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Coronavirus equipment shortages at hospitals renew spotlight on supply chain middlemen

Pharmacy benefit managers (PBM), group purchasing organizations (GPO) locking hospitals into exclusive contracts that stifle market competition, says Practicing Physicians of America

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Medical supply shortages, repeal safe harbor
Sign at a hospital in San Francisco, Calif., following shortage of masks, N95 respirators during COVID-19 outbreak.
(Photo Smith Collection/Gado/Getty Images)
Updated: March 30, 2020 - 10:33pm

Healthcare providers facing medical equipment shortages and exorbitantly high drug prices during the coronavirus outbreak are captive to kickback-receiving “middlemen” who lock up hospitals in exclusive contracts that enable price gouging and supply bottlenecks, according to a network of physician advocacy groups representing 3,000 physicians. 

Nearly 90% of U.S. mayors who responded to a national survey released Friday by the U.S. Conference of Mayors said they lack enough protective equipment for their coronavirus medical workers, and 85% said they do not have enough ventilators for their hospitals. 

Dr. Marion Mass, a Duke-educated physician who founded Practicing Physicians of America (PPA), told Just the News that so-called “safe harbor” (legal protection) provisions allowing for payments from medical equipment and drug manufacturers to pharmacy benefit managers (PBMs) and group purchasing organizations (GPO) — what Dr. Mass calls the “middlemen” between providers and manufacturers — amount to “kickbacks.” 

The “safe harbor” payments are overseen by the U.S. Department of Health and Human Services (HHS), monitored by the HHS Inspector General (IG), and are currently protected by law, but Dr. Mass and her physician network argue they should be repealed. 

“After significant consolidation, four behemoth GPOs now control 90% of the entire chain of hospital and nursing home supplies, and we are in the grip of an unspeakably corrupt, pay-to-play system of financial kickbacks,” Mass wrote in a white paper co-authored by the Physicians for Reform and Texas Public Policy Foundation. “If the law that established the ‘safe harbor’ for kickbacks to the GPOs (and extended to PBMs in 2003) was repealed, the cost for medical supplies and medications would fall by an estimated 25% to 30%. The cost of prescription medications would fall by 35% to 43%. Additional declines in prices are projected as true competition replaces a rigged marketplace. We estimate this reform would save Medicare and Medicaid an estimated $75 billion each year.”

According to Mass, control exerted by PBMs and GPOs locks healthcare providers into rigid, exclusive-supplier contracts that don’t allow free market competition and exacerbate shortages when questionable supplies get recalled.

“This is the root of the shortages,” Dr. Mass, who practices at Children's Hospital of Philadelphia, told Just the News. “When you have a shortage of any product, what happens to the price of the product? It goes up.” 

PBM and GPO defenders reject the term “kickback” and call these payments “rebates.” They argue that the contracts are a vital protection to ensure supply chain stability during normal times and a widely-accepted function of brokerage contracting that exists in virtually every other industry. They say price hikes during disasters like coronavirus are natural due to spikes in demand that resolve themselves, sometimes through extraordinary measures such as President Trump invoking the Defense Production Act to compel auto manufacturer General Motors to produce ventilators.

Dr. David A. Hyman, a physician, Georgetown Law professor, and adjunct scholar at the libertarain Cato Institute think tank, was an expert in cases involving PBMs on behalf of PBM trade associations. He told Just the News that objections like Dr. Mass’ have been recycled by her physician coalition against PBMs and GPOs from arguments repeatedly already made by other industry players who want to undermine PBMs and GPOs for financial reasons. 

“We have exclusive contracts with employers and with places we reside,” said Hyman, who co-authored with Charles M. Silver the book Overcharged: Why Americans Pay Too Much For Health Care. “Exclusive contracts are everywhere. The issue you should worry about is market power, not whether the contracts are exclusive or not. Even if it’s consolidated, there’s lots of incentive from the consolidated industry to sell as much as it can at the highest price that it can. There’s no incentive to not have gowns and other supplies.”

The current marketplace is already functioning with “aggressive competition,” said Hyman, adding that the PBMs and GPOs are sought out by hospitals for their services.

“You can’t just say all middlemen are bad, nor are all middlemen good,” Hyman said. “The broader question is how competitive is the market for PBS and group purchasing. The evidence is that the PBM market is more competitive than the GPO market.”

Dr. Tom Price, an orthopedic physician and former HHS director, told Just the News that the truth probably lies somewhere in between the two sides of the debate.

“This is all multifactorial, and there may be something to that,” Price said of Mass’ criticisms of GPOs and PBMs. “There’s a transparency discussion that we need to have.”

Price said he was glad that the Trump administration had made healthcare pricing transparency a priority and that one way to improve public accountability — since government-funded Medicare and Medicaid account for such a heavy portion of payments to hospitals — would be to ensure that PBM and GPO contracts are made public, since currently they are not.

“The whole issue of ‘rebates’ or ‘kickbacks’ [as] some folks call them, that needs a huge layer of transparency, and again I think the administration is trying to move in a better direction,” Price said.

Price acknowledges that “you can’t have negotiations be in the open during the process.” But “once the price is set, the public has a right to know,” he said. “Any contract that deals with public resources there needs to be transparency in them.”

The coronavirus outbreak raises questions about the FDA's role in the supply chain and whether it should advocate for reforms, given that, per the federal government's COVID-19 response plan, the FDA is to "conduct surveillance of the medical product supply chain, including potential disruptions to supply or shortages of critical medical products in the U.S.”

Mass said that coronavirus medical supply shortages are also in part due to low-quality products of questionable safety being produced in developing countries, often in China, that result in product recalls.

“I wouldn’t have quality issues be an excuse for appropriate levels of supply for emergent situations,” Price said. “You ought to be policing for the quality of pharmaceuticals and supplies that are made overseas all the time. It may be more logistically difficult, but it doesn’t mean it can’t be done.”

An FDA spokeswoman told Just the News that questions about “middlemen” arrangements are “not FDA purview,” adding, “We are not involved in pricing or pricing contracts.”

A spokeswoman for the HHS IG told Just the News that oversight of GPOs and PBMs is ongoing.

“We continue to prioritize work that informs efforts to promote drug affordability so that cost is not a barrier to patients receiving needed medications,” Melissa Rumley told Just the News. “Our agency’s recommendations in the area of drug spending have informed significant legislative and programmatic changes in drug reimbursement methodologies across programs of HHS. Under the Inspector General Act, OIG may conduct oversight over certain GPO and PBM conduct to prevent fraud, waste, and abuse in the Medicare and Medicaid programs, including conduct which involves illegal kickbacks to referral sources.”

Hadley Heath Manning, director of health policy at the Independent Women's Forum, told Just the News that healthcare price transparency could help create a system that is more patient-centered and agile.

“The Coronavirus crisis is drawing attention to the strengths in our healthcare system, as well as the flaws,” said Manning. “One serious flaw is the opaque payment pipeline that often includes too many middlemen who don’t add value, but who simply raise prices. Now is as good a time as any to implement common sense price transparency measures that show us where our healthcare dollars go. When we see this more clearly, we can spend more wisely.”