GPOs to Blame for Drug Shortages, Says Physicians Group

Roxanne Nelson

January 24, 2013

UPDATED February 6, 2013 — Editor's note: Information has been added to clarify sources and potential conflicts of interest.

Over the past few years, there have been unprecedented shortages of a large number of essential drugs, including chemotherapeutic agents. Although a number of reasons have been cited, including the limited number of manufacturers, increased worldwide demand, shortages of raw materials, and production problems, none of these really address the root cause.

According to Physicians Against Drug Shortages, the blame can be laid firmly at the feet of group purchasing organizations (GPOs). The real reason for the current situation is that there is no free market for drugs, medical devices, or healthcare supplies in the United States.

This accusation is apparently being taken seriously; 6 senior Congressman are calling on the Government Accountability Office to investigate the role of GPOs in drug shortages and the recent meningitis outbreak related to compounding pharmacies.

However, a representative of the Healthcare Supply Chain Association (HSCA), the trade organization for the GPOs, told Medscape Medical News that the GPOs are not to blame for the current drug shortages, and strongly objects to the allegation.

Various other reasons for drug shortages have been previously reported; however, despite intervention by President Barack Obama, the shortages are continuing, even increasing. A survey of community oncologists conducted in November 2012 found that virtually all of the 525 responding physicians had experienced a shortage of a cancer drug in the previous year.

"These shortages are simply unacceptable in our free-market economy," said Phillip L. Zweig, MBA, executive director of Physicians Against Drug Shortages. Zweig previously worked as communications director for Retractable Technologies (the maker of safety needles) and as a consultant for Masimo (the leading maker of pulse oximeters). He explained that he has had no financial ties to the medical-device industry for nearly 5 years, and has been working entirely on a pro bono basis to uncover the underlying causes of the drug shortage; related expenses come out of his own pocket.

Zweig told Medscape Medical News that he "cannot think of any other instance since the World War II era when there has been a chronic shortage of anything in the United States," other than shortages related to acute events, such as natural disasters and the gasoline shortages caused by the 1973 Arab oil embargo.

The legislation addressing drug shortages enacted last year is not going to fix the problem, he noted, because it is focused on the symptoms, not the causes. "It accepts the notion that the shortages are caused by different factors, but it doesn't address the root cause. All we want to do is restore competition and get the problem fixed," he explained.

The recent deadly outbreak of meningitis is a direct result of this crisis, Zweig alleges. The multistate outbreak of fungal meningitis and other infections among patients was caused by contaminated steroid injections, which were sold by the unregulated New England Compounding Center. Because methylprednisolone, a steroid used in epidural injections for back pain, was in short supply, physicians and hospitals were forced to turn to compounding pharmacies, which are meant to operate on a limited basis and provide patients with products that are tailored to individual needs. As a result of this increasing demand, many compounding pharmacies were producing a far larger quantity of products than the US Food and Drug Administration (FDA) guidelines permit.

"Ameridose, a sister company that has also been shut down because of quality problems, had contracts with at least 3 of the largest GPOs," Zweig said.

However, the HSCA denies these allegations. "Any attempt to link GPOs to drug shortages is simply not credible," said Curtis Rooney, president of HSCA, in a statement sent to Medscape Medical News. "The true cause of drug shortages is manufacturing problems, disruptions, and barriers to entry in getting new suppliers on line when there is a disruption in supply. The fact is that GPOs are taking a variety of creative and innovative steps to reduce drug shortages."

Owning the Business

GPOs were created to leverage the collective buying power of their members, which include most of the nation's hospitals and a growing number of nonacute-care facilities. Mr. Rooney points out that all GPO contracts are voluntary and a product of competitive market negotiations between sophisticated parties. "All hospitals can purchase off contract and often do. Contracts can be and are cancelled, and pricing regularly adjusted," he said. "Manufacturers regularly and quickly adjust pricing of GPO contracts when they experience shocks to production."

Hospital use GPOs to aggregate their purchasing power, and do not manufacture, compound, sell, or take title to these drugs or any drugs in shortage, according to Mr. Rooney. "Our industry has every incentive to ensure that patients get the medications they need when they need them. GPOs work vigorously with hospitals, manufacturers and distributors to help maintain a safe and reliable supply of products for healthcare providers."

However, Zweig contends that they do precisely the opposite.

GPOs currently negotiate contracts for an estimated $250 billion+ in goods every year for more than 5000 hospitals and other healthcare facilities, according to Zweig. This includes not only generic drugs, but also medical devices and basic supplies, like syringes and gauze pads.

Six GPOs control about 90% of the products purchased by hospitals through such organizations, and 2 of them account for approximately two thirds of the products under contract.

"GPOs are a major, if not the primary, contributor to the market distortions in the healthcare industry in the United States," said S. Prakash Sethi, PhD, from Baruch College, The City University of New York, in a statement. "Through exclusive contracting, which has given GPOs effective monopolistic control of this industry, they have contributed to product shortages and disincentives for legitimate producers to manufacture and stock essential drugs."

Kickbacks and Safe Harbor

Current law allows contracts to include fees that drug manufacturers pay to sell their products to hospitals. These fees are based on a percentage of the total value of the purchase; how much the GPOs actually charge is not transparent, according to Zweig.

The HSCA denies this is the case. In a recent statement, Rooney said that "the group purchasing industry is the most transparent sector in healthcare, and we have a longstanding commitment to promoting openness, accountability, and the highest ethical standards in business practices."

According to government documents, Congress passed legislation in 1986 that provided a statutory safe harbor for GPOs under the Anti-Kickback Statute (42 U.S.C. 1320a-7b). This safe harbor permits GPOs to receive fees from manufacturers without violating antitrust and antikickback laws. Suppliers pay the GPO and, in return, contracts give their products exclusive access to GPO-member hospitals, Zweig explained. This practice has dramatically reduced the number of suppliers of vital generic drugs and discouraged potential competitors from entering the marketplace, he noted.

Under the GPOs, the "money moves from vendor to hospitals, from preferred wholesaler to vendor.... It needs to be exposed just how this money flows around in this system," said Joel B. Zivot, MD, medical director of the cardiothoracic intensive care unit at Emory University Hospital in Atlanta, Georgia.

The fundamental problem is that there are not enough buyers and sellers, so the price is not a real price set by the market, but one that is artificially maintained, Dr. Zivot told Medscape Medical News. "There is not enough money for some manufacturers to stay in the generic drug business, or to enter into it," he explained.

Convoluted Economics

A shortage of the injectable analgesic fentanyl prompted Dr. Zivot's interest in drug shortages. He admits to being shocked that this sort of thing is happening in the United States. "Drug shortages are just not acceptable," he told Medscape Medical News.

The convoluted economics involved in generic drug production and distribution prompted him and other physicians to form Physicians Against Drug Shortages, which is currently comprised of 7 physicians. According to the FDA, injectable fentanyl is still in short supply, as are dozens of other essential drugs.

Another product in short supply is the intravenously administered hypnotic agent propofol, which is often used in the induction and maintenance of general anesthesia. Three years ago, propofol was manufactured by 3 companies, but Teva, the largest supplier, has stopped making it, explained Dr. Zivot. "The number of vendors gets whittled away, and what you are left with is 1 vendor who sells to a preferred buyer. In a healthy market, there are many buyers and many sellers."

Zweig pointed out that some of the shortages are not drugs at all, but basic solutions for intravenous therapy, such as sodium bicarbonate injection and sodium chloride 0.9%. "How can hospitals run short of simple intravenous saline solution, which is nothing more than water and salt?" he asked.

Congressional Action

The issue has prompted Congressional action. In a letter sent November 2012, Ed Markey (D-Massachusetts), Henry Waxman (D-California), John Dingell (D-Michigan), Frank Pallone (D-New Jersey), Diana DeGette (D-Colorado), and Anna Eshoo (D-California) asked the Government Accountability Office to investigate whether contracting practices by GPOs are a driving cause of drug shortages.

Their letter asks the following questions: What market factors contribute to the reliance of hospitals and other healthcare providers on compounding pharmacies?; What impact have the contracting practices of market participants, such as manufacturers, distributors, GPOs, and providers, had on competition, innovation, and access to medical devices and drugs?; Do drug shortages drive hospitals and other healthcare providers to rely more heavily on compounding pharmacies?; What impact have GPO administrative fees had on the financial condition of generic drug makers, their ability to maintain and upgrade plant equipment, and their ability to conduct quality control?

GPOs have been investigated before. Since 2002, there have been 4 Senate Antitrust Subcommittee hearings, federal and state investigations, media exposés, antitrust lawsuits, and academic studies. A 2012 report from the Congressional Committee on Oversight and Government Reform, which reviewed the FDA's contribution to the drug shortage crisis, reports that both the Medicare Modernization Act and GPO contracting have led to an increased market concentration in the generic injectable industry because fewer companies are producing individual generic medications. GPOs have also contributed to inflexible prices in the market for generic injectable drugs, and inflexible pricing can lead to shortages by effectively "distorting market signals that incentivize suppliers to produce more of certain drugs and less of others," the report notes.

In addition, producers of generic drugs that do not acquire GPO contracts for specific items have little incentive to manufacture those products. This can become problematic if there are only 1 or 2 manufacturers and production difficulties occur, according to the report.

In a statement, Rep. Markey said that "as Congress fully investigates all the causes of the tragic meningitis outbreak in an effort to protect patients in the future, we need to look at the role GPOs play in the occurrence of drug shortages that could lead to increased reliance on compounding pharmacies.... Increased hospital reliance on compounded drugs should be a result of increased need, not unfair pricing. The investigation we are requesting will shed light on any possible linkages between drug shortages and reliance on compounding pharmacies, and help address gaps in our oversight of this industry."

Nothing has changed as a result of past hearings because of the political clout of the GPOs, Zweig contends.

"What we want is for the safe harbor clause to be repealed for the GPOs," said Dr. Zivot. "They can be part of the drug distribution industry, but they should not have this kind of power. We want a normal market. When it is cracked open, other manufacturers will enter and drug shortages will stop."