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How Medical Supply Middlemen Worsened The Winter Flu Crisis

BY: DR. MARION MASS, M.D. and Robert Campbell, M.D.

A bad winter flu season, the worst of which is finally over, was made worse by a nationwide shortage of saline and other basic medical supplies. A veiled reason for this supply shortage is a provision in the Medicare and Medicaid Patient and Program Protection Act of 1987 that grants medical supply negotiators “a safe harbor” to receive monetary kickbacks from medical suppliers. Congress must repeal it to restore supplies and bring down costs.

Saline (sterile salt water) is a vital rehydration treatment for many patients with the flu or other illnesses that disproportionately affect pediatric and elderly patients. Manyof the record number of hospitalized patients this flu season were offered Gatorade instead when no saline was available.

It’s not just saline. There is also a national shortage of cheap — yet essential — hospital supplies such as chemotherapeutics, antibiotics, sodium bicarbonate, and anesthetics. And while the opioid epidemic rages on the street, hospital patients are languishing in pain due to a shortage of injectable painkillers. The American Society of Health-System Pharmacists currently lists 153 drugs in short supply.

The outpatient market fares no better. During a recent trip to Capitol Hill,  a Congressman told me in an off-the-record conversation that he had trouble getting his family member an Epi-Pen, which is essential to stop an allergic attack. One in 13 children have food allergies and rely on the now costly Epi-Pens.   

The FDA attributes the saline shortage to Hurricane Maria’s disruption of Baxter Pharmaceuticals’ saline production facility in Puerto Rico. That doesn’t explain the prolonged saline shortage before the hurricane or the chronic shortages of other drugs. http://fortune.com/2015/02/05/theres-a-national-shortage-of-saline                           Why is the market so dependent on one major saline supplier in the first place? And why does a liter of saline routinely cost patients $546 dollars — not including the cost to administer it?

The high costs and shortages of essential medical supplies are a result of middlemen demanding pay from manufacturers for access to the market, while preventing those not paying kickbacks from selling the same supplies. Group purchasing organizations (GPOs) control the market for institutional medical supplies. And pharmacy benefit managers (PBMs) control the market for prescription drugs. Four GPOs control about 90 percent of hospital purchasing. Three PBMs account for 70 percent of prescribed drugs. These organizations do not research, produce, or even distribute products. They simply write purchasing contracts.

As a result of their legalized kickbacks, only one or two major suppliers exist for many critical  supplies and generic drugs, which should be inexpensive. Payout levels are hidden, but leaked documents show they can reach more than 50 percent of revenues for some drugs — an insurmountable barrier to entry for potential competitors.

Shortages cause prices to soar. Repealing the safe harbor for GPO and PBM would eliminate this massive supply-side constraint to production, lowering costs, alleviating shortages, and saving the system over $200 billion annually.  

Manufacturers are not blameless. Big manufacturers that can afford the payoffs, including Baxter in the case of saline and Mylan in the case of Epi-Pens, enjoy an exclusive or near-exclusive market in return. Especially compliant hospitals receive “share-backs” from GPOs — a cut of the payoffs. Everyone except patients is incentivized to keep prices high.

There is growing recognition of the safe harbor problem. In a speech to PBMs in Washington D.C. last week, FDA commissioner Dr. Scott Gottlieb highlighted their “opaque and counterproductive” business practices. Yet repealing safe harbor is difficult because of the lobbying power of GPOs and PBMs. Express Scripts, the biggest PBM, spent nearly $3 million lobbying in 2017, making it one of the biggest influencers in Washington, according to data from the Center for Responsive Politics.

We have briefed many Pennsylvania members of Congress on this issue, yet none have endorsed repeal. In fact, Senators Bob Casey and Pat Toomey have emerged as formidable defenders of the status quo. Doctors and patients must unite to confront these politicians who allow this kickback scheme to continue. Even if it means a new slate of Pennsylvania politicians in Washington.

The GPO and PBM safe harbor for kickbacks is the Rosetta Stone for understanding today’s healthcare costs and supply shortages. Eliminating it would allow an influx of new suppliers, reducing prices and shortages. Just like new suppliers do in every other industry in our economy.  

 

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Dr. Marion Mass M.D. is a Philadelphia-area pediatrician and co-founder of Practicing Physicians of America, a physician advocacy organization. Dr Robert Campbell, M.D. is an anesthesiologist and co-founder of Physicians Against Drug Shortages.

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