It’s fascinating to see the “free market” system in action. Looking and finding for ways to gain an advantage is a major part of how it works. It’s not pretty and it doesn’t result in cost savings and efficiency as we already know from the various banking crises, Enron, Worldcom etc, etc.
In healthcare the results of allowing businesses to operate without regulation (no anti-trust rules for these operations) has consequences. From the Washington Monthly a sobering story about medical supply group purchasing organizations:
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.
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.
Kiani’s testimony was followed by a flood of revelations about self-dealing and conflicts of interest among GPOs and their executives. Congress was also given a slew of documents showing that GPOs were collecting upfront payments of up to $3 million from suppliers, including drug makers like Astra-Zeneca, in return for awarding them sales contracts, not to mention a large share of revenues. In one case, a vendor was handing Novation not 3 percent of its revenue on a given product line, but a full 94 percent, according to Novation documents
As for independent assessment of GPOs’ effect on costs, they are hard to come by. But the little information that is available suggests that they may actually drive up the price of supplies. A 2002 pilot study by the Government Accountability Office found, for instance, that hospitals that went through GPOs paid more for safety needles and most models of pacemakers than those that negotiated prices on their own—for some pacemakers the median gap was as wide as 39 percent.
Medicynical Note: The natural consequence of a “free unregulated market” appears to be corruption–in the broad sense. Guess who pays?