Supply Middlemen May Leave Hospitals Ailing
Joe Kiani racked up another victory recently in his quest to get his breakthrough medical invention into more hospitals nationwide. This time a Los Angeles federal court jury awarded his company a $420-million antitrust judgment against a unit of Tyco International Ltd. that he accused of illicitly trying to torpedo his product.
That's nice for Kiani, although Tyco says it will appeal the verdict. But the collusion between manufacturers and healthcare middlemen that his lawsuit has helped expose, and that keeps worthwhile innovations from being used for patient care, should make the rest of us very nervous.
The middlemen are group purchasing organizations, or GPOs, which claim to save hospitals enormous sums by extracting volume discounts from suppliers. There are grounds for skepticism about these savings. Readers of this space may recall that the prices that the largest GPO, Novation, charges the University of California on its drug purchasing contract have been undercut by hundreds of thousands of dollars by a group of oncologists at UCLA who decided to contract with suppliers themselves.
Kiani's case highlights a different problem: GPOs have conflicts of interest that may motivate them to sidetrack new products that might threaten the market shares of established manufacturers.
The conflicts rise from the GPOs' practice of taking fees from manufacturers to push their products to member hospitals. These fees -- kickbacks by any other name -- can range from 3% of a manufacturer's sales to the GPO to as much as 12% under certain circumstances. They tend to encourage GPOs to protect the big suppliers that can pay them the most. Small, entrepreneurial companies are vulnerable to second-class treatment.
Kiani, 40, founded Irvine-based Masimo Corp. in 1989 to develop a new kind of pulse oximeter, a device hospitals use to measure the oxygen level of a patient's blood. Masimo's product improved on the prevailing technology on the market, which is dominated by Tyco's Nellcor Puritan Bennett Inc. unit. Unlike the existing monitors, Masimo's devices don't lose their accuracy when patients move about. This makes them particularly useful in neonatal intensive care units, where the patients are fidgety infants who can suffer severe injury if their blood gets overly oxygenated.
As Kiani detailed in congressional testimony, Premier Inc., the second-largest GPO, and Novation stonewalled him for years, refusing to release member hospitals from their prior commitments to buy Nellcor meters, even though doctors were clamoring for Masimo's equipment.
