Phillip Zweig on Blumenthal Delrahim GPOs and the Safe Harbor

Group purchasing organizations are legally protected from kickback prosecutions.

They are legally protected by a 1987 law that granted them a safe harbor from prosecution.

And Philip Zweig, director of Physicians Against Drug Shortages, says that it is this safe harbor that is fueling the drug shortage crisis and increasing prices of generic drugs.

You focus on the group purchasing industry. Who are the major players in that industry?

“Vizient, Premier, HealthTrust and Intalere,” Zweig told Corporate Crime Reporter in an interview last week. “Vizient is the largest company. I would venture that they have about a third of the market. Premier is the second largest. It is based in Charlotte, North Carolina. It’s probably approaching a third of the market. Then HealthTrust which is based outside of Nashville, Tennessee. And Intalere.”

What do these companies do?

“They sell market share in the form of exclusionary contracts to vendors in return for what we know to be outrageous but undisclosed fees –  kickbacks.”

The primary purchasers are hospitals?

“The hospitals actually own the group purchasing organizations. Premiere is a publicly held company. There are two classes of stock. There is Class A stock owned by individuals and mutual funds and hedge funds. And there is Class B stock which is owned by the hospital members. They are the shareholders. They control the company.”

The hospitals set up these companies originally as coops to get breaks for the hospitals on products like pharmaceuticals.”

“That was the original idea back in 1910. They were originally conceived down the block from me at Bellevue Hospital here in Manhattan. A group of hospitals got together and decided that they could save money on drugs and suppliers by banding together and buying supplies in bulk. That worked fine for about 70 years. Then in the mid-1980s, hospital lobbyists came along and sold Congress a bill of goods. They argued that if the vendors paid the fees, the hospitals would save more money. The end result was the 1987 Medicare anti-kickback safe harbor. That law exempted the GPOs from criminal prosecution for taking kickbacks from suppliers.”

“The coronavirus has suddenly made chronic drug shortages a matter of immediate and grave concern for everyone on the planet. It threatens to disrupt production and the supply chain in China, where most of the active ingredients are made. By extorting huge fees – kickbacks – from generic drug makers in return for sole source contracts, the GPOs have driven production to China and India.” 

“Some officials, like Sen. Richard Blumenthal (D-Connecticut) and Department of Justice Antitrust chief Makan Delrahim are finally questioning the bogus GPO narrative that the ‘causes are complex and multifactorial and there is no single solution.’” 

“I just heard that in November 2019, there was a Senate oversight hearing on antitrust. I saw a video of the hearing.” 

“There is this remarkable exchange between Sen. Richard Blumenthal (D-Connecticut) and Department of Justice Antitrust Division chief Makan Delrahim at the Senate Antitrust Subcommittee oversight hearing of September 17, 2019. They get it.” 

“As far as I can tell, no one in the media has picked up on it.  I learned about it two months after the fact. It’s very significant, for at least two reasons.”

“In the more than 20 years that I’ve been involved in or have followed the GPO issue, this is the first time I’m aware of that a Department of Justice Antitrust chief has publicly lambasted the GPO industry.”

“Second, to the best of my knowledge, Senator Blumenthal is the first U. S. Senator to publicly call the GPOs out for their role in causing drug shortages.”

Senator Blumenthal: Let me also ask you about group purchasing organizations. As you know, GPOs were designed to keep costs down. But recent research has concluded that in fact they’re a contributing factor to rising hospital costs, medication shortages, and stifling introduction of innovative products from smaller companies. What is the FTC doing to address behaviors like exclusionary and sole-source contracting in GPOs and the medical device industry?

Federal Trade Commission Chairman Joseph Simons: I can’t talk specifically about any non-public investigations but these are things that we look at very regularly, I mean, yes.

Senator Blumenthal: Are you looking at them now?

Simons: I’d have to check and get back to you.

Senator Blumenthal: I would appreciate your getting back. Let me just suggest that if you care about healthcare costs – and every single member on a bipartisan basis of this body cares about healthcare costs – and every single American cares about healthcare costs, you would answer yes, we’re looking at it actively and aggressively because GPOs potentially contribute to the rising health care costs of our country. So I’d appreciate your getting back to me.

Simons: Yes sir.

Delrahim: On that point if I could at the risk of interfering, is that some of the competition issues raised in that industry is due to Congress in 1997 (sic – actually 1987) provided an exemption from the Medicare anti-kickback statute, and that exemption has been kicked in, it’s a mile long, and it’s created a situation where some of these GPOs are buying exclusivity at the risk of innovation, at the risk of cost and at the risk of lives of patients.

What’s the significance of Delrahim saying this?

“He’s saying that the GPOs are nothing but a pay to play scam.”

You say that no Justice Department official has ever weighed in on this?

“As far as I know. And I’ve been following this for longer than I care to talk about, first as a journalist and later I got roped in to try and reform the system on behalf of a group of smaller medical device companies. I’ve been following this an awful long time.” 

You also say it is the first time that Blumenthal has called out the GPOs.

“First time as a United States Senator. He had done an investigation when he was Connecticut Attorney General. When he was Attorney General, the New York Times did a series called Medicine’s Middlemen. It was on abuses by the GPOs. 60 Minutes also did a segment. I worked with Walt Bogdanich and Mike Wallace on it. It was called Needles and it ran in 2001. It was about the long term contracts and the fees and the kickbacks that the large suppliers paid to get exclusive access to these hospitals. Walt Bogdanich went to the New York Times and launched this multi-year series called Medicine’s Middlemen.” 

“That put the issue on the Senate Antitrust Subcommittee agenda. There were four Senate hearings from 2002 to 2006, led by Senator Herb Kohl (D-Wisconsin) and Mike DeWine (R-Ohio) It was all bipartisan. Then Connecticut Attorney General Blumenthal launched an investigation into the GPOs and a related slush fund. That was the subject of a page one article in the New York Times July 17, 2006 titled Hospital Chiefs Get Paid for Advice on Selling. Blumenthal also submitted scathing testimony to the Senate Antitrust Committee. That hearing was March 15, 2006.” 

“Senator Kohl and Senator DeWine drafted legislation. It was called a discussion draft that would have repealed the safe harbor and ended the kickbacks, which are the cause of this whole thing.” 

“The vendors buy market share. They pay for sole source contracts by offering higher fees than other potential suppliers would pay. If one company gets a sole source contract then other companies might as well pull up the tent.” 

“The flip side is that even if you get a sole source contract, you are paying so much in fees that you can’t maintain quality and equipment. You don’t replace the vats and the mixing machines they use to mix these drugs. The equipment wears down, contaminants, metal shards, particulate matter winds up in the drugs. The FDA comes in and they find a house of horrors.” 

The only member of Congress you have had success with so far has been Blumenthal?

“These things usually start with one. Now we have the coronavirus which threatens the global drug supply. Over 80 percent of the active pharmaceutical ingredients come from China.”

“The fact that Blumenthal is prepared to take this on, that’s the only glimmer of hope. We have been fighting a lonely and frustrating battle.” 

What impact will single payer have on GPOs?

“Single payer won’t eliminate the GPOs. It doesn’t eliminate the safe harbor. Hospitals will still likely use GPOs that use this business model to contract with vendors.” 

What would happen if the safe harbor were eliminated?

“All kinds of good things would start to happen.”

The GPOs would go out of business?

“No, they would just revert to the good cooperative model. The model I see for this is Costco and Sam’s Club. There is a place for the coop models of GPOs. This is not about getting rid of GPOs. It’s about getting rid of this perverse destructive payment model in which the vendors pay the GPOs for access. It’s a pay to play model. It’s payola. It’s a get out of jail free card. The Congress of the United States awarded these people a get out of jail free card.”

[For the complete q/a format Interview with Phillip Zweig, see 34 Corporate Crime Reporter 7(12), February 17, 2020, print edition only.]

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