A little background on group purchasing organizations: GPOs represent their member hospitals. They "buy in bulk" and extract discounts from manufacturers and take "administration fees" to cover theirs costs.
Who owns the GPOs? The hospitals do! The largest GPO, Novation, is owned by VHA and UHC, two of the largest healthcare alliances that is comprised of US hospitals.
Margaret Clapp, the first author of this article used to work for Mass General who is a member of VHA, who thus owns the GPO Novation.
These GPOs exist because the hospitals themselves created them.
And it's ridiculous to say that GPO discounts are responsibly for drug shortages. GPOs don't want drug shortages because (1) their member hospitals don't get the drugs they want (2) because the GPO loses money every time a hospital can't order a drug.
The current drug shortages are actually due to a number of different factors:
(1) Margins on generic drugs are razor thin, they are basically commodities. The purchasers of these drugs don't care who makes them, since they are all deemed equivalent by the FDA; the result is that whoever has the lowest price gets to sell their drug
(2) The generic drug market looks like a commodity marketplace, but in fact it isn't. There are a number of costs associated with manufacturing a drug to FDA standards. If the FDA comes in and says "you can't ship that drug", you've probably just lost all of your profits for an entire year.
(3) Drug prices are "sticky" due to the way that Medicare and Medicaid pays for drugs. If you suddenly have a manufacturing problem and need to raise the price of your drug to cover costs, you're out of luck since it means the purchasers of your drug will lose money.
(4) Because of the low profit margins, companies are simply getting out of the business. There are other products they could sell that are lower-risk and higher margin.
If generic drugs are too cheap, it seems (3) is the real issue here. (2) can be accounted for by large companies if they are allowed to raise the costs of their products.
(4) wouldn't be a concern if there was room to innovate on the business model of pharmaceutical manufacturing. It seems like this sort of thing would be a great opportunity for disruption in other industries. I'm assuming that the regulatory burden makes this difficult? Car dealerships, restaurants, and grocery stores all have razor thin margins as well.
I don't disagree with your assessment. (3) is a major factor in drug shortages.
There is room to innovate in the generic drug industry. Most generic drug manufacturers have R&D budgets aimed at reducing the cost of manufacturing.
However, the generic drug market is an odd one. It all comes down to price and some companies price certain generics at below cost (i.e. loss leaders) in order to gain other business.
The most interesting quote I've read was from Barry Sherman who runs Apotex, one of the biggest generic drug makers. I don't have the quote in front of me, but to sum it up: "I rarely make any profit on any of my drugs. Most of my profit comes from patent settlements and court cases I win again the branded drug makers."
This is the sort of corporate shell game that is only profitable due to the practices of Medicare, Medicaid, and health insurers.
The exact workings are beyond my investigative ability, but I think it very likely that kickbacks, payola, and other off-book activities are involved. The cash flows are massaged until it appears that the hospital itself is operating on thinner margins, and the satellite business entities are making fatter profits. Since only the hospital deals directly with the insurers, this tricks them into paying for procedures at a rate much higher than the actual bottom-line cost to the hospital.
I think the reason hospital systems are so secretive about their billing and procurement systems is that the public would find their practices to be scandalously avaricious, if not outright fraud.
Unfortunately, I can't support even a tiny bit of my hypothesis with actual evidence.
Comments
No offense, but this is a very weird article.
A little background on group purchasing organizations: GPOs represent their member hospitals. They "buy in bulk" and extract discounts from manufacturers and take "administration fees" to cover theirs costs.
Who owns the GPOs? The hospitals do! The largest GPO, Novation, is owned by VHA and UHC, two of the largest healthcare alliances that is comprised of US hospitals.
Margaret Clapp, the first author of this article used to work for Mass General who is a member of VHA, who thus owns the GPO Novation.
These GPOs exist because the hospitals themselves created them.
And it's ridiculous to say that GPO discounts are responsibly for drug shortages. GPOs don't want drug shortages because (1) their member hospitals don't get the drugs they want (2) because the GPO loses money every time a hospital can't order a drug.
The current drug shortages are actually due to a number of different factors:
(1) Margins on generic drugs are razor thin, they are basically commodities. The purchasers of these drugs don't care who makes them, since they are all deemed equivalent by the FDA; the result is that whoever has the lowest price gets to sell their drug
(2) The generic drug market looks like a commodity marketplace, but in fact it isn't. There are a number of costs associated with manufacturing a drug to FDA standards. If the FDA comes in and says "you can't ship that drug", you've probably just lost all of your profits for an entire year.
(3) Drug prices are "sticky" due to the way that Medicare and Medicaid pays for drugs. If you suddenly have a manufacturing problem and need to raise the price of your drug to cover costs, you're out of luck since it means the purchasers of your drug will lose money.
(4) Because of the low profit margins, companies are simply getting out of the business. There are other products they could sell that are lower-risk and higher margin.
If generic drugs are too cheap, it seems (3) is the real issue here. (2) can be accounted for by large companies if they are allowed to raise the costs of their products.
(4) wouldn't be a concern if there was room to innovate on the business model of pharmaceutical manufacturing. It seems like this sort of thing would be a great opportunity for disruption in other industries. I'm assuming that the regulatory burden makes this difficult? Car dealerships, restaurants, and grocery stores all have razor thin margins as well.
I don't disagree with your assessment. (3) is a major factor in drug shortages.
There is room to innovate in the generic drug industry. Most generic drug manufacturers have R&D budgets aimed at reducing the cost of manufacturing.
However, the generic drug market is an odd one. It all comes down to price and some companies price certain generics at below cost (i.e. loss leaders) in order to gain other business.
The most interesting quote I've read was from Barry Sherman who runs Apotex, one of the biggest generic drug makers. I don't have the quote in front of me, but to sum it up: "I rarely make any profit on any of my drugs. Most of my profit comes from patent settlements and court cases I win again the branded drug makers."
This is the sort of corporate shell game that is only profitable due to the practices of Medicare, Medicaid, and health insurers.
The exact workings are beyond my investigative ability, but I think it very likely that kickbacks, payola, and other off-book activities are involved. The cash flows are massaged until it appears that the hospital itself is operating on thinner margins, and the satellite business entities are making fatter profits. Since only the hospital deals directly with the insurers, this tricks them into paying for procedures at a rate much higher than the actual bottom-line cost to the hospital.
I think the reason hospital systems are so secretive about their billing and procurement systems is that the public would find their practices to be scandalously avaricious, if not outright fraud.
Unfortunately, I can't support even a tiny bit of my hypothesis with actual evidence.