Jae C. Hong/AP Photo
When I was writing my book Monopolized, I talked to a guy who went viral for a 2017 tweet about how his cancer patient wife had to be given her chemotherapy drugs manually. “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. 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 was referring to Donald Trump.)
It was a visceral response to an emotional moment. And it wasn’t the whole story.
In fact, intravenous saline solution had been on the Food and Drug Administration’s official shortage list for four years before Hurricane Maria slammed into Puerto Rico, knocking out the two Baxter International factories that produced the bags. The reason why was complex, but it came down to this: Over time, we built an insane system for generic, low-margin, vital medications and supplies, and it introduced unnecessary fragility into what should be a perfectly simple supply chain.
The pandemic brought home a greater lesson about the dangers of centralizing markets and production within single companies and at single geographic locations. The indelible image of medical professionals fighting COVID while wearing trash bags for protection infuriated policymakers. Years of internal deliberation ensued, about the need to diversify sources of supply, to remove hidden risk, to dismantle systems built up by globalization and just-in-time logistics that everyone could recognize as looming time bombs.
Well, guess what? That bomb just went off again.
Another hurricane is shouldering the blame. This time, Hurricane Helene tore through the Southeast, flooding Baxter’s North Cove facility in Marion, North Carolina, its largest in the U.S. for the production of IV solutions like saline and dextrose. (The North Carolina plant mostly produces large IV bags; the Puerto Rico plant specialized in “mini-bags.”) Roadway access has become treacherous, and the plant is closed for “cleaning,” which sounds benign until you realize this is a medical facility and its output of sterile IV solution must be absolutely pristine before being injected into sick humans. Baxter said in a securities filing this week that the facility should regain between 90 and 100 percent of capacity for “certain intravenous solution product codes by the end of 2024.”
Health care providers were told Wednesday they would get 60 percent of their normal allocation, up from 40 percent at the beginning of the week. Baxter happens to supply 60 percent of the nation’s health care providers with IV solution, and the company responsible for another 25 percent, B. Braun, inexplicably also has a major factory in the region, in Daytona Beach, Florida. That plant was evacuated on Tuesday in advance of Hurricane Milton, but it was thankfully spared any damage. Production is scheduled to resume Friday, but even a couple days of missed time adds to the shortage.
Airlifts of IV bags from overseas have been approved, as they were after Hurricane Maria. But providers are already scrambling, forced to cancel surgeries and ration care in the absence of this ordinary yet critical supply, used for hydration, nutrition, and as a delivery mechanism for certain drugs and procedures, from at-home dialysis to chemotherapy. Lives are literally at stake from a shortage of IV solution.
What’s important to know here is that these types of imports have been happening off and on for over a decade. We have proven unable to self-sufficiently produce salt and water in a bag. And the reason why has everything to do with how a concentrated middleman has screwed up the market for medical supplies.
HOSPITALS GET THE GENERIC DRUGS, GAUZE PADS, bandages, syringes, and, yes, the IV bags they need to treat patients through a system of co-op buying outlets known as group purchasing organizations (GPOs). The idea was to save money: GPOs would centralize the buying power of hundreds of hospitals and negotiate volume discounts. It’s similar to the pitch for pharmacy benefit managers, which serve the same function for prescription drugs at pharmacy counters. Roughly 97 percent of all hospitals affiliate with a GPO, amounting to more than $300 billion in purchasing annually.
Here’s what you need to know about GPOs. The top three—Vizient, Premier, and HealthTrust—account for at least 80 percent of the beds that the largest GPOs serve. (Some put this number at 90 percent.) Typically, GPOs lock in both sides of the transaction. Hospitals must buy almost all of their supplies from the same group of vendors year after year; many contracts have a “90-10” or “95-5” clause that requires hospitals to maintain 90 or 95 percent of the purchase order, entrenching the dominant supplier. And then suppliers pay the GPOs to obtain sole-source contracts. So if you’re Baxter, and you have the sole-source contract with market-leading GPO Vizient, you are the only supplier for all of the hospitals in Vizient’s network.
This distorts the market in a bunch of ways. First, locked-in suppliers can raise prices on hospitals, though all the benefit of the hospitals banding together to purchase goods kind of goes away if they are forced to buy from a single source. Studies on GPOs I reviewed for my book in 2020 have shown that supplies in a competitive market were 10 to 15 percent cheaper than the GPO offerings.
This dangerous restriction of supplies is a function of the perverse market structure that values concentration.
For nearly 40 years, GPOs have been paid by suppliers, and they charge more for higher market shares. This feeds into higher prices for the hospitals, as their interests and the GPOs’ interests are not aligned. A safe harbor for anti-kickback laws was put in place in 1986 to make this arrangement legal. (Some of this money also goes to hospital administrators, which is why they’re not too upset about the whole deal.)
What’s worse from the standpoint of resiliency is that suppliers depend on those sole-source contracts to survive. Products like IV solution or syringes do not enjoy high margins; you have to sell a lot to make it financially viable. And if you’re not signed up with a GPO, you just can’t sell. This drives consolidation in these markets. While Baxter has been said to have 60 percent of the IV solution market, for example, market-leading GPO Premier has said that 86 percent of health care providers are experiencing shortages at this time. That can only be true due to the sole-source GPO contracts Baxter has, extending its reach across the country.
This lack of competition means that any disruption to supply from the thin group of existing manufacturers can quickly spiral into crisis. Moreover, the high charges that suppliers face from GPOs to get sole-source contracts tighten margins and prevent companies from investing in additional capacity. Disruptions are relatively routine. With something as sensitive as IV solution, the presence of a single human hair in one bag can cause regulators to throw out an entire lot.
Most important, when those disruptions occur, the hospitals are prevented from seeking a second supplier, even if there were one out there. Despite GPO trade groups claiming that contracts with hospitals and suppliers are entirely voluntary, high fees are triggered if hospitals buy from secondary sources. This effectively locks them into their GPO contract, forcing them to buy from the same company that doesn’t have enough to sell. So while it’s good that Hurricane Milton spared the B. Braun plant, that means little to hospitals that get their IV bags from Baxter.
That’s why hurricanes causing shutdowns of IV solution facilities are so catastrophic. There’s no rule stipulating that only one company must make over half of the IV solution supplying American hospitals; this dangerous restriction of supplies is a function, rather, of the perverse market structure that values concentration. There’s simply no slack when a supply shock occurs. And it’s nearly impossible to spin up the kind of supply in that moment of crisis; a newish IV solution producer told Stat News that, if they maxed out, they could only manage to produce 5 percent of the annual supply.
In fact, we have hundreds of drug shortages at any one time in America—in a capitalist economy that’s supposed to automatically supply any human need—because the market is set up to be so fragile. Most of these shortages are in the kind of low-margin, generic drugs that hospitals use. A cheap cancer drug went into shortage last year, causing upheaval in treatment for thousands of patients.
The 2017 hurricane in Puerto Rico was actually a boon to Baxter, which was then under Justice Department investigation for colluding to artificially create supply shortages to raise prices, as well as tying higher-margin products like pumps and tubes to its IV bag sales. Once the hurricane hit, Baxter could shift the blame to the weather for the supply disruptions, even though they had been going on for years. Baxter got clearance to import IV bags from abroad, the supply issues faded, and everyone forgot about the ongoing shortages of these medically necessary products. The Justice Department investigation quietly closed.
Today, in the aftermath of Hurricane Helene, hospitals and lawmakers are seeking action. The American Hospital Association, Sen. Amy Klobuchar (D-MN), and Rep. Ruben Gallego (D-AZ), who is now running for Senate, have called on the Department of Health and Human Services to take all steps to boost supply, including a declaration of emergency and other forms of flexibility. Many of these steps have been taken. But unless you actually address the market structure, these shortages are going to keep happening.
“The GPOs’ safe harbor from the federal anti-kickback statute enables these abuses and is now stranding vulnerable patients in the storm’s aftermath, which is why Congress must repeal it,” said Emma Freer, senior policy analyst for health care at the American Economic Liberties Project, in a statement. AELP has repeatedly called for removal of the safe harbor, and it’s the only way to get the market functioning on terms that benefit hospitals and patients and make the system safe and resilient.
We just went through these kinds of disruptions during the pandemic, revealing the thin margins for error in the system. We went through exactly the same experience with Baxter, hurricanes, and IV fluid seven years ago. We are apparently determined to learn nothing, ever.
