Dirty medicine: how medical supply behemoths stick it to the little guy, making America's health care system more dangerous and expensive.

• Author: Blake, Mariah
• Position: Group purchasing organizations - Cover story

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When Thomas Shaw gets worked up, he twists in his chair and kneads his hand. Or he paces about in his tube socks grumbling, "They're trying to destroy us," and "The whole thing is a giant scam." And Shaw, the founder of a medical device maker called Retractable Technologies, spends a lot of time being agitated.

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.

A few years ago, Shaw, an engineer by training, decided he wanted to do something to help solve this problem and quickly homed in on the mechanics of needle-less IV catheters. Rather than using needles to inject drugs into IV systems, most hospitals have moved to a new design, which involves screwing the threaded tip of a needle-less syringe into a specially designed port. 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.

After months of trial and error, Shaw hit on the idea of surrounding the tip of the syringe with six petal-like flanges, which could flare open to make way for the catheter port. Unlike some of the solutions floated by big medical device makers, such as coating the ports with silver, Shaw's innovation added only a few pennies to the cost of production. And it seemed to be remarkably effective: a 2007 clinical study funded by Shaw's company and conducted by the independent SGS Laboratories found the device prevented germs from being transferred to catheters nearly 100 percent of the time.

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 the hospitals 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. "The product does exactly what it is supposed to do," Shaw says. "But it has one fatal flaw. Right there at the bottom of the handle it says Retractable Technologies."

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.

Thomas Shaw is a lanky fifty-nine-year-old man with dark eyes and a shock of gray hair that gives him a bit of a mad scientist air. Growing up, he lived in Mexico and Arizona, where his father worked as a chemist (among other things, the elder Shaw invented the first nitrogen test for plants). Shaw describes his childhood home as a kind of frenetic laboratory where science and math problems were worked out on a chalkboard that hung over the dinner table.

After high school, Shaw went on to study engineering at the University of Arizona, and eventually launched his own engineering firm in a former bicycle-repair shop on a rundown strip in Lewisville, Texas. His core business was small-town building projects, like road repairs and structural inspections, but he also dabbled in medical devices. At one point, a friend's grandmother underwent gallbladder surgery and came out addled and confused. Believing a medication mix-up was to blame, Shaw invented an automated pill dispenser.

Then, one night in the late 1980s, Shaw saw a news program about a doctor in California who had been infected with HIV after being stuck with a contaminated needle. This got Shaw's attention. One of his oldest friends had recently been diagnosed with AIDS, and Shaw was all too aware of the ravages of the disease. "I thought, I can't do anything to save my friends," he recalls. "But maybe I could do something to save other people."

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. "I remember being in South Padre Island with my wife and kids," Shaw recalls. "Everyone wanted to go out and play. I wouldn't go anywhere until I figured out what to do with the back corner of the syringe. I told my wife, 'I have to work on it all the time until I get it or I'm dead.'"

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.

Shaw had just invented the first retractable syringe, a fact that drew the attention of public health officials. 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.

Around this time, Shaw launched Retractable Technologies and began searching for funds to build a factory in Little Elm, Texas. Eventually, he raised $42 million, much of it from doctors at Presbyterian Hospital in Dallas. "Everyone was eager to invest," recalls Lawrence Mills, who was then chief of thoracic surgery at the hospital and invested $95,000 in Shaw's company. "We all thought it was just a matter of time before it became the standard in the industry."

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 "essential to the safety and health of our employees, staff and patients." 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...