The following is an excerpt from my book Monopolized: Life in the Age of Corporate Power. I wrote it before the coronavirus hit, but one chapter had an astounding relevance to what we’re going through right now. In particular, it shows how monopolies make vital supply lines for necessary medical equipment more vulnerable to sudden shocks. This wasn’t a new phenomenon generated in the crisis, but a long-standing issue caused by consolidation and monopoly middlemen, as this excerpt details.
It didn’t even register with Ben Boyer at first. Usually the nurse practitioner would set up an intravenous infusion for his wife, Xenia, start the cancer medication flowing, and walk away, leaving her sitting in the chair. But he wasn’t leaving this time. “It took me a minute to go, ‘What are you doing?’” Ben told me. “He was matter-of-fact about it; he said, ‘It’s the damnedest thing, we don’t have any IV bags because there’s a shortage.’”
The place Ben and Xenia heard this news, the Moores Cancer Center at UC San Diego Health in picturesque La Jolla, is one of the best treatment facilities in the United States. There were big-screen TVs everywhere, comfortable Barcalounger chairs, giant banks of glass windows offering a waterfront view, clean and gleaming equipment. It was the day after Christmas 2017, not a busy day on the floor. A skeleton crew tended to patients. Despite all that, Ben and Xenia were being told there weren’t enough IV bags to go around.
Ben wasn’t thinking too deeply about the situation, because he didn’t say anything as the nurse practitioner took a syringe and hooked it up to a bag full of medication. It looked like he was going to approximate the function of a slow infusion manually.
“We were doing small talk. I had just seen The Last Jedi,” Ben said. “And then I said, ‘Wait, why don’t you have any IV bags?’” That’s when the nurse told him that all the IV bags for the hospital come from Puerto Rico. And because of Hurricane Maria, which had struck a few months before, there was a critical shortage.
An IV bag is simply a durable plastic shell filled with saline solution. It’s used in countless procedures, from administering antibiotics to providing dehydrated patients with fluids. From the room in the hospital, Ben could look down the cliffs of La Jolla to the Pacific Ocean. He could see salt water all around him, except where he needed it. The surface of the earth is roughly three-quarters salt water, and yet there’s a shortage of salt and water in a bag? Water, water, everywhere, but not a drop for a drip?
Ben watched in mild shock as the nurse squeezed the bladder of the bag and slowly guided the medicine through the syringe, which was attached through tubing to Xenia’s arm. This is known as an IV push. Every five seconds, the nurse had to carefully depress the plunger, with machine-like precision, to dispense the proper amount of drug. It took about thirty minutes, with the nurse standing the whole time.
“I thought, ‘This is insane, this is crazy, this is wild,’” Ben recalled. And the association with Puerto Rico made it doubly surreal. Ben’s father was a health care professional in the navy who was stationed in Puerto Rico; Ben had spent years on the island growing up, and his sister had been born there. But though both parents worked in health care—his mom was a nurse—Ben didn’t understand Puerto Rico’s centrality to the U.S. health care system. It’s been a haven for pharmaceutical manufacturing for decades, and Baxter International, which produces about half of the nation’s IV solution, uses two facilities on the island for this purpose. Both of them were crippled during Hurricane Maria, leaving hospitals scrambling for months.
It was a classic consequence of concentration: supply chain disruptions magnify when one company makes too great a share of the product. But the even dirtier secret, the one that confuses this simple explanation, is that IV solution has been on the Food and Drug Administration’s shortage list since 2013—four years before the hurricane knocked out Baxter’s facilities in Puerto Rico. The Justice Department had already been investigating the matter. Once again—and I can’t stress this enough—we’re talking about salt, water, and a bag.
Stalwart capitalists snicker that shortages occur only in centrally planned communist countries. But here we have private-sector companies unable to match demand, with grave potential implications for public health. How did this happen? The complex, multifaceted answer can be found by trekking through the forest of monopolies that constitute America’s health care system, not only among clinics and facilities, but everything required to deliver care. Competition has died, leading to absurd pricing, lower wages for medical workers, and substandard results.
We have a depressingly narrow debate about health care in America. Left behind by a developed world that guarantees coverage for every citizen, liberals fight about the benefits of single-payer or a tightly regulated private insurance market, while burn-it-down conservatives signal through their actions that access to medicine is a mere privilege for whoever can afford it. But we mostly remain silent about what matters in health care beyond whether the insurer is public or private. Our monopolized system is the chief reason why we pay more than anywhere in the world, with worse outcomes to boot. Our monopolized system has made GoFundMe pages one of the major insurance providers in America. Our monopolized system has turned errors at the hospital into the nation’s third-leading cause of death. And our monopolized system was responsible for Ben Boyer shaking his head in disbelief as his wife was treated for cancer with a process last in widespread use around World War II. “That’s the eye-opening thing,” Ben said. “This is all being held together with fragile, gossamer-thin strands of business dealings.”
CDC/Unsplash
THE EXECUTIVE DIRECTOR of Physicians Against Drug Shortages is not a medical doctor. Phil Zweig still calls himself a journalist, after decades of investigative reporting for American Banker, the Wall Street Journal, and Businessweek. He broke the story in the early 1980s about Penn Square Bank, a small firm based out of a shopping center in Oklahoma City that made $2.5 billion in reckless loans to fraudulent oilmen at the peak of a production boom, passing the risk around to multiple banks. When it all went bust, Penn Square took the hit; regulators forced it to close in 1982. But its counterparties felt the pain too, including Continental Illinois, at the time the seventh-largest bank in America. The government had to step in and save Continental in 1984 with a $4.5 billion federal bailout, the largest in history to that point, which inspired Connecticut congressman Stewart McKinney to quip in a hearing that the government created a new class of financial institutions that were “too big to fail.”
Zweig wrote a book about Penn Square in 1985, and he kept in touch with his contacts in Oklahoma City. One day in the late 1990s he met a former U.S. attorney for breakfast who had worked on the criminal case against Penn Square. “We were chatting about what he was up to and whether he had any cases,” Zweig told me. “He starts telling me about this Texas company, Retractable Technologies.”
Retractable was the brainchild of Thomas Shaw, an engineer from Little Elm, Texas, who in the late 1980s saw a news report about the surging incidence of HIV and hepatitis C infections among health care workers. They called the problem “needle stick”: health care workers would accidentally prick themselves with used needles. Over 380,000 medical professionals experienced needle stick every year. Shaw was a mechanical engineer, and he saw it as a design challenge. “I had a couple friends I knew from childhood, they had contracted AIDS,” Shaw said to me. “I knew I couldn’t fix the biology side of it, but I could fix my part.”
Shaw went to the nearest drugstore and bought a handful of syringes, spending years pulling them apart and testing different options until hitting upon a solution. Shaw’s syringe, which he called VanishPoint, operated like a ballpoint pen. After the needle had been stuck into the patient, a ring would snap and retract the needle, allowing workers to safely pull it out. Shaw thought his invention had eliminated needle stick forever. Then he tried to sell it.
It turned out that one company, Becton Dickinson, sold the majority of all syringes in America. Moreover, it had practically locked in this dominance with hospitals through something called group purchasing organizations, or GPOs. Established in 1910 as co-op buying groups, these organizations sprang from the same impulse as hospitals merging to gain leverage over insurance companies. A similar dynamic could take hold with medical suppliers: a big hospital coalition could bargain down prices by securing volume discounts.
Hospitals outsourced supplier negotiations to GPO firms that specialized in the process. But the deals all had a curious clause: the vendors would pay the GPO’s administrative costs as long as hospitals bought entirely from a narrow group of vendors. Many contracts included a “90-10” or “95-5” requirement. To use the syringe example, if a hospital purchased 1,000 syringes from Becton Dickinson in one year, it would have to buy at least 900 or 950 the next year. If not, it would lose the administrative discount and pay a penalty. The effect was to entrench the dominant supplier.
If you have a locked-in supplier, prices are likely to rise. A metal screw used in spinal surgery that costs $1 on eBay goes for as high as $800 in a GPO arrangement. And the GPO companies shared in this windfall, as they were paid by the suppliers. “If you’re a major GPO facility, you get a check at the end of the year, a partial refund of the deliberate overcharge,” Zweig said. The fees were typically a percentage of the product cost. So if that price ran higher, GPOs would get more in kickbacks; this created incentives toward inflation. Indeed, when economists ran tests on this, they found that supplies sold in a competitive market were between 10 and 15 percent cheaper than those sold through GPOs. Of course, many of these overpayments get kicked on from hospitals to patients.
You might ask why hospitals wouldn’t use their clout to get fairer contract terms; the answer is that they also have a hand in the till. Checks go out to hospitals or sometimes the top administrator. Zweig would eventually find a contract between a GPO and a hospital describing these as “patronage dividend” payments. A now-defunct industry trade publication called Healthcare Matters bluntly stated in 2013 that it was “common knowledge” that GPOs gave “share-backs” to member hospitals, including hospital executives, who have “learned to rely on that share back as an integral part of their annual compensation.” As Zweig explained, “The CEOs are the glue that keeps it together.” So hospitals don’t end up with cheaper supplies, as intended, but executives and middleman GPO companies are well fed. And entrepreneurs like Retractable’s Thomas Shaw, who built a better syringe, couldn’t get their products to market.
Shaw was unsuccessfully trying to get the Justice Department’s antitrust division interested in investigating these contractual blockades. Zweig decided to write a story about it for Businessweek called “Locked Out of the Hospital.” Zweig caught up with Shaw a short time later, to see if his story helped. Shaw told him not much had changed, and offered him a chance to take a break from journalism and become Retractable’s communications director. Zweig took it, staying in the position for several years.
Nothing really worked for Retractable. It got a $650,000 grant from the National Institutes of Health, lobbied Congress to pass the Needlestick Safety and Prevention Act, which required hospitals to reduce reliance on unsafe syringes, and successfully sued Becton Dickinson twice for anticompetitive behavior, winning $440 million in settlements and jury awards. Someone even made a movie about Retractable’s struggles called Puncture (Zweig consulted on the movie). But Retractable got no further than saving itself from bankruptcy. It still couldn’t penetrate the market, dwarfed by Becton Dickinson, which controls nearly two-thirds of all sales. In 2000, the Centers for Disease Control estimated 380,000 needle sticks at hospitals every year. Today, they estimate 385,000. “We went out to the market thinking we’ve done the technical part, and now we can make good on government’s interest in making tech available,” Shaw said. “I sit here today with zero hope that we will go into hospitals. Lower price and better technology doesn’t matter.”
The main consequence of the Retractable saga was to activate Phil Zweig. He agitated against GPOs, even forcing a series of congressional hearings in the early 2000s, which concluded that while GPOs were originally intended to save hospitals money, in practice they were doing the opposite. Zweig decided that the problem lay with a safe-harbor provision passed in 1986, making kickbacks between medical suppliers and GPO companies legal. Before then, hospitals paid the GPOs; afterward the funding came from the suppliers. Intended to save hospitals money, the safe harbor completely transformed incentives around purchase prices; in Zweig’s estimation, it inflated costs by hundreds of billions of dollars.
Tim Roske/AP Photo
At a June 1999 news conference in Albany, New York, registered nurse Karen Ballard, left, and New York Assemblyman Richard Gottfried watched a demonstration of a syringe with a spring-loaded retractable needle designed to prevent needle stick injuries.
While the fee to the GPOs was statutorily limited to 3 percent, Zweig found a bio from a major GPO executive with Novation, now known as Vizient, claiming that the company made $95 million a year on $1.3 billion in sales, which comes out to 7.3 percent. Often these additional charges take the form of “marketing” or “advance” payments, so GPOs could maintain the fiction of staying below that 3 percent number. The excess fees expose the GPO strategy of sticking up suppliers for access to exclusive buying groups. Zweig pulled one report from 1998 showing that Ben Venue Laboratories paid an amount equivalent to 56.25 percent of its overall sales of diltiazem, a blood pressure drug, to access the contract of major GPO Novation. “The more a vendor pays for a contract, the more market share it gets,” he said.
This all grew worse in 1996, when the Justice Department and the Federal Trade Commission gave GPOs an effective antitrust exemption except in “extraordinary circumstances.” This was also supposed to assist hospitals by increasing the size of the buying groups, but it only led to mass consolidation. Today, four companies—Vizient, Premier, Healthtrust, and Intalere—control the overwhelming majority of GPO purchasing, about $300 billion for five thousand different health systems. According to a 2018 report, 98 percent of all hospitals use a GPO, and the Big Four account for 90 percent of the market.
Zweig helped draft legislation to repeal the safe harbor, but the hospitals and GPOs teamed up to sink it—remember, hospitals were in on the kickback game as well. Then, during the Obama administration, Zweig noticed a story about an executive order instructing the Food and Drug Administration to prevent record drug shortages. Hundreds of drugs, mostly old, low-profit, generic medications like injectables that hospitals used routinely, were simply unavailable, causing hospitals and patients to scramble. The unavailable drugs treated bacterial infections, childhood leukemia, and numerous types of cancer; lack of access endangered the lives of countless patients. Even those with curable diseases had been forced into less effective alternative treatments, with uncertain results. (Obama’s attention to drug shortages did reduce them for a time, but as of 2019 shortages sat near the peak before the executive order.)
Buried inside the article was a line that made Zweig’s hair stand up: “Just five large hospital buying groups purchase nearly 90 percent of the needed medicines, and only seven companies manufacture the vast majority of supply.” That was a reference to GPOs. (Since that 2011 story, the five GPO giants have shrunk to four.) “It took me five minutes to see the same anti-competitive contracting practices, the exorbitant pay-to-play fees, were creating the shortage,” Zweig said.
Economists had come up with all sorts of conflicting explanations, but Zweig thought it was simple: if the GPOs were the only way to get drugs into the hospitals, then generic drug manufacturers would just shut down if they didn’t win a sole-source contract from one of the Big Four. Because the margins were so low, manufacturers had consolidated to win through volume. Lack of competition can lead to shortages amid the slightest disruption. A Government Accountability Office report from 2014 backs this up; it maintained that quality problems and temporary manufacturing facility closures primarily caused drug shortages, but it added that the “operating structure of GPOs results in fewer manufacturers producing generic drugs and this, in turn, contributes to a more fragile supply chain for these drugs.” The study did note that GPO executives disagreed with this assessment, as you’d expect.
Zweig started a Google alert for “drug shortages,” and stories started rolling in from around the world; the problem was not limited to the United States. He attended a panel about drug shortages at a meeting of the American Society of Anesthesiologists. Officials from the FDA again meandered when discussing the causes, claiming that no single factor was responsible. “I was sitting next to this doctor. He jumps up and says, ‘You’re giving us nothing but BS,’” Zweig said. “He talks about the role of the GPOs. The woman from the FDA says, ‘Well, economics may have something to do with it.’”
The doctor was named Joel Zivot, and in 2012 he and Zweig formed Physicians Against Drug Shortages, which is focused primarily on GPOs. It’s a small organization that Zweig helps fund out of his own pocket. And while focusing on the known problem of drug shortages over the more obscure issue of hospitals being overcharged at least makes people take notice, it’s been an uphill battle. “We’ve gotten a lot of resistance from even medical societies, because the purchasing groups have bought them off,” Zweig said. “I’m talking literally here.”
The industry does seem to project a degree of power; for example, the leading academic expert on drug shortages, Erin Fox of the University of Utah, discloses in slide presentations that her information comes from market-leading GPO Vizient. Zweig also points to a daylong November 2018 conference in Washington on the root causes of drug shortages, put together by the Duke Margolis Center for Health Policy. This came months after the FDA revoked a no-bid $4.2 million grant to Duke Margolis, in part because its director, former FDA commissioner Mark McClellan, is also a paid board member of Johnson & Johnson, one of the world’s largest drug companies. Nevertheless, the Duke Margolis event was convened through a cooperative agreement with the FDA, and then FDA commissioner Scott Gottlieb gave a keynote address.
Speakers at the event included Blair Childs, senior vice president of public affairs for Premier, the number two GPO; David Gaugh, a former marketing executive at Vizient who now lobbies for drugmakers; and Erin Fox, who has a data relationship with Vizient. While Gottlieb had previously cited GPO middlemen as a factor in drug shortages, it didn’t really come up in his speech. “We don’t have a lot of very good answers, and we certainly don’t have easy solutions, or we would have fixed this problem a long time ago,” Gottlieb said.
This set Zweig off. He stewed as panelists repeated familiar claims about the unclear rationale for drug shortages. Finally, in a question-and-answer period, he stood up. “Listening to these folks today, one would get the sense that the shortages of these medications are among the great unsolved mysteries of the universe,” he began. “They’re not. This is a very simple matter, it’s about money.” He went on for several minutes as panelists squirmed in their seats. Finally, as there was no question coming, the moderator, Gregory Daniel of Duke Margolis, tried to cut him off. “I came down here at my own expense, I’m going to finish!” Zweig said, his voice rising. “The only solution to this problem is to restore open competitive markets … by eliminating the kickbacks, the bribes, the rebates, the payola.” Applause followed. Zweig told me that people came up to him after his remarks, thanking him.
There was one other interesting slide from the panel. It was labeled “Sources of Shortages: Natural Disasters,” punctuated by a picture of a hurricane bearing down on the Caribbean. But the text below was very telling: “IV fluid shortages which began in 2014 [emphasis mine] were worsened due to Baxter facility impact in PR [Puerto Rico].”
insung yoon/Unsplash
BAGS OF SALINE, which have been available for commercial use since 1931, typically cost around a dollar for hospitals, and they use them incessantly. Hanging an IV is typically the first action nurses take when dealing with a sick patient. Baxter, the leading producer, ships over a million units every day. That requires constant manufacturing of a low-margin product. The FDA’s drug shortage database first posted a shortage in IV saline solution in January 2014. Bags of dextrose—sugar and water—have also been in chronically short supply. The United States was actually importing saline IV bags—which, as I’ve mentioned so much that you’re mad at me, is salt and water in a bag—from Spain, Norway, and Germany. And of course the shortages were leading manufacturers to raise the price as much as five- and six-fold. “We’re not supposed to have shortages in a market economy,” said Phil Zweig.
Some chalked up the lack of saline to an increase in demand, especially around flu season (which creates lots of need to replenish fluids). But the simple fact remains that three companies—Baxter, ICU Medical, and B. Braun—make around 86 percent of the nation’s saline solution. And any problems, whether a recall or a manufacturing plant closure, can reduce the already tight supply. ICU’s saline division, at the time known as Hospira, recalled an entire lot in 2015 after finding one human hair in one bag. Other findings of particulate matter have shut down plants, and even routine maintenance disturbs supply.
Clearly, producing a medical product that will be injected into human veins must be 100 percent sterile, and made to exacting specifications. There are hundreds of regulatory checks, which manufacturers of course complain about. But there’s a bigger problem here. Each company producing saline contracts it to hospitals through a GPO. And the GPOs do not allow a second supplier to step in when a manufacturer runs into trouble. So hospitals don’t really have three sources of saline; they have one.
Indeed, as Zweig explained in the Wall Street Journal in 2018, market-leading GPO Vizient has held an “extended single source award for IV solutions” with Baxter since 2007, when the GPO was still called Novation. Any hospital using Vizient has no other opportunity to find saline if Baxter runs into a supply problem. Moreover, new suppliers of saline don’t pop up anyway, not only because of the barriers to entry but also because GPOs eat away at already thin margins. Plus, the high fees companies like Baxter pay to secure GPO contracts make it more difficult for them to invest in building new plants to make more saline.
There are also allegations of straight-up anticompetitive conduct. Months before the hurricanes in Puerto Rico, the Justice Department began investigating Baxter for antitrust violations, related to whether it colluded with other producers to artificially create saline IV supply shortages, in order to demand higher prices. A federal grand jury had been impaneled in Pennsylvania, and hospitals weren’t waiting for the outcome, suing Baxter and ICU over collusion. Separately, the Federal Trade Commission and the New York attorney general’s office were investigating whether Baxter illegally tied purchase of saline to other medical supplies, forcing hospitals to order higher-margin products like pumps and tubes in long-term contracts or risk being unable to obtain a steady supply of IV bags.
While these critical investigations were going on, Hurricane Maria struck Puerto Rico on September 20, 2017. And it certainly made a bad situation worse. All of Baxter’s small-volume IV bag production, equaling roughly half of the bags used in the United States, comes from the island. On September 22, Baxter told hospitals and customers that it had lost “multiple production days” from the storm, affecting its production of dextrose and saline. The next day it told hospitals it would have to ration release of IV solutions to conserve its supply. “We regret this disruption to your daily operations and appreciate your patience as we re-establish our supply pipeline,” Baxter wrote in a letter to customers. Months later, Baxter got clearance to import saline from Brazil and Mexico.
In a way, the hurricanes got companies like Baxter, and the GPO sellers of its products, off the hook. Now they could point to the storm as causing the shortages, instead of to a system designed to create shortages for profit. All the news headlines—CBS News, the Washington Post, the Associated Press, the Wall Street Journal, even local outlets in Minnesota and Philadelphia and Ben Boyer’s hometown of San Diego—referenced Puerto Rico as a proximate cause of the shortage. Most of them included a to-be-sure paragraph noting that supplies had been low prior to the hurricane but never explained why. The media appropriately conveyed the sense of crisis; flu patients were going to die if they didn’t get the fluids they needed. But overall, the coverage gave the impression that the shortages were an unfortunate case of bad luck, not a business model.
Ben Boyer didn’t know any of this when the nurse told him about injecting his wife, Xenia, directly with chemotherapy medication instead of using an IV drip, because the IV bags weren’t coming in from Puerto Rico. Incidentally, the increased use of syringes to mimic the IV process led to shortages in that product. It also kept the nurse from attending to other patients for a half hour, an effective manpower loss. But the immediate effect of this, given Ben’s family history with Puerto Rico and his general anger at the mismanaged response to the hurricanes there, was a social media firestorm.
“My wife’s nurse had to stand for 30 mins & administer a drug slowly through a syringe because there are almost no IV bags in the continental U.S. anymore,” Ben tweeted. “See, they were all manufactured in a Puerto Rican factory which still isn’t fixed. Meanwhile that stupid swollen prick golfs.” (We can assume that last bit referred to Donald Trump.)
This was not a normal tweet for Ben. He had just moved back to San Diego with Xenia from London, after working for the BBC and then Sky News as a writer and producer. Xenia had been diagnosed with inoperable brain cancer in 2009 and did a round of chemo in Britain. She needed more treatment when the couple moved to the United States, forcing Ben to rustle up stateside insurance coverage. “I didn’t know anybody in the city, so I spent an even more unhealthy amount of time on social media than most people,” he told me. “Especially during chemo, my wife would be sleeping, and I would be endlessly scrolling stuff.” But normally Ben’s posts were apolitical, mostly jokes and gags, perhaps to release tension.
“It really was off the cuff,” Ben said. But it started to get traction, particularly among some friends in television who had large followings. Within a day or so it had over 100,000 likes and 62,000 retweets; fury directed at Trump moves pretty well online. Reporters from Newsweek and Snopes picked up the story, which devolved into the usual political back-and-forth of charges and countercharges. “It was definitely pretty fascinating. I’ve never had anything like that happen before or since,” Ben said. But he eventually figured out that his rage about IV saline, while partially accurate, had a huge backstory attached to it. “It very much felt that way once you zoomed out,” Ben said. “That this is an insane side effect of a larger issue.”
Two weeks after Xenia’s Christmas-week chemo session, she and Ben returned to the hospital; the IV shortage was ongoing. They were told that since Xenia had had to deal with the syringe the week before, now she’d get a machine. Xenia never experienced the manual process again. But the ravages of cancer finally became too much. She died on Mother’s Day 2018, leaving behind Ben and a daughter.
“The entire experience of going through my wife’s illness and death is the sort of thing you don’t wish on anyone,” Ben said. “But if you have to deal with the health care system, you can’t hold the opinion that everything’s working, or that there’s not enormous improvements to be made.”
The question is how you get to those solutions without addressing the concentrations of power and double-dealing schemes in the industries that supply and administer medical treatment. “I’ve talked to politicians. I’ve said if you just have engineers around a table with the devices used in a hospital, and figure out what it costs to make and what it would cost to buy, it would change everything,” said Lillian Salerno, who was on the team at Retractable Technologies and later worked in the Obama White House and ran for Congress. “I think the public deserves to know, we can have single payer if we get the costs down.” But nobody wants their ox gored, and when it comes to hospitals, suppliers, and the middlemen in between, it’s a pretty big ox.
Copyright © 2020 by David Dayen. This excerpt originally appeared in Monopolized by David Dayen. Published by The New Press. Reprinted here with permission.
