Prof. Elhauge, permit me to introduce you to the Law of Supply and Demand and reintroduce you to Herbert Hovencamp, professor of Law at the University of Iowa and one of the most respected antitrust scholars in the United States. Reintroduce, because Elhauge cites Hovencamp's work in his report -- but inaccurately. In parlance familiar to every Harvard alum, wither veritas?
Research, as they say, is like a bikini. What it shows you is interesting, but what it conceals is essential. So, it is crucial to read the small print. In the case of the new Harvard study, let's examine the first footnote: "The initial work for this report was funded by the Medical Device Manufacturer's Association." That is the same MDMA that's lobbying for a change in the laws governing hospital purchasing practices so their members can get a bigger piece of the pie. Certainly the MDMA can sponsor research it feels is in its best interest, but did they really get their money's worth?
The issue at hand, specifically, is the role that Group Purchasing Organizations, or GPOs, play in keeping down hospital costs while enhancing quality. Elhauge claims that GPOs are monopolies, but the pesky facts tell a different story.
While 98 percent of hospitals nationwide buy their products through a GPO, according to Hovencamp, not a single GPO has more than a 15 percent market share. Elhauge claims -- correctly -- that healthcare GPOs prefer that the hospitals with which they do business, do business with them exclusively. That is why group purchasing organizations can offer lower prices. Higher volume, lower cost. That's the intrinsic nature of supply and demand.
Are GPOs anti-competitive? Hardly. Hovencamp points to Volume 11 of the Anti-Trust Law treatise: "If a rival cannot match the price, that is a stronger indicator that the quantity discount program is efficient in the sense that the larger volume customer imposes lower unit costs than the smaller customer does." Not complicated at all. In other words, Uncle Sam has taken and passed Supply and Demand 101.
So, what is the angle for the Harvard study's funder, the Medical Device Manufacturer's Association? Again, the answer is not complicated at all. The MDMA membership wants to sell more of their products to hospitals --- but they are not price competitive. The solution? Fabricate a study that attempts to circumvent not only basic economic theory, but common sense. And then make sure the study is widely circulated to the media and members of Congress.
Supply and demand. As 19th century British Prime Minister Benjamin Disraeli said, "As scarce as the truth is, the supply has always been in excess of the demand."
(Peter J. Pitts is a senior fellow at the Institute for Strategic Communications and an adjunct professor at the School for Public and Environmental Affairs at Indiana University.)
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