Valerie Lapointe

Most of us assume that a saline IV drip for dehydration or a nitroglycerin injection for heart attack symptoms would be available at any hospital any time in the U.S. Yet both are on a growing list of drug shortages.

Currently, the FDA’s Drug Shortage Program (DSP) lists 60 drugs, mostly generic injectables, that are in short supply. The DSP list is not comprehensive, relying on information provided voluntarily by manufacturers and distributors. The University of Utah Drug Information Service, which also tracks shortages, puts the number of drugs impacted at 156.

Most of the drugs on these lists would sound foreign to anyone outside of medical school, but a few like the saline drip should be familiar to even those with a basic understanding of high school chemistry or medical care. Sodium chloride (salt water), dextrose (sugar), electrolyte fluids, vitamin E, morphine, and lidocaine all appear on both lists, sometimes multiple times for different solution concentrations. How is it possible that hospitals in one of the richest nations in the world could be experiencing shortages of salt solution, sugar solution, electrolytes, vitamin E and basic painkillers?

“In a market economy we are not supposed to have shortages,” said Phillip Zweig, executive director for Physicians Against Drug Shortages, a small, nonprofit advocacy group. “The shortages that have now been running for over seven years are not only unprecedented in healthcare, but in post-U.S. World War II economic history. Shortages simply do not occur like this in a market economy without resulting from natural disasters, external political shocks, or trade embargos.”

Craig Garthwaite, an assistant professor of strategy at the Kellogg School of Business at Northwestern University agreed, saying, “Saline shortages are something that shouldn’t happen, they baffle economists.”

The medical professionals belonging to Physicians Against Drug Shortages aren’t so baffled. They blame the increase in drug shortages on Group Purchasing Organizations, or GPOs.

GPOs were originally created in 1910 as organizations that would purchase drugs in bulk for hospital chains. They acted like a Costco or Sam’s Club, both of which sell memberships to buyers for the privilege of tapping into savings the chains wield in negotiating lower prices from wholesalers since they buy in bulk. GPOs operated by charging drug makers for the privileges of selling to groups of hospitals and then negotiated prices on the hospitals’ behalf.

Belonging to a GPO is voluntary and in theory is an excellent way for hospitals to get lower prices. In 2014, Becker’s Hospital Review found that between 96 and 98 percent of hospitals nationwide belong to at least one GPO and approximately 72 percent of hospital purchases are made through GPO-negotiated contracts.

In 1987, Congress passed a safe harbor law amending the Social Security Act and eliminating criminal penalties for entities receiving fees from the suppliers for services covered by Medicare or state health programs. Under the subsequent safe harbor rules issued by Office of the Inspector General in 1991, GPO fees from drug suppliers were effectively legalized, with the justification given at the time that:

“Concern has arisen among a number of health care providers that many relatively innocuous, or even beneficial, commercial arrangements are technically covered by the statute and are, therefore, subject to criminal prosecution.”

For critics of GPO activities, this is where the trouble began.

“This is a pay to play scheme in which these cartels award exclusive contracts to favored suppliers in return for exorbitant administrative marketing and other fees,” claims the website Physicians Against Drug Shortages in an urgent call to action. “In a nutshell, they’ve rigged the market. As a result of these dubious practices, there are now only one or two suppliers for many of these drugs, or none at all.”

The Healthcare Supply Chain Association (HSCA), a broad-based trade association that represents 16 GPOs, explains the fees GPOs take for their services this way,

“The contracting services that GPOs provide to hospitals, other healthcare providers and product and/or service vendors are financed in part by administrative fees paid to GPOs by vendors. These fees are generally based on the purchase price the healthcare provider pays for a product purchased through a GPO contract.”

By law, the administrative fees GPOs collect are not to exceed 3 percent of purchase price, but this does not mean other fees cannot be collected. Use of a GPO is voluntary for both the hospital and the supplier, and there are multiple GPOs in the market to choose from.

“Every customer of a GPO knows and understands that there’s an admin fee, and if they didn’t want to use GPOs they didn’t have to, but they continue to do so because we provide value,” said HSCA President and CEO Todd Ebert. “If a customer doesn’t use our contracts we don’t get paid, so we have to be competitive and we have to provide value.”

Still, a Government Accountability Office report published in 2002 that looked at the prices of pacemakers negotiated by GPOs stated: “For the hospitals that we studied, a hospital’s use of a GPO contract did not guarantee that the hospital saved money: GPOs’ prices were not always lower and were often higher than prices paid by hospitals negotiating with vendors directly.”

The report went on to state that price savings differed by the size of the hospital. Large hospitals- those with more than 500 beds- generally obtained lower prices by negotiating on their own, but small and medium-sized hospitals did see price savings by going through a GPO.

A later GAO report that looked more specifically at the economics of the GPO funding structure found that:

“The literature and the views of experts varied widely on the effects of this funding structure. Some suggested it creates misaligned incentives for GPOs to negotiate higher prices for medical products in order to increase the vendor fees that they receive. Others suggested that competition between GPOs incentivizes them to negotiate the lowest possible prices, and mitigates these concerns. There is little empirical evidence available to either support or refute these concerns.”

The alternative to a GPO contract is individual contracting. “Guidelines on Medication Cost Management Strategies for Hospitals and Health Systems” produced by American Society of Health System Pharmacists (ASHP) and published in 2008 compared individual contracting versus GPO contracting.

“Opportunities for better pricing through individual contracting may exist for specialized health systems that purchase a large volume of a selected drug and are able to commit to maintaining a market share for the drug. Because of larger GPO volume, manufacturers often will not offer the same pricing or other terms to individual facilities or IDNs that they offer to GPOs. Another factor to consider with individual contracting is that a facility may require contracts to be reviewed by attorneys, whereas the GPO acts as the contracting agent of the facility, obviating the need for legal review of each contract by the facility’s counsel. Finally, the amount of time required to negotiate, write, and maintain an individual contract should be weighed against the incremental value gained over what a GPO contract would offer.”

Other benefits of a GPO contract for a hospital as listed by ASHP are a reduction of contract labor costs for institutions, enhancement of purchasing expertise, protracted periods of price protection, coordination of the contracting and budgeting process,  assistance identifying alternative or secondary products during a shortage, and enhancement of information sharing.

Since an overwhelming majority of hospitals go through GPOs for their drugs and medical supplies, what GPOs are effectively selling to the suppliers is market share. “If a given vendor is buying 75 percent of the market share for a particular drug or device, that means there isn’t a whole lot left for other suppliers to enter the market.” said Zweig.

Even for the companies that are able to buy a majority of the market share, critics claim that the fees GPOs levy can make it difficult to stay in business. “Even if you have a contract, if you’re paying half of your total revenue in GPO fees, as some of these suppliers are, there’s not a whole lot left to maintain equipment and facilities so companies are sometimes forced to suspend production of a drug,” Zweig said.

An article published in the peer-reviewed journal of American Physicians and Surgeons entitled, Modern Medicine at the Crossroads stated that the “Medicare anti-kickback ‘safe harbor’ provision  exempts GPOs from criminal prosecution for taking kickbacks from suppliers. This yet-to-be-repealed legislation rigs the entire healthcare supply chain. Kickbacks paid by suppliers to GPOs can exceed half of the supplier’s’ annual income for a single drug.”

Here is where shortages begin to appear, according to GPO critics. If suppliers are whittled down to one or two for a given product, and heavy fees are being levied on them, often the money they are being given for their products is just enough to cover production, and not enough to reinvest into maintaining facilities, or replacing aging equipment. Such was the case with the now shuttered Ben Venue Laboratories in Bedford, Ohio.

Ben Venue Labs was a major producer of generic chemotherapy agents including methotrexate, a key chemo drug for childhood leukemia, and among several drug it was producing. When the drug went into extreme shortage the FDA went in to determine the cause of the problem.

An FDA report from December 2011 stated that the plant had failed to keep up with any preventive maintenance, leaving 107 pieces of lab equipment past their scheduled maintenance date. The report noted a packaging record for the batch of drugs about to ship out and that the drugs exceeded the percent of defects rate of 2.4 percent. Another finding indicated that a 10-gallon storage can with an unknown liquid, later determined to be urine, was found in a storage area. Apparently it had been used by lab technicians working in a sterile environment so they didn’t have to completely undress and redress every time they left the sterile lab area.

After the FDA filed their report, the lab voluntarily shut down for remediation. It never reopened. A New York Times article entitled “Supply of a Cancer Drug May Run Out In Weeks” from Feb 2012 referred to the situation as dire, quoting Dr. Michael P. Link, president of the American Society of Clinical Oncology  who said, “We have worked very hard to take what was an incurable disease and make it curable for 90 percent of the cases. But if we can’t get this drug anymore, that sets us back decades.

”Novation’s excess fee report for Ben Venue labs was one of the only ones to be made public when their fee documentation for methotrexate was requested by the Senate Antitrust Subcommittee for its 2002 hearing and later obtained through discovery in a federal whistleblower lawsuit against Novation. The report the Senate was given stated that 56.25 percent of the revenue the lab was paid to their GPO to gain and maintain their market share.

“There was no capital investment made at Ben Venue Labs” said Dr. Robert Campbell, immediate past president of the Pennsylvania Society of Anesthesiologists. “Antitrust attorneys will tell you that a 10 percent kickback is huge, this is 56 percent. When you have 56.25 percent going to kickbacks,  you are left with no money to upgrade your plant, they run these companies ragged, they run them into the ground.”

“Low supply, high demand, high prices is an anti-competitive marketplace, that’s all you need to know,” said Campbell. “it’s that simple.”

When propofol, a drug used to start and maintain general anesthesia as well as decrease vomiting and nausea during the process went into shortage, anesthesiologists across the country had to make some hard choices.

“Injectable propofol is a very valuable drug, and a difficult one to find a good substitute for,” said Dr. Sean Adams, a practicing anesthesiologist in Naperville. “We had to tell our patients that they were going to have more nausea and vomiting and it was going to take longer to go to sleep before surgery and wake up afterwards and that it would be a less comfortable transition. Patients care was compromised.”

While critics of GPOs blame them for creating an economic system where drug shortages are the new normal, the HSCA makes the case that this as a baseless assertion, as it would undercut their financial interests.

“If there isn’t product in the marketplace, then we can’t sell it,” said Ebert. “We have been working extremely close with congress to get approval of new generics through the FDA. The backlog is currently about 42 months”

As drug shortages continue to rise and the debate over how best to ensure affordable healthcare and medications for America’s aging population rages on, the debate over the value of GPOs is not one that is likely to go away.

U.S. Sen. Richard Blumenthal (D-Conn.) said in March that he is asking the Federal Trade Commission and congressional colleagues to examine whether GPOs are leading to rising drug costs and possible shortages of some drugs and supplies, according to the New Haven Register.  An FTC response to Blumenthal indicated that “to date, the Commission has not charged a GPO with a violation of the antitrust laws. Nonetheless, we will continue to monitor competition among GPOs  as well as the markets for the products that hospitals can purchase through them.”

That same month, the Center for American Progress released a report titled “The FDA is not the Problem: Why Undermining the Drug Approval Process is Not the Answer to High Drug Prices.”

In a response to Blumenthal’s initiative, Ebert invited congressional review.  “We believe oversight is important and welcome congressional interest as an additional measure,” Ebert said in a Modern Healthcare article. The article quotes him as saying that the GPO business model has been “thoroughly reviewed” by Congress and the courts as well as federal agencies. The article paraphrased Ebert as saying that GPOS “operate in line with strict industry-established rules that guard again conflict of interest.”

“Congress included the Safe Harbor Provision in its 1987 Medicare and Medicaid Patient Protection Act for a reason: to protect cost savings realized through lawful GPO practices,” Ebert stated in the article.

Congress may well take up the latest invitation for review, as interest in the role of GPOs in the generics market has been on the rise. On February 4 2016 the House Committee on Oversight and Government Reform looked into developments and oversight in the prescription drug market and found “an absence of generic competition” leading to an “increase in generic drug prices.”

As healthcare costs are on the rise along with the population of Americans approaching retirement age, this conversation has become increasingly important.

“If we can’t have affordable medications,” said Campbell, “we will never have affordable healthcare.”