The Office of the Inspector General has decided that physician owned distributorships are unethical and probably illegal.  Physician owned distributorships are companies that doctors set up to procure surgical implants from the manufacturers, implants that are then sold to the hospital once marked up by this intermediary.  I am no fan of this arrangement, as in most every case, the intermediary (the physician owned distributorship) brings no value, representing simply another layer that gets paid along the way.  There are exceptions to this but not many.  Are many of these “companies” formed to line the pockets of the physicians who set them up?  Without a doubt. 

It should be obvious that a free market would destroy these distributorships.  If surgery center “A,” for instance, is charging too much for its implants, they are ripe for competitive destruction by surgery center “B” having decided to avoid ripping people off with these fictitious markups and thus pricing their surgeries at a correspondingly lower rate.   These distributorships are viable only because the folks receiving health care are typically not the ones paying the bill, or as Jim Epstein of Reason Magazine says,” there is no sticker shock.”  

I want to be clear.  I am no fan of these distributorships because they fail the Austrian economic test, that of looking at all economic transactions from the viewpoint of the buyer.  There is simply no advantage conferred upon the buyer via this arrangement.  The hypocrisy of attacking these distributorships cannot go without comment, however.

Hospitals mark up implants 300-1200% as a matter of course.  That’s right.  A $25,000 cochlear implant will be marked up to $80,000 and a $9400 pacemaker will be marked up regularly to $100,000.  Scorpion anti-venom, obtained for $3750, morphs into a $40,000 charge in Arizona.  These criminal practices while well known to the federal government have never been addressed.  In fact, to the extent that many hospitals don’t collect on these outrageous markups, they get a secret kickback from Uncle Sam through the uncompensated care scam, where reported “losses” come back to them in the form of Disproportionate Share Hospital payments.  

So let me get this straight.  It is criminal for physicians to set up sort of phony companies through which to funnel the implants they are going to use for the purpose of making a little dough, but it’s ok for the hospitals to mark up their implants by a factor of 10, and their pharmaceuticals by 70,000%?

I know of a not-for-profit hospital system that has set up a hospital owned distributorship.  That’s right.  This for profit distributorship procures all of the supplies (implants too) for all of the hospitals in this organization, obtaining these supplies at significant discounts due to their size in the marketplace.  They then…...mark these supplies up when they sell them to themselves!  This helps to maintain the fiction of their not for profit status and furthers their take from the uncompensated care system, because they don’t pay all of the bill they give themselves, and undoubtedly report the unpaid portion as a “loss.”  

All of this insanity goes away with transparent and upfront pricing.  All of it goes away when patient consumerism is promoted.  None of this goes away as long as the federal government continues to create a distraction by vilifying the petty activities of physicians, while they ride shotgun for their hospital buddies whose bankrupting supply charges  represent institutionalized larceny, the scale of which is difficult to comprehend.

G. Keith Smith, M.D.