by Mariah Blake
Washington Monthly - July/August 2010
from WashingtonMonthly Website
Or he paces about in his tube socks grumbling,
And Shaw, the founder of a medical device maker called Retractable Technologies, spends a lot of time being agitated.
The long shot: Thomas
Shaw has spent fifteen years struggling to break into the hospital
One of the topics that gets him most riled up these days is bloodstream infections.
And with good reason - while most people
rarely think about them, these are the most dangerous of the
hospital-acquired bugs that afflict one in ten patients in the
United States. Their spread has helped to make contact with our
health care system the fifth leading cause of death in this country.
The problem is that if the
tip brushes against a nurse's scrubs, or a counter, or the railing
of a hospital bed, it can pick up bacteria. And the rugged threaded
surface makes it difficult to get rid of the germs once they're
there. Often, the bacteria go straight into the patients'
bloodstream - which explains why, according to some studies, the rate
of bloodstream infections is three times higher with needle-less
systems than with their needle-based counterparts.
And it seemed to be remarkably effective:
Given these facts, you might expect that hospitals would be lining up to buy Shaw's product.
But that is not the case, even though his company is offering to match whatever price medical facilities are paying for their current, infection-prone IV catheter syringes. In fact, since the device hit the market two years ago, Retractable has sold fewer than 20,000 units, mostly to one New York hospital.
Often, the company's sales team can't even get in the door to show their wares to purchasing agents.
This is hardly the first time Shaw has found his path to market blocked. In fact, he has spent the last fifteen years watching his potentially game-changing inventions collect dust on warehouse shelves.
And the same is true of countless other small medical suppliers. Their plight is just the most visible outgrowth of the tangled system hospitals use to purchase their supplies - a system built on a seemingly minor provision in Medicare law that few people even know about. It's a system that has stifled innovation and kept lifesaving medical devices off the market.
And while it's supposed
to curb prices, it may actually be driving up the cost of medical
supplies, the second largest expenditure for our nation's hospitals
and clinics and a major contributor to the ballooning cost of health
care, which consumes nearly a fifth of our gross domestic product.
Believing a medication mix-up was to blame, Shaw invented an
automated pill dispenser.
One of his oldest friends had recently been diagnosed with AIDS, and Shaw was all too aware of the ravages of the disease.
The next day, Shaw set to work trying to invent a safer syringe. He began buying pigs' feet from the local butcher and using them to simulate injections.
He outfitted every room in his engineering firm with chalkboards so he could draw design ideas whenever they popped into his head. To make time for the syringe venture alongside his regular work, he started pulling ninety-five-hour weeks. And even when he was on vacation, he rarely stopped obsessing.
It took four years and more than 150 design permutations, but Shaw finally came up with a crude prototype and found a local physician to test it on him - an event Shaw's wife documented with a shaky handheld camcorder.
In the video, the doctor holds up a
saline-filled syringe about the size of a kielbasa sausage. Then he
jabs the needle into Shaw's arm and pauses for a second before
pushing in the plunger. First the saline empties, and then the
needle snaps back into the barrel with a pop.
In 1993, the National Institutes of Health gave him a $600,000 grant to shrink it down to the size of an ordinary hypodermic and produce 50,000 of them for clinical trials. Shaw was now able to bring on a team of engineers and product designers, and turn a cinderblock bay adjoining the old bicycle shop into a clean room.
By the mid-1990s, he had the final
design in hand.
In 1996, Shaw returned to Presbyterian to conduct a final round of clinical trials.
The nurses who took part gave his syringe uniformly high marks (though some complained in the follow-up survey that the packaging was hard to open and that the air bubbles were difficult to get out), and Presbyterian's top medical brass was clamoring to get it into the supply rooms.
Edward Goodman, the hospital's director of infection control, wrote a letter to the purchasing department, saying Shaw's product was,
But Shaw soon learned that the enthusiasm of health care workers was not enough to gain him entree; the hospital initially promised him a contract, only to back out three months later.
Though he didn't realize it at the
time, Shaw had just stumbled into the path of a juggernaut.
As early as
1960, BD was brought up on Justice Department charges for its
anticompetitive practices - among them price fixing, buying up
patents to kill its rivals' innovations, and forcing hospitals to
buy its syringes to get other essential supplies, some of which were
only produced by BD.
To keep costs in check, in the 1970s many medical
facilities began banding together to form group purchasing
organizations, or GPOs. The underlying idea was simple: because
suppliers generally give price breaks to customers who buy large
quantities, hospitals could get better deals on, say, gauze or
gloves, if a group of them came together and bargained for ten
cases, rather than each hospital buying a case on its own.
This meant that instead of collecting membership dues, GPOs could collect "fees" - in other industries they might be called kickbacks or bribes - from suppliers in the form of a share of sales revenue. (For example, in exchange for signing a contract with a given gauze maker, a GPO might get a percentage of whatever the company made selling gauze to members.)
The idea was to help struggling hospitals by shifting the
burden of funding GPOs' operations to vendors. To prevent abuse,
"fees" of more than 3 percent of sales were supposed to be reported
to member hospitals and (upon request) the secretary of health and
This created an incentive to cater to the sellers rather than to the buyers - to big companies like Becton Dickinson rather than to member hospitals. Before long, large suppliers began using "fees" - sometimes very generous ones - along with tiered pricing to secure deals that locked GPO members into buying their products. In many cases, hospitals were obliged to buy virtually all of their bandages or scalpels or heart monitors from one company. GPOs also began offering package deals that bundled products together.
the best price on stethoscopes, a hospital might have to agree to
buy everything from pacemakers to cotton balls from the GPO's
preferred vendors. Hospitals went along because they got price
breaks, usually in the form of rebates if they met buying quotas.
Once again, the
idea was to help struggling hospitals, this time by allowing the
buying groups to grow big enough to negotiate the best deals for
their members. But the decision led to a frenzy of consolidation.
Within a few years, five GPOs controlled purchasing for 90 percent
of the nation's hospitals, which only amplified the clout of big
Under the agreement, member hospitals - among them Dallas-based Presbyterian, where Shaw would hit a brick wall - had to buy 90 percent of their syringes and blood collection tubes from the company. Over the next two years, BD landed similar deals with all but one major GPO.
As a result, almost everywhere Shaw turned, he
found hospital doors were closed to him.
He also teamed up with the SEIU, the nation's largest union of health care workers, which was lobbying for legislation to curb the needle sticks that were afflicting more than 600,000 health care workers each year.
Shaw ended up helping craft a California bill that required hospitals to keep a log indicating which syringes were causing needle sticks and take regular steps to transition to the safer ones. Twenty-one states later passed laws patterned after California's, and in 2000 the federal government followed suit.
winter, Shaw traveled from Little Elm for the signing ceremony in
the Oval Office, and President Bill Clinton gave him a pen he had
used to sign the measure into law.
And some medical facilities had found that, rather than drive down needle sticks, BD products caused their numbers to rise. After the federal needle safety law passed, Cook Children's, a Fort Worth-based chain of pediatric clinics, first moved to BD safety needles. But after dropping initially, the number of needle sticks more than doubled, from nine to nineteen a year.
in 2004 Cooks began transitioning to Retractable syringes, and over
the next four years the number of sticks fell to zero.
After that, Shaw struggled to get his syringes into Kaiser supply rooms - often, he says, they sat locked in warehouses or trucks in distributors' parking lots. Kaiser spokesman Jim Anderson argues that if Shaw's products didn't make their way to hospitals it was because of "significant supply issues" on Retractable's end. He also says they were prone to malfunction and that, in several cases, needles detached and were left "stuck in the arms of patients."
Whatever the reasons, Kaiser broke off the deal early.
payment, which it dubbed a "special marketing fee," was on top of
more than 3 percent of its sales revenue and other perks valued at
hundreds of thousands of dollars. Becton Dickinson's grip on
hospitals was now even tighter than it had been before.
When he was invited to speak at a luncheon of the Medical Device Manufacturers Association, an alliance of small medical suppliers, no one would sit near him; he ate alone, surrounded by twelve empty chairs, and was booed when he stepped to the podium.
Meanwhile, Retractable Technologies' stock had lost nearly two-thirds of its value, and its operating capital was dwindling rapidly.
After weighing his options, in 2001 Shaw finally filed an
antitrust suit against Becton Dickinson, Novation, and Premier.
similar devices, Kiani's worked even when patients moved around or
had little blood flowing to their extremities, a crucial innovation
for treating sickly, premature infants, who tend to squirm and need
to be monitored constantly for oxygen saturation - too little and
they suffocate, too much and they go blind. But most hospitals
couldn't buy Kiani's product because his larger rival, Nellcor, had
cut a deal with the GPOs.
Congress was also given a slew of documents showing that GPOs were collecting upfront payments of up to $3 million from
suppliers, including drug makers like Astra-Zeneca, in return for
awarding them sales contracts, not to mention a large share of
revenues. In one case, a vendor was handing Novation not 3 percent
of its revenue on a given product line, but a full 94 percent,
according to Novation documents.
For the first time, it seemed as if these
powerful middlemen might actually cede some ground.
As the case was getting ready to go to trial the
following year, Shaw received a two a.m. phone call from his lawyer
saying that Becton Dickinson was prepared to offer a $100 million
settlement. Shaw roused his children, and they piled in the car and
drove to the local IHOP for blueberry pancakes.
Shaw has since come to see the settlement as nothing more than a tool for the GPOs to keep the details of their operations under wraps.
Shaw is not the only one who kept running into brick walls after the GPOs' promised reforms took hold.
In 2004, Garrett Bolks, a Tulsa native who had spent twenty-four years working in the medical supply business, brought the first X-ray-detectable surgical towel to market.
It was a simple invention - nothing more than a strip of blue
waffle-weave cloth about the size of a hand towel, with a flexible
ribbon of barium sulfate tucked into one corner of the hem. But it
promised to eliminate the problem of towels being accidentally left
to fester inside the body after surgery, and it garnered attention
in high places.
Thompson liked what he heard.
administration the following year, Thompson agreed to sit on the
company's board and began talking up Bolks's product in speeches.
Bolks also landed a contract to sell his towels to the venerable
So when a Dallas-based GPO named Broadlane put out a bid for surgical towels that year, he decided to go all out.
Not only did he offer his towels at pennies above cost, he also called in his connections, including Thompson, who personally put in a call to Broadlane.
But even this was not enough for him to land the deal.
Instead, Broadlane chose to go with ordinary, non-X-ray-detectable surgical towels from two established players, Medical Action and Medline. On its face, this choice made little sense.
According to internal Broadlane documents, the quality of Bolks's towels was on par with
competitors, and his bid was nearly 20 percent lower than any other
company's X-ray-detectable products. It was also lower than the
non-X-ray-detectable towels Broadlane chose. By all appearances,
Broadlane went with a more expensive product that offered fewer
benefits for patients.
But Diana Smith, a former director of surgical services at Broadlane who was privy to the selection process, sees the situation differently.
Smith, who provided the information on which bids were chosen, adds that the tricky part for GPO executives is getting member hospitals to sign off on higher-priced contracts, something she says Broadlane did by presenting the statistics in ways that, though technically accurate, were often misleading.
In the case of the towel bid, hospital administrators were shown a PowerPoint presentation (a copy of which she gave to me) indicating that going with the Medline and Medical Action bids would save them between 6 and 29 percent.
But this was relative to the same companies' bids the previous year, not the bids offered by other vendors.
The Broadlane decision turned out to be the death knell for Bolks's towel company.
But he continues to come up with new devices. Last April, I visited him at his office in Tulsa, which was stuffed with crumpled cardboard boxes full of medical supplies, and he showed off his newest invention - a black handheld wand and a diode about the size of a fleck of pepper with a tiny antenna poking out from one side. He explained that the idea was to embed the diode, which gives off a special frequency, into all kinds of surgical supplies.
That way, if objects are left inside patients, the wand can be used to detect them before the incision is even sown back up.
However, his savings are too depleted to put it into production, and he has been unable to drum up outside funding.
Stories like these abound among small suppliers, a number of whom have filed suit against GPOs.
But most are wary of speaking out. Several talked to me off the record. At least a half dozen more agreed to speak, only to back out at the last minute or retract their statements after we had spoken.
As for the GPOs and their advocates, they argue that if small companies have trouble breaking in, it has to do with the quality of their wares.
that GPOs pick vendors through competitive bidding, which puts small
companies on equal footing with their larger rivals.
Rather than setting caps on kickbacks, for example, it merely directs GPOs to take steps to ensure that any financial perks don't "encroach upon the best interests" of hospitals and clinics.
Obviously, this leaves room for maneuvering. And, while the industry generally keeps its business practices under wraps, critics charge that the tactics that raised red flags in the past continue. In fact, there is evidence to this effect. Some GPOs admit in their limited public disclosures to collecting "fees" of 25 percent or more of vendors' sales.
continue to pursue aggressive bundling programs - the GPO
now bundles together everything from sutures and bedpans to
blood-oxygen monitors and cafeteria services (although hospitals
have a certain number of opt-outs).
Through a recently launched program called ASCEND - a program the company's president, Mike Alkire, has called "the future model of Premier" - it has also begun locking individual hospitals into sole-source agreements for a wide variety of products.
What's more, Premier's code explicitly bars it from pursuing sole-source deals and bundling for what are known as "physician preference items," meaning those that are seen by doctors as affecting the quality of patient care. But during Premier's official quarterly conference call for suppliers last February, ASCEND's director, Andy Brailo, suggested that, while hospitals are not required to sign restrictive deals for physician-preference products, the company is taking steps to persuade them to do so.
He added that Premier is "investigating
things even down to profit sharing with the physicians." (Premier
maintains that either Brailo misspoke or his words were taken out of
context, and that the company "does not include physician preference
items in the commitment associated to the ASCEND program" or "engage
in profit sharing programs of any type with physicians.")
The multibillion-dollar question is what this incentive system means for health care costs.
GPOs maintain that by pooling hospitals' buying power and getting big medical suppliers to submit to competitive bidding, they are able to negotiate better deals and save hospitals billions of dollars.
If this weren't the case, Blair Childs, Premier's senior vice president for public affairs, argues there would be no reason for hospitals to join.
Industry-funded studies support these cost-saving claims.
In fact, one recent study found that GPOs save hospitals as much as $36 billion a year. The problem is that, rather than hard numerical data, this figure is based on surveys of hospital administrators. And while survey takers weren't asked what yardstick they used to measure savings, the study's author, Arizona State University professor Eugene Schneller, says that hospitals generally base their figures on the discounts they get off GPO list prices, often in return for agreeing to buy from select suppliers.
Obviously, this is
a far less meaningful benchmark than what they would pay for the
same supplies if they negotiated prices on their own. But, then,
most hospitals don't appear to have that information. An earlier
survey of hospital purchasing managers by supply chain expert Lynn
James Everard found that most of the managers who claim to know what
they are saving through their GPOs know only what their GPOs report
many larger hospitals hold stakes in GPOs, and even smaller ones
have less incentive than outsiders might think to pour over cost
reports, since insurance companies and government programs, like
Medicare and Medicaid, are picking up the tab for much of their
supplies and equipment.
But the little information that is available
suggests that they may actually drive up the price of supplies. A
2002 pilot study by the Government Accountability Office found, for
instance, that hospitals that went through GPOs paid more for safety
needles and most models of pacemakers than those that negotiated
prices on their own - for some pacemakers the median gap was as wide
as 39 percent.
Yancy later had his staff add a field to their database to track just how GPO bids stacked up. Over the last seven years, his company, which serves more than 500 medical facilities, has collected tens of thousands of bids.
On average, Yancy says, the GPOs' prices are 22 percent higher than the ones that hospitals can get on their own.
To back up these claims, Yancy sent me more than three dozen paired bids, including two quotes for a suite of endoscopy equipment from the same vendor that were issued on the same day.
The specs were identical, from the cameras down to the fiber-optic cables.
But one had "aggressive pricing" scrawled across the top and came out to $83,000, while the other had the name of a large GPO above the header (Yancy asked that the name and other sensitive details be withheld to protect his business contacts), and was priced at $131,000 - or nearly $50,000 more for the same equipment. In other cases, the picture was less clear; there were modest variations between the specs of the two bids, for instance.
But the overall
pattern was unmistakable.
Critics of the system find this baffling, especially since most believe that if GPOs are driving up prices, the problem could be fixed by simply getting rid of the anti-kickback protections. Nevertheless, lawmakers appear to have limited appetite for taking the issue on. Last August, Congress launched an investigation into GPO contracting practices, and the Government Accountability Office followed suit.
But Senate staffers now say
that hearings on the subject are unlikely to be held this year, and
may not be held at all.
For Shaw this unsolvable riddle has become a kind of obsession. He turns it over and over in his head like an engineering problem, as if the fix might come to him if he just looks at it from enough different angles.
Perhaps the part he finds most perplexing is that it was largely government grants that paid for him to develop his retractable syringe.
Even today, Shaw continues to develop new products.
In fact, he has brought five of them onto the market in the last two years, including the IV catheter syringe. But his efforts remain consumed largely by the struggle for access. Among other things, he has hired a lobbyist to agitate for the repeal of the anti-kickback exemption and filed a stack of lawsuits, including a second antitrust suit against Becton Dickinson.
All this struggle has brought a few scattered victories - most recently last November, when a jury found that BD had used Shaw's patented technology for its own retractable syringe and ordered the company to pay Retractable another $5 million. (The case is on appeal.)
But Shaw still isn't any closer to
breaking into the hospital market, and in the meantime the life on
his patents is dwindling. In just four years, the first of them will
expire and the game will be over.
When his patents do run out, the Chinese manufacturers will
be the ones poised to bring his technology to the world market,
meaning all the jobs and economic benefits that could have gone to
the local residents will instead go to the people of Gansu Province.
He was in one of those moods where he paces about, his mind flitting from outrage to outrage so quickly that it can be hard to follow the flow, much less stop it.
As I got up to leave, he trailed me down the stairs and out to the parking lot, where he stood amid the gravel and grit in his socks. Even as I backed my car out of the lot, he was still talking.
The question is whether anyone out there