Last post (Transparency Lowers Healthcare Prices) I discussed how patients can shop for the best healthcare deal if prices are transparent. We should be able to pick the best deal for elective surgery just as we do when we purchase a new car.

The lack of transparency is one of the contributing factors to the rising cost of healthcare. Another contributing factor is the near-monopoly of “group purchasing organizations”, known as GPOs.

Industry Kickbacks

Phillip L. Zweig and Frederick C. Blum, writing in The Wall Street Journal, say the greatest harm to lowering healthcare costs is done by GPOs. These GPOs supply hospitals with every thing from saline to anesthetics to antibiotics. Their dominance in the marketplace contributes to higher prices and shortages of supplies.

When Amazon Business signaled last year that it planned to infuse competition into the marketplace for hospital supplies, clinicians were optimistic that scarce items would soon reappear. But they didn’t recognize the power of these GPOs.

Four giant GPOs – Vizient, Premier Inc., HealthTrust and Intalere – control purchasing for most of the supplies used by thousands of hospitals, outpatient clinics and nursing homes. These buying cartels literally sell market share, taking money from drug makers and other vendors in exchange for exclusionary supply contracts.

Zweig and Blum say hospitals sometimes even get a cut of the GPOs’ fees. When Premier was considering an initial public offering (IPO) in 2013, Thomas Finn, an analyst at HCMatters.com, explained: “As a member-driven enterprise, it is common knowledge that Premier and other GPOs ‘share back’ with their members and owners In fact, many hospital executives who are part of the Premier alliance have learned to rely on the share back as an integral part of their annual compensation.”

They say the results of this anticompetitive system are high costs and inevitable supply breakdowns. For example, the GPOs would have the public believe that Hurricane Maria triggered shortage of sterile IV solutions by damaging Baxter International’s Puerto Rican plants. In fact, shortages of saline and other solutions have existed for years, forcing the U.S. to import them from several countries.

The reason for this chronic problem of shortages is that GPOs have relied almost exclusively on Baxter for these products, concentrating production and discouraging potential competitors. Baxter essentially admitted this fact in a 2007 press release when they reported a new deal with Novation (now Vizient) describing the terms as “an extended single source award for IV solutions.”

Zweig and Blum say the fees manufacturers pay to GPOs can be exorbitant. In a 2003 whistleblower case filed by a former employee of Novation, documents showed that Ben Venue laboratories, an Ohio company producing a heart medication diltiazem, paid GPO fees that exceeded half its sales on the drug.

History of GPOs

It wasn’t always this way. The first GPO was founded in 1910 when several New York City hospitals banded together to buy supplies in bulk. Member hospitals paid dues to cover administrative expenses. This “co-op” model worked well for decades.

Then government got involved. In the mid-1980s, Congress gave GPOs a “safe harbor” by exempting them from the laws against taking kickbacks from suppliers. The result of this foolish legislation is the system of kickbacks, shortages, and higher prices we have today.

The premise of these GPOs is that they save hospitals money. That was the original reason they were formed. But a 2010 report by the Senate Finance Committee found no independent empirical evidence that GPOs save hospitals money. On the other hand, a 2002 Government Accountability Office study of purchases of safety needles and pacemakers in one metropolitan area found hospitals that negotiated on their own often obtained lower prices.

Zweig and Blum estimate GPOs inflate costs by 30% or more. Yet most hospital administrators would rather accept the status quo than buck the system.

The same problem is wide-spread in the pharmaceutical business. In 2003 the Department of Health and Human Services (HHS) advised drug makers that the safe harbor would protect rebates paid to pharmacy benefit managers. This has resulted in a rising drug prices sold through these middlemen.

With the pullback of Amazon from the market, it is clear that the only way out of this system of kickbacks, rising prices, and shortages is repeal of the “safe harbor” provisions. This will allow competition back into the marketplace resulting in lower costs and increased supplies of vital medical supplies.

If you’re shopping for a new car, prices matter. Why shouldn’t it be the same when you’re shopping for surgery?

That’s the evident thinking of a bipartisan group of state lawmakers in Colorado. This novel idea makes perfect sense in virtually every other consumer purchase but for the last fifty years or more it has been lacking in healthcare.

Dr. Tom Coburn, obstetrician/gynecologist and former Senator of Oklahoma, reports this exciting development in The Wall Street Journal. Coburn says The Comprehensive Health Care Billing Transparency Act would allow Coloradoans to see the true price of any health service they use – exams, procedures, prescriptions – before they undertake treatment.

Coburn explains, “If passed, the legislation would mandate that hospitals and other facilities disclose the base fees they charge for specific services “before applying any discounts, rebates, or other charge adjustment mechanisms.” Every bill sent to a patient would need to include an itemized list, which would allow patients to see if a service had been marked up. By making such information available upfront, the legislation would reintroduce competition to Colorado’s opaque healthcare markets.”

The problem in medicine is third-party payers – insurance companies and government healthcare programs – that pay most healthcare bills. The consumer-patients never really see the actual cost of the treatments they receive. The result is a system of healthcare pricing that is out of control – and a major cause of healthcare cost inflation.

Since the introduction of healthcare insurance and Medicare in the 1960s, the cost of healthcare has been rising much faster than inflation. One way to slow the growth of healthcare inflation is transparency in pricing. When patients understand the costs up front they can better determine if the care they are getting is reasonably priced. They can comparison shop or possibly negotiate for a better price with their preferred provider.

Hospitals have taken this process to a new level of sophistication and secrecy. Coburn calls this “a well-executed scam.” He says there are “gag clauses written into pharmacy and hospital contracts which can prevent providers from telling you that it could be cheaper to pay with cash instead of using your insurance.”

Another factor is “middlemen,” large “group purchasing organizations” or GPOs that supply hospitals with everything from saline to anesthetics to antibiotics. These giant GPOs limit competition and therefore keep prices artificially high. (More on GPOs in a subsequent blog.)

Competition in the marketplace always lowers prices and usually leads to improved quality. The healthcare industry has been lacking competition for years because it lacks transparency in prices. Colorado appears poised to change that.

Coburn summarizes, “By enacting the Comprehensive Health Care Billing Transparency Act, lawmakers in Colorado would be working toward lower healthcare costs for their state’s residents. At the same time, they’d be advancing the cause of price transparency and setting an example for the nation. Free markets have the ability to make healthcare more affordable – if only government will let them.”

As a medical doctor I’m trained in scientific methods. I learned that science is always discovering new information that challenges or refutes our earlier understandings. So declaring anytime that the “science is settled” is just unscientific.

The latest example of such a fiasco is the fifty-year anniversary of the publication of Stanford biologist Paul Ehrlich’s book The Population Bomb. In 1968 Ehrlich was convinced the earth couldn’t sustain the growing population and he predicted a global cataclysm if something wasn’t done about it. (Does this sound familiar?)

William McGurn, columnist for The Wall Street Journal, says, “The book sketched out possible scenarios of the hell Mr. Ehrlich believed imminent: hundreds of millions dying from starvation, England disappearing by the year 2000, India doomed, the average American’s lifespan falling to 42 by 1980, and so on.” (The average American’s life span in 2017 was 78.6 years.)

Ehrlich certainly got a lot of people’s attention – he sold three million copies of his book. His false scientific assumptions became an unquestioned orthodoxy for the technocratic class that seems to welcome such cataclysmic scares as an opportunity to tell the rest of us what to do.

Robert McNamara, former Defense Secretary under Presidents Kennedy and Johnson, who was largely responsible for escalation of the Vietnam War, later went on to become President of The World Bank. McNamara would declare that overpopulation was a greater threat than nuclear war – because the decisions to have babies or not were “not in the exclusive control of a few governments but rather in the hands of literally hundreds of millions of individual parents.”

McGurn goes on to say, “In his day, Mr. Erhlich’s assertion about the limited “carrying capacity” of the Earth was settled science (emphasis mine). Never mind that it is rooted in an absurdity: that when a calf is born a country’s wealth rises, but when a baby is born it goes down. Or that the record shows that when targeted peoples resist the prescription – don’t have babies – things quickly turn coercive, from forced abortions in China to contraceptive injections given to black women in apartheid-era South Africa.”

This “settled science” was challenged by Julian Lincoln Simon, a professor of business and economics at the University of Illinois – at Urbana-Champaign. Simon wrote a counter-argument book called The Ultimate Resource. Simon recognized that human beings are more than just mouths to feed. They also come with minds.

Simon believed that human beings were able to adapt to their circumstances in a way that Ehrlich discounted. He believed that human ingenuity could turn what were once luxuries into everyday amenities. That’s why he called the human mind, “The Ultimate Resource.”

Fifty years has demonstrated that Simon won this argument with Ehrlich and the “settled science” is no longer settled. In 2011, David P. Goldman published a new book called How Civilizations Die. The opening words of his book paint an entirely different picture compared to that of Ehrlich’s book fifty years ago:

“Population decline is the elephant in the world’s living room. As a matter of arithmetic, we know that the social life of most developed countries will break down within two generations. Two out of three Italians and three of four Japanese will be elderly dependents by 2050. If present fertility rates hold, the number of Germans will fall by 98 percent over the next two centuries. No pensions and health care system can support such an inverted population pyramid. Nor is the problem limited to the industrial nations. Fertility is falling at even faster rates – indeed, at rates never before registered anywhere – in the Muslim world. The world’s population will fall by as much as a fifth between the middle and the end of the twenty-first century, by far the worst decline in human history.”

The reason for this population decline is declining fertility rates, not starvation or overpopulation. Changes in the cultures of the world have led to fewer women having babies – as a matter of choice.

Mr. Ehrlich remains impervious to the false science he perpetrated on the world fifty years ago. McGurn says Ehrlich gave an interview to the Guardian just two months ago in which “he decreed the collapse of civilization a “near certainty” in the next few decades. Which may be a good reminder that skepticism is in order whenever someone waves the flag of “science” to justify the latest antihuman nostrum.”

Some people never learn.