Researchers blame misguided government incentives for rising health care costs

Chris Moody Contributor
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The medical industry and the federal government would save billions of dollars every year and lower health care costs by changing the way hospitals buy medical supplies, according to a new study paid for by the Medical Device Manufacturers Association.

Hospitals currently rely on middlemen known as Group Purchasing Organizations (GPO’s) to buy supplies, which were established to keep costs down by bargaining collectively on hospitals’ behalf. According to the study, the system worked well until a loophole was inserted into a 1986 Medicare reform law that allowed GPO’s to earn money based on the cost of medical supplies, providing little incentive for them to buy at the lowest possible cost.

The authors recommend closing the loophole and argue that hospitals would save money if they bought their equipment directly from suppliers.

“We have created a system where GPO’s are expected to guard hospital prices, yet these organizations financially benefit when prices rise, and they’re top lines suffer when prices fall,” said Bob Yancy, CEO of MEMdata, the company that collected the data for the study. “With this supply chain structure in place, how can we be surprised to see health care costs continue to rise?”

Economists Robert Litan, a senior fellow at the Brookings Institution, and Georgetown University Adjunct Professor Hal J. Singer authored the report, which analyzes data from hospitals in 41 states and more than 20,000 types of equipment. They concluded that medical supplies could have been purchased at lower prices over that time, and GPO practices were one of the main forces blocking market forces that could help to reduce those costs.

The researchers recommended that the government no longer allow GPO’s to receive payments, sometimes known as “kickbacks,” based on the price of the supplies they purchase for hospitals. Ending the current incentive structure would reduce medical expenditures by up to $37 billion per year and save taxpayers $17 billion annually on federal health care costs, the authors said.

“So long as GPO’s are compensated this way, they have an inherent conflict of interest that limits their ability to negotiate the best prices for the member hospitals,” Singer said.

A spokesman for the Health Industry Group Purchasing Association (HIGPA), a trade organization that represents GPO’s, called the report “reckless…propaganda” and accused the medical device industry of “politicizing the health care debate.”

“The device industry attacks GPOs because we are working for hospitals. The relationship between GPOs and manufacturers should be adversarial in this context, and the attacks tell us that we are effective in driving manufacturer prices down and providing significant cost savings to hospitals, patients and payers alike,” said HIGPA President Curtis Rooney in a statement.

Those who support reversing the exemption GPO’s receive from the 1986 law would need an act of Congress. They are hoping that their study, and more like it in the future, will start the process.

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