How to stop generic drug shortages: end hospital group purchasing kickbacks by Phillip L. Zweig @FortuneMagazine January 30, 2015, 3:14 PM EDT E-mail Tweet Facebook Google Plus Linkedin Share icons For millions of patients suffering from unprecedented shortages and skyrocketing prices of vital generic drugs, President Obama’s State of the Union address last week was a huge letdown. In laying out his agenda, he neglected to mention this ongoing public health emergency, which in recent years has claimed countless lives worldwide. Even more disturbing, the Obama administration and Congress are well aware that they could end this travesty with a pen stroke. That hasn’t happened because political courage is even scarcer in Washington than affordable generic drugs. To stop the shortages, they would have to take on a powerful industry: giant hospital group purchasing organizations (GPOs), which control the purchasing of upwards of $300 billion in drugs, devices and supplies for some 5,000 hospitals. The anticompetitive contracting and pricing practices, self-dealing, kickbacks and other abuses of these cartels — which have been exhaustively documented in Senate hearings, federal and state investigations, lawsuits and media reports – have broken this marketplace. Five companies — MedAssets, Novation, Premier, HealthTrust and Amerinet — account for roughly 90% of contract volume. This system is protected by a well-heeled cabal that includes the Healthcare Supply Chain Association, the GPO trade group; the American Hospital Association; and even the Service Employees International Union. And no member of Congress has done more on their behalf to block reform than Sen. Charles Schumer (D-NY), who has received substantial campaign contributions for his services. This is a “pay-to-play” scheme in which drug makers and other suppliers pay outrageous fees to GPOs in return for exclusive access to their member hospitals. Consequently, there are now only one or two viable U.S. makers — in some instances none at all — of many of the 300+ essential anesthetics, antibiotics, chemotherapies, nutritional IV solutions other generics in short supply. Last year, this crisis reached a new level of absurdity: the United States is now importing sterile saline solution (a.k.a salt water) from Spain and Norway. GPOs have turned the once-robust U.S. generic drug marketplace — indeed, the entire healthcare supply chain — into a vestige of the disgraced Soviet economic system. In fact, our shortages have had a global domino effect, in part because the Food and Drug Administration has authorized “temporary” overseas imports. Because GPOs award exclusive contracts on a drug-by-drug basis, manufacturers that don’t win a contract for a drug often halt production of it entirely. Meanwhile, GPO fees — which have sometimes exceeded half of a company’s total revenue for a single drug — have forced contract holders to skimp on outlays for quality control, maintenance, and new equipment. The result: shutdowns of production lines and even entire plants. GPOs have transformed a low-margin business into a money-loser for manufacturers, while creating a gravy train for themselves.How could this happen in a market economy? GPOs were originally created in 1910 to save hospitals money by buying in bulk. For about 80 years, they did just that. Then in the mid-1980s, hospital lobbyists sold Congress on the notion that hospitals could save more if vendors, rather than hospitals, covered administrative expenses. So in 1987, Congress enacted the Medicare anti-kickback “safe harbor,” which exempted them from criminal penalties for taking kickbacks from suppliers. Because GPO fees are calculated as a percentage of sales volume, higher prices mean more revenue for GPOs. Consequently, GPOs actually inflate supply costs by an estimated 30% or more. Hospital chiefs generally support this arrangement because the GPOs reward them with so-called “patronage fees” for ensuring contract compliance.The GPO cabal even succeeded in shutting down a Government Accountability Office investigation, requested in November 2012 by six senior House members, into their role in causing the shortages and the deadly 2012 fungal meningitis outbreak. A separate February 2014 GAO drug shortage study, which was mandated by federal legislation, cited GPOs as a “potential underlying cause” and provided still more evidence of their complicity. Yet on November 24, 2014 the GAO released a report that had absolutely nothing to do with drug shortages. So much for the GAO’s much vaunted reputation as the “independent, non-partisan” government watchdog. Memo to President Obama: To restore access to affordable, lifesaving generic drugs, you must immediately send Congress a bill to repeal the anti-kickback safe harbor, which would jump start competition and revive this moribund marketplace. Phillip L. Zweig is executive director of Physicians Against Drug Shortages (PADS). Robert A. Campbell, MD, is Chairman of PADS and president of the Pennsylvania Society of Anesthesiologists.