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How Medical Suppliers Block Innovation, Elevate Costs

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Reader Francois T highlighted a story at Washington Monthly that I recommend highly to readers. It illustrates how the intersection of corporate pursuit of profit and regulatory backfires can produce tidy oligopolies that pursue rent-seeking behavior with impunity. From his e-mail:

A well-intentioned move by Congress in 1986, followed by another one in 1996 converted Group Purchases Organizations (non-profit collectives formed by medical facilities that hoped to keep a lid on prices by banding together to make bulk purchases of supplies and devices at a discount) in for profit quasi-monopolies that now has a near total stranglehold on the medical device market in the USA.

Needless to say that all the negative consequences of such a state of affairs (stifling of innovation, reduced competition, impossibility to access the hospital markets for smaller players, excessive prices paid by…us!, avoidable pain and mortality) has happened and is still happening, despite congressional inquiries and court cases.

It is a long, but very illuminating article about the inner workings of an oligopoly that is out there to stick it to all of us, make health care costs even more egregious than they are now, and harm patients by choking life-saving innovations. Of course, the fuckheads in Congress cannot be bothered to reverse their mistakes, since there is money for them too, in the form of this legalized bribery called campaign contributions.

An extract:

GPOs started to come under scrutiny. The New York Times ran an investigative series on their business practices in 2002, and Congress followed suit with a string of hearings. One of the first witnesses was California entrepreneur Joe Kiani, who had invented a machine to monitor blood-oxygen levels. Unlike other similar devices, Kiani’s worked even when patients moved around or had little blood flowing to their extremities, a crucial innovation for treating sickly, premature infants, who tend to squirm and need to be monitored constantly for oxygen saturation—too little and they suffocate, too much and they go blind. But most hospitals couldn’t buy Kiani’s product because his larger rival, Nellcor, had cut a deal with the GPOs.

You can find the story here.

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9 comments

  1. Ina Deaver

    It’s been a long time since I dealt with this case, but I believe that it would take Congressional action at this point. The Supreme Court cases on these issues have lately been extremely damaging to plaintiffs who want to bring monopoly charges – indeed, the DOJ almost got rid of the whole idea of Section II enforcement. In particular, “bundling,” which was one of the theories in the pulse-ox case, has been shot down.

    There are a thousand ways to stifle innovation and keep the market closed to potential competitors – usually by killing them off when they become large enough to actually constitute a threat. Unfortunately, it has become very difficult to prosecute those practices because so many neolib economists think that the invisible hand can’t be wrong, even when it shoots everybody the middle finger.

    1. Francois T

      “The Supreme Court cases on these issues have lately been extremely damaging to plaintiffs”

      With the current edition of the SCOTUS, I can’t recall a case where a small plaintiff won against a deep pocketed/powerful defendant. And that is saying something, doesn’t it?

      Congressional action? Well…that sure would be nice.
      Small problem tough: the GPO vexing problem was not even on the radar screen of any politician or policy maker during a full year dedicated to reforming health care, (a debate I followed very closely) with all this talk of “bending the cost curve”. The Hound of the Baskervilles comes to mind; the guard dogs of fiscal rectitude didn’t bark once…they knew the perpetrators.

  2. bob

    I read a book written by Thomas Shaw(from the article) a while ago. I cannot believe that this has not been changed yet. He has a clearly superior product which would save lives, and hospitals a lot of money in the long run.

  3. mikkel

    There is a lot of research that has been done about monitoring and prediction (some almost 30 years old) that could save a lot of lives and money if implemented but all of the major companies refuse to collaborate with outside research groups to get them implemented. The “features” that they put in have nothing to do with what nurses or doctors are truly asking for.

    I designed a way to increase efficiency by making it very easy for the various devices and departments to communicate to each other, that based on a RAND case study I projected could save $100-$200 billion a year after the 10 years it would take to have widescale implementation. I have pitched it to the upper technical management at places and gotten the same response: “This is wonderful and exactly what we need, but the higher ups won’t do it because a) it means that it’d be easy to add competing systems to the network so hospitals wouldn’t be so pressured to buy everything from one company and b) they make a lot of money in ‘servicing’ that arises due to the inefficiency that this would cut out. In either case they would view it as a threat to their bottom line, go talk to the hospitals.” So I went and talked to people that have worked with major hospital boards and got: “This is great and exactly what we need, but no one will do it because hospitals operate with two year budgets and you say it will take five to implement enough to get a positive return. They’ll just see it as a loss. Plus you said that many hospitals would have to adopt it and no one will be willing to be the first because no one will want to stick out their neck.”

    What’s the only place that has shown potential interest? The VA.

  4. Fair Economist

    This is just another result of the US refusing to enforce monopoly law as of the Reagan administration (and all since, including Obama). Things like GPOs are effectively attempts to create monopsony (single buyer) to counter the exploitative monopolies on the supplier end but the actual result is that any potential innovators/entrepreneurs are totally squeezed out – if they are consumers/downmarket they get squeezed out by the monopolists and if they are producers they get squeezed out by the monopsonists. I suspect this is the primary reason US business formation has been declining for years and is now one of the lowest in the developed world.

  5. Dave of Maryland

    I have read the comments about posting & plead Guilty As Charged!

    Where to start with this sadness? Congress messes up legislation so often that, gee, you’d think that lobbyists write it & that they get exactly what they want. How else to explain the puzzling fact that Congress rarely revisits any of their earlier “failures”? The solution is simple: Prohibit moonlighting by Congresscritters. Make them live on their government salaries, but this is unlikely.

    Space on grocery store shelves is limited & if you want a piece of it, you have to pony up. That’s the way it’s always been in America, one way or another. Which means that Mr. Inventor should go, cap in hand, to say, GE Healthcare, & sell them on his product.

    And it’s not a bad idea in any case. Mass production is fraught with traps & pitfalls. Not only do you need a manufacturing plant that specializes in what you’ve invented, you need skilled supervisors who can guide your product through the initial manufacturing process. Even with skilled help, you will likely find that prototypes are one thing, finished products quite another. It is not unusual for initial production runs to have 10% (or more) defective. With medical products, that means lives at risk, or lives lost. (Many years ago I sold fancy cameras at Harrods. As one of the world’s showcase locations, we typically got the very first copies off the production lines. Defects were common. And film cameras were really simple things.) That means you must partner with an existing medical product manufacturer, such as GE.

    But you’ll have a hard time at GE because they’ve already got a stable of wanna bes ahead of you. They won’t let you in.

    This is aside from the fact that not a week goes by that the New York Times does not publish news of the latest & greatest medical gadgets or breakthroughs. Eager readers must have concluded that all serious human ailments were cured long ago.

    The reality is more sobering. Most “breakthroughs” turn out to be dead ends. Interferon was the big thing 20 years ago. What happened? It fizzled. Now I hear the Human Genome Project won’t give the answer to Life, the Universe & Everything after all. I’m not surprised. Cold fusion failed. Superconductivity fizzled. I stopped reading NYT’s Science pages some years ago. I don’t think I’ve missed anything.

    What frustrates & saddens me all the more is that American medicine is so clearly maladroit. I won’t let the average doctor near me, with their useless tests & dangerous drugs & procedures. Up to 300 years ago, no serious doctor diagnosed without reference to a decumbiture chart. In modern times, the combination of decumbiture & natal charts (and, yes, I’m talking astrology) is a comprehensive & very nearly foolproof solution.

    H.L. Cornell (1872-1938), who practiced medicine in the US & India, wrote,

    “In my years of practice as a physician, I have, by the use of Astrology, been able to very quickly locate the seat of the disease, the cause of the trouble, the time when the patient began to feel uncomfortable, as based on the birth data of the patient, and this without even touching or examining the patient, and my intense desire to get this knowledge and wisdom before students and Healers in a classified form, is the reason for this Encyclopaedia . . . When once you have discovered the cause of the disease, and understand its philosophy and the relation of the patient to the great Scheme of Nature, the matter of treatment I leave to you, and according to the System and Methods you may be using.” (Encyclopaedia of Medical Astrology, page 502)

    Strip the useless tests from medicine & you will eliminate huge expenses. Using simple astrology, yes, that is possible. Precisely as Dr. Cornell stated, so long ago. Once you know what is wrong, once you have a diagnosis, and, more importantly, know WHY, cure becomes a simple matter.

    So far as what the old folks knew, know that no modern doctor has ever faced plagues that rendered perfectly healthy adults dead in twelve hours or less. No modern doctor would have any idea how to diagnose, much less treat, diseases that move at that kind of terrifying speed. You will find accounts of those who did in Richard Saunders’ Astrological Judgement & Practice of Physick, from 1677. This book was in Benjamin Franklin’s library. It’s where he got his “Poor Richard”. (Despite what Wiki says.)

    I recently reset & published Joseph Blagrave’s Astrological Practice of Physick (1671). The methods he advocates have no modern equivalents whatsoever. To even mention that he was able to externalize disease & treat it remotely is to heap ridicule upon oneself, from those who have studied nothing.

    I admit that American medicine is good for a few things, but without a proper astrological grounding, it is otherwise far too dangerous to contemplate. To say nothing of the wasted expense. American medicine is expensive because it fails. Shouldn’t that be blindingly obvious by now?

    I leave you with this thought: The next time you are in pain & reach for a pain pill (aspirin, Tylenol, whatever), instead of swallowing the pill, wash & dry your hands & then tape the pill to the center of your left palm. Pill in direct contact with the skin. If you’re still in pain after five minutes, swallow it. If you’re not, you’ve learned something.

  6. Conor

    Sooooo depressing. Of course, this kind of naughtiness isn’t new as readers of this blog surely know.

    Remember Lee Iacocca, developer of the Ford Mustang, hero of Chrystler – he also had a big hand in suppressing air bag in automobiles for basically the same reasons as outlined here. It’s enough to make one slightly cynical.

    Take a look at this little gem:

    54. On April 27, 1971 President Richard M. Nixon met with Henry Ford II, Lee Iacocca (who at that time was an executive with FORD), and White House chief aide John Ehrlichman in the Oval Office at the White House. During that meeting, Mr. Iacocca told the president, A. . . safety has really killed all of our business [**14] . . .” [National Archives tr. Nov. 10, 1982 at page 16.] Mr. Iacocca and Mr. Ford asked the president to impede the implementation of the proposed regulations, and the president agreed.

    http://www.lexisnexis.com/documents/pdf/20090302105405_large.doc

    Or here:
    http://webcache.googleusercontent.com/search?q=cache:_-IYnv-qxB8J:www.lexisnexis.com/documents/pdf/20090302105405_large.doc+lee+iacocca+suppression+air+bags&cd=5&hl=en&ct=clnk&gl=us

    1. Paul Repstock

      Nothing will ever change so long as we abdicate our responsibilities to others, hoping that as ‘elected’ representatives, they will guard our best interests..:(
      It is amazing how often the interests of the common people and the interests ‘of the nation’, are in conflict.

      Check out “Tucker”, a movie, a book, and a crime!
      One of many crimes in the automotive industry.

  7. Paul Repstock

    The medical devices are only one front in their war against our liberties and welfare. I particularly like the Paine quote.

    CODEX ALIMENTARIUS: The Elephant in the Room that They Don’t Want …
    By Barbara Peterson
    Codex is a subsidiary body of the Food and Agriculture Organization (FAO) of the United Nations and the World Health Organization (WHO). Codex develops international food safety and quality standards, such as standards concerning the …

    “We are fast approaching the stage of the ultimate inversion: the stage where the government is free to do anything it pleases, while the citizens may act only by permission; which is the stage of the darkest periods of human history, the stage of rule by brute force.” – Ayn Rand
    “One can bail out the banks by printing money, but one can’t bail out a stupid nation by printing diplomas.”
    “Government ought to be as much open to improvement as anything which appertains to man, instead of which it has been monopolized from age to age, by the most ignorant and vicious of the human race. Need we any other proof of their wretched management, than the excess of debts and taxes with which every nation groans, and the quarrels into which they have precipitated the world?”
    – Thomas Paine
    (1737-1809)

    http://survivingthemiddleclasscrash.wordpress.com/2010/07/07/codex-alimentarius-the-elephant-in-the-room-that-they-dont-want-you-to-see/

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