Why in America, land of the free, home of the brave, are hospitals struggling with drug shortages?

Two words – legalized kickbacks.

At the center of the crisis are for profit corporations known as group purchasing organizations. The big four are Vizient, Premier, HealthTrust and Intalere.

The group purchasing organizations control purchasing of $300 billion annually in drugs, devices and supplies for the nation’s healthcare system.

If you pay the GPO a big enough fee, you get the sole source contract to the hospitals.

But aren’t kickbacks like this criminal?

In every other industry, yes.

In this one, no. Why?

Because Congress, in its wisdom, in 1987, created a safe harbor for the group purchasing industry.

In other words, no longer could the government criminally charge the group purchasing organizations for taking kickbacks.

This has led to a reduction in the number of suppliers and drug shortages for hospitals.

It’s so bad that the United States now imports sterile saline solution from Spain, Norway and Germany.

How to fix the problem?

Repeal the 1987 law and reimpose criminal penalties for kickbacks.

That’s the take of Phillip Zweig, a business journalist who now heads a group called Physicians Against Drug Shortages.

In his career, Zweig worked for a number of news outlets including the Wall Street Journal, Business Week and Bloomberg. He is the author of two books – Belly Up: The Collapse of Penn Square Bank (Ballantine Books, 1985) and Walter Wriston, Citibank, and the Rise and Fall of American Financial Supremacy (Crown Publishers, 1996).

He now has a laser focus on legalized kickbacks in healthcare.

“Group purchasing organizations were originally founded in 1910 as cooperatives,” Zweig told Corporate Crime Reporter in an interview last week. “Hospitals found they could band together and by buying supplies in bulk, they could save everyone money. This cooperative arrangement, which started down First Avenue from me in Manhattan at Bellevue Hospital, worked fine for 80 years.”

“In 1972, Congress passed anti-kickback laws that prohibited kickbacks of this sort. In the mid-1980s, the hospital lobby and the group purchasing lobby went to Congress and sought a safe harbor. They said – we need to codify what’s already going on. Manufacturers had been paying kickbacks to the group purchasing organizations, obviously illegally. The lobbyists said – let’s just put this into statute.”

Who are the major players?

“The major lobbying group is the Healthcare Supply Chain Association. They represent all of these group purchasing organizations. Their primary function is to preserve the safe harbor.”

The GPOs make money doing what?

“They make money selling sole source contracts to the highest bidder. They make money off of these legalized kickbacks. As far as I have been able to tell, this is the only industry in America that has a blessing from the United States Congress to take kickbacks.”

And they are taking kickbacks from whom?

“From suppliers. Every company that supplies goods to American hospitals, outpatient clinics, nursing homes, most every product that is purchased by 5,000 American hospitals.”

You pay us and we will get your products into hospitals?

“That’s the long and short of it yes. Because of the safe harbor, it’s the principal agency problem. Under the old cooperative model, the purpose was to save money for hospitals. The GPOs were working for the hospitals. As soon as the rules were implemented in 1991, the business model changed 180 degrees to where the GPOs were in the business of selling market share to the suppliers. They have said this in print – we deliver market share. The more market share that a company wants, the more it pays to the GPO.”

If the law is repealed, how does that relieve the shortages?

“The shortages have resulted from the fact that the GPOs have awarded sole source contracts to many of these large suppliers, eliminating competitors. If you know that your competition has a sole source contract with two group purchasing organizations that control the marketplace, why would you want to enter this business?”

What role do hospitals play in the kickback game?

“There are all of these drug shortage stakeholders – the American Hospital Association, the American Medical Association, the American Society of Health System Pharmacists, the American Society of Clinical Oncology. Many are conflicted.”

“Take the American Hospital Association. This is the clearest example. The GPOs are for profit organizations. Vizient, formerly Novation, is owned by major shareholder members. As institutions, they get the profits from the kickbacks. Premier is a publicly held GPO. How do you grow shareholder revenue and market value while saving money for hospitals? There are two classes of stock. One class is owned by their hospital members. And another class is owned by institutions and whoever wants to buy it.”

“We had known for years that the shareholder hospitals get what is called patronage fees from the GPOs. The GPOs admit that the CEOs of member hospitals count on what are known as sharebacks as part of their annual compensation.”

What is a shareback?

“A percentage of the kickback goes to the CEOs. That’s how they keep this system in place.”

“Have there been any books written on this?”

“Yes back in 2009 by S. Prakash Sethi. It’s called Group Purchasing Organizations: An Undisclosed Scandal in the U.S. Healthcare Industry.

Is there legislation in Congress?

“There was a discussion draft bill that was introduced in 2005 but never made it out of the subcommittee,” Zweig says. “Last year, we met with Congressman Mark Meadows (R-North Carolina). He drafted a bill based on the 2005 bill that would repeal the safe harbor. That is circulating. He never introduced it.”

Why not?

“Two months later, we get an email from Congressman Meadows’ legislative assistant saying that Freedom Works and Heritage Foundation don’t support it, so that’s the end of that.”

Senator Richard Blumenthal (D-Connecticut), when he was Attorney General in Connecticut in 2006, testified before the Senate Antitrust Committee saying that group purchasing organizations amounted to a “pay-to-play scheme” and an “insidious, incestuous, insider system,” that created “a myriad of conflicts of interest and anti-competitive behavior that must be regulated if not prohibited.”

At the time, Blumenthal called for “immediate Congressional action” and “more aggressive federal action to investigate and prosecute” antitrust violations.

Blumenthal’s investigation landed him on the front page of the New York Times.

But as Senator, Blumenthal has refused to introduce legislation to correct the problem.

Zweig took to the pages of the New Haven Register in 2016 with an op-ed piece titled Blumenthal’s Silence Deafening on Root Cause of Surging Generic Drug Prices.

“Somewhere on the road from Hartford to Washington, Senator Richard Blumenthal seems to have lost the pugnacity and sense of outrage over corporate wrongdoing that marked his 20-year tenure as Connecticut’s attorney general,” Zweig and co-author Dr. Rob Campbell wrote.

“The Obama administration and Congress are well aware of these abuses,” they wrote. “But they haven’t intervened because of the formidable political clout of the GPO cabal.”

[For the complete q/a format Interview with Phillip Zweig, 32 Corporate Crime Reporter 17(12), April 23, 2018, print edition only.]