The press widely reported that Hurricane Helene’s damage to the Baxter International plant in North Cove, NC, is causing a critical shortage of IV saline and dextrose throughout the United States.
The reports all focused on the effects of this terrible storm. However, the press refuses to discuss the real reason behind the IV fluid shortage.
There is considerable damage to bridges and roads surrounding the North Cove plant, and there is no projection of when supplies will return to pre–storm levels.
Baxter supplies 60% of all IV fluid in the US, and the North Cove plant Is the largest in the US. Baxter informed customers that they would receive 40% of their usual allotment of IV fluid and they should take all possible measures to conserve IV fluid.
The public takes IV fluids for granted because they are inexpensive and widely available at IV hydration businesses. After all, IV fluids are nothing more than a clear plastic bag with sterile salt water.
IV fluids are crucial throughout healthcare. They are used to rehydrate patients who cannot take oral fluids, to dispense IV medications, and for every surgery. Because of the shortage, elective surgeries are being postponed, and every trauma patient is now at risk.
The question arises of why other companies can’t produce this straightforward product of sterile salt water in a soft plastic bag.
The reason is that a middleman you never heard of distorts the market for hospital supplies. These middlemen are group purchasing organizations or GPOs.
Hospitals use GPOs to purchase medications, supplies, and medical devices. The first GPOs originated in 1910 in New York City and were formed as co-ops to lower the prices of products purchased in bulk.
Member hospitals initially paid the GPOs, and the incentives for the GPOs and member hospitals were aligned. The goal was to obtain the best price and supply of hospital goods.
This system worked well for 80 years until Congress passed an exemption to the Anti-Kickback Law in 1987. In 1991, the Inspector General of the Dept. of Health and Human Services developed a rule allowing GPOs to obtain payments from vendors instead of hospitals.
The GPOS have consolidated; today, the top three control 80-90% of the market. They are, in order of size:
- Vizient
- Premier
- HealthTrust Purchasing Group
Vizient supplies more than 60% of providers and 97% of academic medical centers. If a vendor has an exclusive contract with Vizient — it is the only vendor for its entire network of hospitals.
Now, the GPOs are working for the vendors and not for the hospitals, physicians, or patients. The GPOs utilize several strategies that inflate the cost of hospital supplies and make the supply chain fragile, including:
Pay to play: the vendors must pay rebates to the GPOs to secure a contract. This favors large companies over smaller companies as the fees are quite high.
Long-term contracts: often there is a stipulation of 90-10 or 95–5 clauses in contracts. This means that if you buy 10,000 items one year, you must purchase at least 9,500 the next year. If you don’t, you will suffer large financial penalties. This locks hospitals into long-term relationships with vendors and keeps out innovative smaller vendors.
The GPOs market exclusive contracts as they can charge more money for these. The effect is to limit the number of vendors producing a product. This leads to a fragile supply chain, as there will be issues if the vendor runs into any manufacturing issues.
Once the vendor has a long-term exclusive contract, they are free to raise prices to the hospital.
In fact, the prices paid by hospitals are often 15-20% higher with a GPO versus a competitive market. The fees and rebates the GPOs receive are based on the price of the item, and this provides a perverse incentive to increase and not decrease the prices paid.
The GPOs’ actions result in higher prices and fewer vendors, and the hospitals have ceded control to the GPOs; why would hospitals agree to this arrangement?
The answer is that the hospitals receive part of the rebates and fees from the vendors, which creates a conflict of interest.
Thomas Finn, an analyst, said the following about Premier:
“ Many hospital executives who are part of the Premier Alliance have learned to rely on payments from GPOs as an integral part of their annual compensation.”
Many hospital executives are on the boards of the GPOs, which is a significant conflict of interest as they receive payment and benefits from the same entity that is negotiating the price of supplies, medications, and medical devices with the hospital.
The following health systems have executives on the board of Vizient, the largest GPO:
Froedtert Health
OhioHealth
Novant Health
Standford Health Care
Sutter Health
Mayo Clinic Platform
BJC Healthcare
UCLA Health
Memorial Hermann Health System
GPOs have not only caused serious supply issues with hospital supplies but also with generic drugs. There are currently 300 drugs that are in short supply.
The drugs that are in short supply include the following:
- Local anesthetics such as lidocaine
- Antibiotics such as Amoxicillin, Ampicillin and Tetracycline • Chemotherapy drugs Cisplatin, Carboplatin, Vinblastine and Vincristine. These are used to treat about 20% of cancer patients.
- Asthma medication such as Albuterol
- ADHD medications
- Injectable medications used in hospitals
The reason for the short supply is that the GPOs often underpay the drug manufacturer for the medication. This forces them to go overseas for production and causes other vendors to exit the market.
Then, if there is a manufacturing issue, there are no other factories to pick up the slack. In the current system, the middleman who produces nothing is getting paid well, and the drug manufacturer isn’t getting paid enough to continue production.
The solutions are:
Repeal the Anti-kickback exemption that GPOs currently have. This would eliminate vendors paying the GPOs and return them to the original model in which the hospital pays them. This incentivizes the GPOs to create a robust supply chain with many vendors and to obtain fair prices.
Break up the large three GPOs. Monopolies in healthcare increase costs and decrease quality. We need to return to a market with many GPOs for hospitals and vendors to work with. This will allow small, innovative vendors to introduce their products to hospitals.
Hospital executives should not receive fees from GPOs or be on their boards. This is a conflict of interest and harms patients.
We need to take all steps necessary to establish a robust and free market for hospital supplies, medical devices, and generic medications. The greed of middlemen and politicians should not override the safe and efficient provision of medical care in the U.S.
