Jonathan Cohn

Secretary Sebelius, Read This Article

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Hospital-acquired infections are the proverbial double-whammy. They make people sick and they force the country to spend more on health care. Cut down on infections and you’ve saved some money. And oh, by the way, you’ve saved a few lives too.

A few years ago, an engineer named Thomas Shaw came up with a way to accomplish that. Hospitals had adopted a new system for putting drugs into intravenous catheters. Basically, health care workers would screw specially fitted syringes into a matching receptacle, rather than the traditional method of injecting drugs into catheters with needles. But workers frequently let the tip of the screw-in syringe brush against something--a coat sleeve, a bed sheet, whatever--and pick up some germs. The germs went through the receptacles and catheters, and then into the patients' bloodstreams where they started infections.

Shaw came up with a new syringe design that, in effect, covered the opening until workers connected it to the catheter receptacle. (At least, that's how I understand it works.) His results were impressive: The device had nearly a 100 percent success rate, according to a 2007 independent study. That made it more effective than anything existing device makers could offer. It was cheaper, too.

But if a doctor admits you to a hospital today, chances are the staff there won’t be using Shaw’s invention. In a new and devastating article that appears in the Washington Monthly, journalist Mariah Blake explains why:

Breaking into the medical supply market has always been tough, in part because for decades the business has been dominated by a handful of behemoth suppliers. ... Often, these large companies used their clout to squeeze hospitals on prices. To keep costs in check, in the 1970s many medical facilities began banding together to form group purchasing organizations, or GPOs. The underlying idea was simple: because suppliers generally give price breaks to customers who buy large quantities, hospitals could get better deals on, say, gauze or gloves, if a group of them came together and bargained for ten cases, rather than each hospital buying a case on its own.

Originally, these purchasing groups were nonprofit collectives and were managed and funded by the hospitals themselves. But in the mid-1970s, the model began to shift. Some large hospital chains started to spin off for-profit GPO subsidiaries, which other hospitals could join by paying membership dues, much the way members of buying clubs like Costco pay dues to get bulk-buying discounts. By decade’s end, virtually every hospital in America belonged to a GPO.

Then, in 1986 Congress passed a bill exempting GPOs from the anti-kickback provisions embedded in Medicare law. This meant that instead of collecting membership dues, GPOs could collect “fees”--in other industries they might be called kickbacks or bribes--from suppliers in the form of a share of sales revenue. (For example, in exchange for signing a contract with a given gauze maker, a GPO might get a percentage of whatever the company made selling gauze to members.) The idea was to help struggling hospitals by shifting the burden of funding GPOs’ operations to vendors. To prevent abuse, “fees” of more than 3 percent of sales were supposed to be reported to member hospitals and (upon request) the secretary of health and human services.

But, as with many well-intended laws, the shift had some ground-shaking unintended consequences. Most importantly, it turned the incentives for GPOs upside down. Instead of being tied to the dues paid by members, GPOs’ revenues were now tied to the profits of the suppliers they were supposed to be pressing for lower prices. This created an incentive to cater to the sellers rather than to the buyers... Before long, large suppliers began using “fees”--sometimes very generous ones--along with tiered pricing to secure deals that locked GPO members into buying their products. In many cases, hospitals were obliged to buy virtually all of their bandages or scalpels or heart monitors from one company. GPOs also began offering package deals that bundled products together. To get the best price on stethoscopes, a hospital might have to agree to buy everything from pacemakers to cotton balls from the GPO’s preferred vendors. Hospitals went along because they got price breaks, usually in the form of rebates if they met buying quotas.

I can't vouch for Blake's reporting, but she certainly seems to have the goods, including some internal company documents from medical suppliers. And it's broadly consistent with a series of investigative articles that two New York Times writers, Barry Meier with Mary Williams Walsh, wrote several years ago.

You might be wondering why, after all these years, hospitals don't simply turn their back on the GPOs and buy directly from companies selling better, cheaper wares. It's not clear, but the likely answer is a combination of inertia (hospitals have always done it this way, so they keep doing it) and corruption, of the moral if not legal kind (hospitals still have personal and perhaps financial ties to the GPOs). Of course, it helps that lobbyists have fought to give GPOs so much leeway--and that Congress has gone along.

But there's a silver lining here: Health care reform seeks to reduce spending, in part, by rewarding hospitals that have low infection rates. It will also reduce payments to hospitals, by a substantial amount, on the theory that hospitals can cut their prices without cutting quality. Blake's story suggests there's plenty of room to do just that.

By the way, one network of hospitals does use Shaw's syringe invention: The Veterans Administration system, which is the purest form of government-run health care in America. Imagine that.

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