Government-Enabled Kickbacks Escalate Medical Prices, Worsen Shortages, Stifle Innovation


In searching for treatable causes of sky-high medical costs, both government and private entities are scrutinizing the cost of hospital supplies, writes Marilyn Singleton, M.D., J.D., in the summer issue of the Journal of American Physicians and Surgeons.  Supplies account for an average 15 percent of total costs, and as much as 40 percent.

About 97 percent of hospitals in the United States purchase through group purchasing organization (GPO) contracts, Dr Singleton writes. GPOs were intended to reduce costs. At first, they were paid through membership dues, but in the 1970s GPOs began collecting “contract administrative fees” or “rebates” from vendors. Such fees are typically based on a percentage of the costs of the products that GPO customers purchase through GPO-negotiated contracts. They are essentially kickbacks, which would be illegal under the federal healthcare programs Anti-Kickback Statute, Dr. Singleton explains, except  for “safe harbor” provisions enacted by statute or regulation.

“While there are more than 600 GPOs in various industries, only a few GPOs dominate the medical market,” Dr. Singleton writes. “The current fee structure raises an obvious conflict of interest: … since vendors pay the fees as a percentage of the product cost, the higher the price, the higher the GPOs’ fees.”

Safe-harbor protection is supposedly afforded only to arrangements that meet certain regulatory requirements, but government oversight is extremely limited, Dr. Singleton notes.

High prices, serious and worsening drug shortages, and stifled innovation may all be largely attributable to the favorable treatment accorded to GPOs, Dr. Singleton suggests.

“Since the federal healthcare Anti-Kickback Statute GPO exception was created 30 years ago, the landscape has changed. The current GPO funding structure’s incentive is to ‘negotiate’ higher prices for its customers. The vendors with the most money can afford to pay the high fees and buy themselves into the game. The term ‘payola’—pay to play—comes to mind. The situation is exacerbated because insurers absorb the higher prices and thus hospitals may have less incentive to monitor pricing.”

Dr. Singleton concludes that “an honest look at the current state of GPOs should label the conduct illegal,” but notes that “money talks.” Premier, one of the five largest GPOs has 19 lobbyists and spent $1,790,000 on lobbying in 2017. It contributes to Democrat and Republican congressional committees, and to candidates of both parties.

“The time has come to do what is best for patients and to restore integrity, competition, choice, and cost savings to the purchasing process,” she states.

The Journal of American Physicians and Surgeons is published by the Association of American Physicians and Surgeons (AAPS), a national organization representing physicians in all specialties since 1943.

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