So Bad the DoJ Woke Up: Saline Bag Makers Look to Have Endangered Patients Via Illegal “Tying” and Price Gouging

Lambert has remarked occasionally that one of the side effects of the Puerto Rico hurricane is that the US is in the midst of a saline bag shortage, an important hospital staple. The official story was that a plant that was knocked out was close to a monopoly supplier, forcing hospitals into cumbersome and costly work-arounds, like injecting saline solutions.

It turns out, by happenstance, that he’d become the unwitting transmitter of partial information that is unduly flattering to big medical manufacturers who have been under scrutiny by the New York and California attorneys general and now the Department of Justice for possible criminal anti-trust abuses. As this Financial Times story explains, even though anti-trust law in the US is weak and not often enforced, the conduct at issue is a bulls-eye for Things Not To Do: “tying” or forcing customers to buy other products to get the ones they want and misusing monopoly/oligopoly power.

The reason that a product so commodity-like as saline bags would come to be an oligopoly is that they have significant economies of scale in production.

The squeeze in the saline bag market started well before the Puerto Rico hurricane made things worse. Three companies, Baxter Healthcare, Hospira Infusion Systems and B Braun, virtually own the market in the US. In 2014, shortages began, allegedly due to remedies that the manufacturers were required to implement to correct quality problems (like stuff in the saline, ick!).

Prices in the US have more than doubled in the last four years. A saline bag that once cost $1.77 is now $4.04, while the price has increased to only roughly $2 in the UK.

But the even bigger deal is that Baxter apparently used the scarcity as an excuse to withhold supplies unless hospitals agreed to buy certain (higher than they’d otherwise order) amounts of alternate saline delivery mechanisms. This is bad for patients in three respects. First, it imposes additional, unnecessary product costs. Second, as the hospitals pointed out, this forces nurses to use non-standard protocols. Even though delivering saline by injection is in theory as safe as setting up a saline drip (which entails a different sort of injection), having staff operate on a new routine increases the risk of mishap. But third, and I am surprised no one stressed this, is that having nurses make injections with syringes is far more time consuming than setting up a saline bag. The extra nursing cost is almost certain to be greater than the increase in the cost of supplies. That also means it is taking nursing time away from other duties.

Saline bags are a staple in hospitals and emergency rooms. For instance, when your humble blogger got a bad cornea scratch in July, my first stop on my West Coast emergency room tour was to Cedars Sinai. It felt like something was still way up high under my eyelid. The doctor had the nurse put a Morgan lens in my eye, which allowed her to flush it out, which took an entire bag of saline solution (not a comfortable process). And as you can see from this little instructional video, the alternatives aren’t so hot. But it never occurred to me that my use of a mundane saline bag could force another patient to have their saline solution administered in a much more cumbersome manner.

And when, might you ask, would this have been particularly acute? The article points out that outbreak of a particularly deadly winter flu in the US squeezed saline supplies even further. That among other things means ER nurses were scrambling not just to secure saline, but spending more time than they should have to administer it via injection, which could have led to patients being treated later than they would have otherwise. There were widespread reports of emergency rooms being strained to the max. People were dying this winter at much higher rates than usual from this flu. It’s not a stretch to think that these saline suppliers have blood on their hands.

The Financial Times story quotes at length from reports from the Cleveland Clinic, as well as a large, unnamed “New York hospital group”. The accounts are damning:

At the peak of the crisis, the [Cleveland Clinic] hospital had the equivalent of eight full-time pharmacy employees battling the shortage. Technicians worked through the night to mix saline by hand, while nurses injected the solution of salt in water into patients using syringes — a task normally done by the metal stands and plastic bags used for intravenous drips.

“Sometimes we’ve had over 20 nurses at a time doing that,” says Scott Knoer, chief pharmacy officer….

Hospitals alleged that sales representatives from the company [Baxter] pressured them into buying higher margin products used to deliver saline and other intravenous solutions, such as pumps, tubes and catheters…

As the shortage became more serious in the winter of 2014, a sales representative from Baxter arranged a meeting with one of its major customers….

According to a person who attended that meeting, the sales rep suggested Baxter would be unable to guarantee the hospital’s existing supply of saline unless it signed a new five-year contract that required it to also buy other “consumables” used to deliver the solutions, like intravenous tubes and taps…

The hospital agreed to sign the contract, but the decision caused anger among some employees. They feared that forcing nurses to switch to unfamiliar products for solely commercial reasons would jeopardise safety and leave the group vulnerable to legal action…

….the hospital tried to delay the introduction of the contract…The exchanges show the Baxter rep becoming increasingly pushy as the hospital tried to stall.

“I really need to talk to someone,” the Baxter rep wrote in an email to a hospital employee in February 2015. After receiving no reply, a few weeks later they wrote: “I have no choice but to send a letter notifying [the hospital] that they are not in compliance” with the agreement.

Eventually, the hospital capitulated and made the switch. The agreement was not only inconvenient, it was also expensive: moving from its existing supplier will end up costing the hospital more than $1m or 10 per cent extra over the duration of the five-year contract…

The Federal Trade Commission first got wind of these issues and started probing the big saline suppliers in 2015. In early 2016, New York’s Eric Schneiderman saddled up, and in late May, issued subpoenas to several hospitals instructing them to preserve relevant records. A Financial Times source said the big saline players stopped their tying games when they got wind of the New York State investigation. The DoJ has taken over the matter and has subpoenaed Baxter plus the former and current owners of Hospira Infusion.

Normally, private litigants wait to piggyback the discovery findings of public prosecutors. The fact that private parties are filing suits suggests that they think they have such a clear cut case that they don’t need to wait. Again from the Financial Times:

A group of hospitals from Alabama, New York, Pennsylvania and Puerto Rico launched a class-action lawsuit in 2017 against Baxter and Hospira Infusion, alleging they engaged in a “conspiracy” to “artificially fix, raise, maintain and/or stabilise the prices of intravenous saline solution . . . under the pretext of a supply shortage”.

The lawsuit alleges the companies “issued a series of voluntary product recalls” to exacerbate the supply problems so they could push up prices.

Both defendants have filed motions to dismiss, arguing in effect that the facts presented didn’t support the allegations.

Unfortunately, the medical industry is rife with abuses of monopoly/oligopoly power, and not just in the highly-visible area of drug prices. Industry incumbents and investors have been adept at identifying niches that are too small for anyone in DC to care about, even when the products are expensive and also serve relatively large numbers of patients.

A reader provided this case study in late 2015. We tried to get interest in DC with no success.

A particularly striking example of how private equity drives consolidation is found in the renal care industry, which provides dialysis services for approximately 500,000 Americans[1] at any given moment. The federal government, through the Centers for Medicare and Medicaid Services (“CMS”) spent $11.2 billion in 2014 on outpatient dialysis services[2], which gives taxpayers a direct stake in the competitiveness of the dialysis industry. Two companies dominate the outpatient dialysis market, each with approximately a third of total market share, while the number three company in size is more than ten times smaller than the second largest, and the overall one-third of the market not controlled by the “top-two” oligarchy remains very fragmented.[3]

Both of the top two dialysis companies were created by multiple mergers over time. If one looks at the genealogy of each, one finds that private equity firms were involved in “rolling up” predecessor entities into the two dominant players. For example, the largest firm, Fresenius, came together, in part, in 2010, when two private equity firms, Bain Capital Ventures and KRG Capital, invested in Liberty Dialysis. In 2011, that firm then acquired Renal Advantage, which was backed by Welsh Carson, another private equity firm and sold the entire combined company to Fresenius.[4] Similarly, DaVita, the number two player several years ago the private equity-backed HealthCare Partners firm as part of its industry dominance strategy.[5] The number three dialysis industry player, U.S. Renal, is backed by multiple private equity firms and is pursuing an explicit strategy of rolling up the third of the market that remains unconsolidated into the largest two firms.[6]

This strategy of private equity firms attempting to roll-up major spending nodes in the U.S. healthcare system can be found over and over. For example, the practice is so entrenched in the outpatient surgical center industry that entire newsletters exist simply to track private equity activity in that space.[7]

The ability for these firms to increase prices is almost certainly greater than the national picture suggests. Remember that patients typically get outpatient dialysis several times a week for 3-4 hours a day. That means they will need to go to a facility close to their home. That in turn means that the relevant market for pricing purposes isn’t the US but local markets, like cities, even small ones if they are somewhat isolated geographically (think Charlottesville, Virginia, which sits in a valley and over an hour away from the nearest population center, Richmond). But who is ever going to look at the pricing power of dialysis centers even in cities as large as Los Angeles to determine whether they are abusing their position?

I hope readers will circulate this post widely. The public needs to understand how much the deck in medicine is stacked against them, and that is why half way measures won’t make enough of a difference. The only way out is single payer, and we have plenty of examples around the world to show that literally any implementation in an advanced economy works better than what we have. We aren’t lacking in models. What the US lacks is the will to break some oversized rice bowls.

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[1] See http://www.nephrologynews.com/a-quiet-year-for-consolidation-among-largest-dialysis-providers/

[2] See http://www.modernhealthcare.com/article/20160624/NEWS/160629935

[3] See http://www.nephrologynews.com/a-quiet-year-for-consolidation-among-largest-dialysis-providers/

[4] See http://www.thehealthcareinvestor.com/2012/02/articles/healthcare-services-investing/private-equity-investing-in-the-dialysis-sector-part-i/

[5] See http://www.modernhealthcare.com/article/20120526/MAGAZINE/305269878

[6] See http://www.usrenalcare.com/article/us-renal-care-and-dsi-renal-announce-definitive-merger-agreement

[7] http://www.thehealthcareinvestor.com/2012/10/articles/healthcare-services-investing/private-equity-investing-in-ambulatory-surgery-centers-part-i/