Danziger: Cut Kickbacks to Hospital Group Purchasing Organizations, Not Medicare and Medicaid

Many lawyers have a screenplay that was inspired by a real case squirreled away in their bottom drawer. Often, it’s a case that reminds them of the idealism that drove them to study law in the first place: to seek justice for the powerless and downtrodden. Few of these scripts are ever read by a filmmaker, much less make it to the big screen.

Luckily, mine did. “Puncture,” starring Chris Evans of “Captain America” fame, opened Sept. 23 in limited release. But while I’m obviously delighted, I wish I could say that “Puncture” was entirely fictional. Tragically, however, it’s based on a true story involving a Houston emergency room nurse who contracted HIV/AIDS through an accidental needlestick injury and hospital purchasing cartels that control which products can be used in hospitals.

I wrote the original screenplay because the more I learned about the case, the angrier I got. With President Barack Obama proposing $320 billion in cuts to Medicare and Medicaid over the next 10 years, I believe every American should share my outrage.

Delving into the case, my partner, Mike Weiss, (played by Evans) and I found that an engineer had developed a safety syringe that could have prevented the injury if her hospital had been able to buy it. Nurses and doctors were clamoring for this revolutionary device, and we couldn’t understand why hospitals didn’t buy it.

Digging deeper, we discovered why: Giant hospital group purchasing organizations, which today contract for more than $100 billion a year in medical supplies, devices and drugs for about 5,000 American hospitals, block the sale to these hospitals of countless innovative, lifesaving products that threaten the business of their big supplier partners. These products include safer syringes, pacemakers, surgical towels, even cancer drugs — you name it. In this anti-competitive, pay-to-play scheme, the dominant medical suppliers pay kickbacks to the GPOs to make sure that their products have exclusive access to these facilities.

Incredibly, Congress created this monster in 1987, when it approved the Medicare anti-kickback “safe harbor” exemption. Enacted ostensibly to give small hospitals more clout with suppliers, this provision exempted the GPOs from criminal penalties for accepting vendor kickbacks. Before long, the safe harbor became a pirate cove.

I didn’t have to attend law school to know that paying or receiving kickbacks could land you in jail. That’s true for virtually every industry in America — except the GPO industry.

Although the GPOs claim to obtain volume discounts, a decade of evidence indicates exactly the opposite. This evidence includes testimony from four Senate subcommittee hearings, federal and state investigations, academic studies and numerous antitrust lawsuits and media exposes. A 2010 study by Navigant Economics (full disclosure: funded by a trade group that’s been fighting this system for years) found these kickbacks inflate health care costs by up to $37.5 billion a year, including $17.3 billion in government outlays. That’s more than half of what the president proposes to cut from Medicare and Medicaid every year.

Because the GPOs are paid by vendors, not their member hospitals, they have no incentive to get the best prices for hospitals. Vendor payments — euphemistically called “administrative fees” — are based on a percentage of sales, so the higher the price of a product, the more money a GPO makes. No one seems to know where the billions in kickbacks are going.

Few hospital executives object because they simply pass on the higher costs to taxpayers, who pay 46 cents of every health care dollar. What’s more, their facilities typically receive fat rebate checks from suppliers.

None of this takes into account the incalculable cost of medical errors, lawsuits and suffering by patients and health care workers who are denied access to the best products, or the dampening effect on medical innovation.

Like the ER nurse in “Puncture,” health care workers still suffer an estimated 800,000 potentially deadly needlesticks every year. This happens despite the Needlestick Safety and Prevention Act of 2000, which requires the use of “safety-engineered” devices whenever available. Worldwide, the toll from needlesticks and needle reuse is staggering: One respected study indicated that about 1.3 million deaths, 23 million new hepatitis infections and 260,000 HIV infections occur annually.

Despite the human and financial cost of these abuses, virtually nothing has changed because of the GPO lobby’s immense financial clout.

Whatever the original rationale for this perverse arrangement, there’s no longer any place for it in our broken economy and health care system. The president and Congress can restore integrity and competition to the health care supply industry by repealing the anti-kickback “safe harbor.”

It’s time for them to find the courage to do that — without further prodding from Captain America.

Paul Danziger is a partner with the Houston law firm of Danziger & De Llano and has a story credit on “Puncture.”