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California | Michael Hiltzik / GOLDEN STATE

Secrets Aid Drug Suppliers, Not UC

February 21, 2005|Michael Hiltzik

When two parties enter into a contract and agree to keep its key provisions confidential, one thing is certain: The secrets will benefit one side more than the other.

That would seem to be the case in the University of California's five-year pharmacy procurement pacts with a couple of nationwide purchasing groups.

These accords, readers may recall, were the subject of last Thursday's column, which told how John Glaspy of UCLA's Bowyer Oncology Center discovered he could save as much as $800,000 a year on chemotherapy drugs for a network of community cancer clinics he supervises by going outside the bulk purchasing contracts and making his own deal. UC fought him tooth and nail for nearly a year before finally letting him put his clinics' purchasing out for bid independently.

One disturbing thing about this saga is that, while it suggests that UC may have been systematically overpaying for drugs, no one can tell for sure. That's because the pricing formulas and other crucial information are kept confidential at the insistence of the contractors, Novation and Cardinal Health Inc.

Plainly, the two firms gain more from this concealment than the state.

Taxpayers can't verify that they're getting the most bang for their buck when the details of a $200-million procurement contract are safeguarded as though they're tied up with national security. It took me nearly six months to pry loose the Cardinal and Novation agreements from university officials because they first gave the firms the opportunity to excise any information they deemed proprietary. When the documents finally arrived in my mailbox, they were so heavily redacted they might have been CIA dossiers.

Naturally, all the good stuff -- including the prices charged for pharmaceuticals and the "administrative fees" that manufacturers pay the purchasing groups to encourage them to buy their goods -- was removed.

These administrative fees, by the way, are commonly known as "kickbacks." In many businesses they're illegal -- but not in hospital purchasing, where they're specifically permitted by federal law. To the extent that the kickbacks are passed on to the hospitals, they're equivalent to discounts.

Most important, the price and fee schedules aren't hidden only from the general public, they're withheld from administrators at UC's five medical campuses, who are thus unable to judge whether alternative suppliers might be able to undercut Cardinal/Novation.

This arrangement undermines any incentive at the campus level to look for more savings. Glaspy was an exception because he manages a unique network of clinics that was threatened with extermination if it couldn't get its costs into line. The manager of a medical center department -- anesthesiology, say -- whose budget is lumped in with the rest of the institution would scarcely have the same incentive.

Other provisions also discourage independent deal making. The contracts mandate that at least 95% of all UC pharmaceutical purchases go through Cardinal/Novation. Why should campus purchasing agents bother to nose around for better deals if the most they can gain is a few percentage points of savings on a thin 5% sliver of supply?

Indeed, the reason UC's vice president for clinical services development, William Gurtner, gives for quashing Glaspy's money-saving effort is that it would drop the total share of UC purchases from Cardinal below the 95% floor.

"The people responsible for the overall contract," he says, "were not prepared to risk the benefit to the whole system for what was viewed as a one-off."

There's evidence that group purchasing contracts like these bear a lot of watching. A study by the General Accountability Office, the nonpartisan auditing arm of Congress, found in 2002 that procurement of supplies through a Novation-style group purchasing organization "did not guarantee that a hospital saved money." The firms' prices were often higher than those available to hospitals that negotiated directly with suppliers.

Perhaps the most interesting finding was that big hospitals -- and all the UC medical centers would seem to fall into that category -- were the ones most likely to do better on their own.

The GAO and other sources note that a wave of mergers among group purchasing organizations has made the survivors so big that they may be stifling price competition, rather than facilitating it. Novation and one other huge GPO already account for nearly half of all hospital purchasing in the nation.

Meanwhile, it doesn't appear that UC has exploited the tiny bit of leverage it has had in the Cardinal/Novation contract -- two one-year renewal options, exercisable in 2003 and 2004.

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