by preventing it from being able to negotiate drug prices. Get your government hands off my Medicare drug prices."
posted by kliuless at 9:01 PM on September 29, 2021

@nislatr: "hard to read anything @rickperlstein writes without 1) being impressed by the supporting evidence for his arguments 2) feeling a deep sense of clarity followed by dread"
Consider William Kristol, in his infamous 1993 memo “Defeating President Clinton’s Healthcare Proposal.” As I wrote a couple of years ago, for Kristol “the notion of government-guaranteed health care had to be defeated, he said, rather than compromised with, or else: ‘It will revive the reputation of the party that spends and regulates, the Democrats, as the generous protector of middle-class interests. And it will at the same time strike a punishing blow against Republican claims to defend the middle class by restraining government.’ Kristol wrote on behalf of an organization called the Project for a Republican Future. The mortal fear is that if government delivers the goods, the Republicans have no future.” Even their pragmatists are nuts.
posted by kliuless at 9:41 PM on September 29, 2021 [2 favorites]

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