The Grey market: Financial issue. Patient safety issue.
By April 2018, BD was so concerned about the potential patient-safety impact from product diversion and the grey market that the company put into place a full-time Channel Protection Team to identify and address grey market activity. The effort has paid off, as the amount of diverted BD product has declined.
“The Channel Team has taken an aggressive approach to seeking out and shutting down diverters, proactively identifying fraudulent accounts and unauthorized resellers, as well as pursuing legal action against grey market participants,” says Jim Berdela, channel development and marketing vice president.
And with good reason: Products sold on the grey market are vulnerable to a multitude of patient safety issues.
Grey market commerce denies companies the ability to track an item’s end user or distributor – a significant liability in the event of a recall, Berdela points out. Additionally, without a proper chain of custody, the quality and sterility of a product can no longer be assured. “From a business perspective, companies face data distortion around purchasing trends, and loss of line-of-sight into who the ‘real’ customers are, and financial damage.”
What is the grey market?
Diverted products can enter the grey market from both inside and outside the U.S. “For example, a U.S. manufacturer sells its product to a supplier outside the U.S. for the sole purpose of servicing a different country or region (e.g. Latin America),” says Berdela. “The product is sold to this supplier, but after the sale, all or much of it is fraudulently diverted from the region, unbeknownst to the manufacturer, and re-sold back into the U.S.”
Richard Bergner, chief operating officer, Integritet Global Consulting & Investigations in Miami, Florida, points out that domestic diversion in the U.S. can occur when products are sold at special pricing for home healthcare, Medicare, group pricing volume or other incentives. “These products can also be diverted, which usually involves falsified sales tracings and in some cases, fraud,” says Bergner, who since 2004 has been investigating healthcare diversion.
“In other cases, we have seen cargo thefts where trucks are stolen. In yet other cases, we have seen multi-million-dollar thefts occurring at hospitals, distributors, wholesalers, manufacturers and others. These are not huge single hit ‘heists,’ but instead are daily thefts, which lead to losses in the millions of dollars over short periods of time – with the products making their way right back into the supply chain.”
The desire for the lowest-price option on the part of purchasers fuels the secondary market, adds Bergner. Manufacturers inadvertently fuel the problem with varying global cost structures to penetrate emerging markets and improve healthcare for patients globally. “Savvy traders exploit these opportunities, which means products intended for a particular market never make it to those patients.”
Given that the grey market is “a shadow supply chain,” assigning a dollar value to it is difficult. Bergner estimates it is a “multi-billion-dollar problem for manufacturers, [which] results in lost sales, strained customer relationships, poor forecasting and in some cases, markets desperately in need of supplies underserved.
“Worst of all, it creates an illicit supply chain which fuels cargo theft, counterfeiting, and other criminal activity. This channel can lead to improperly handled, misbranded, or counterfeit products being sold to healthcare providers, putting patients at risk.”
Online commerce
The growth of online commerce may be exacerbating the problem.
“Heavily trafficked e-commerce sites that specialize in marketplace sales provide easy access to outlets selling grey market product,” says Berdela. “Many online resellers using these retail sites’ third-party marketplaces are not authorized medical distributors, and it is difficult to know how they source the products they sell.”
Says Bergner, “Third party market sellers can set up a storefront with little or no inventory, so there is no barrier to entry. Illicit products can be shipped to the online marketplace, get comingled with other inventories and fulfilled by that marketplace, so a reputable distributor could have their orders fulfilled with grey goods or worse.” Online auction sites are another concern.
“Hospitals, clinics, surgery centers and even doctors are buying these products online to cut costs, improve margins, and sometimes to keep a struggling practice from failing,” says Bergner.
Meeting the challenge
Although it is not illegal to buy product from the grey market, buyers should be aware of possible illegal or criminal activity going on behind the scenes, says Bergner. “Purchasing product from the grey market only encourages more such behind-the-scenes illegal activity.”
In March 2019, the FDA Office of Criminal Investigations arrested four individuals accused of fraudulently diverting infant baby formula into the U.S. market that was contractually meant for sale into South America, Bergner points out. The indictment by the FDA included a requested judgment in excess of $120 million and jail time for the indicted individuals. The FDA got involved with this case due to the combination of fraudulent diversion and the potential public safety risk, he says. While the case focused on baby formula, the group was also trading in medical devices.
BD’s Channel Protection Team “has made significant progress in implementing proactive and preventative measures to identify diversion, including educating and training our sales teams to recognize a fraudulent account or unauthorized reseller, data mining, using red-flag reports based on parameters and algorithms, and limiting access to U.S. products outside the country,” says Berdela. “BD also takes legal action against diverters by holding grey market suppliers accountable for impairing legitimate businesses, raising questions about brand authenticity and most important, compromising patient safety.”
In 2018, the company discovered a U.S.-based distributor submitting fraudulent rebates, that is, rebates submitted on sales that never took place, and diverting product purchased from BD into the grey market, he continues. BD initiated litigation and was awarded a multi-million-dollar judgment. Such action was taken to help ensure a safe and secure supply chain for its customers and their patients, says Berdela.
Attacking grey market product sales is a win for the entire healthcare supply chain, from manufacturer to patient, adds Bergner. “You can prevent risk to patients and improve the bottom line at the same time,” he says. Basic approaches include:
- Conducting proper due diligence on new or even existing customers or companies of interest.
- Evaluating shipments versus consumption for markets or geographies where diversion is possible.
- Requiring proof of performance beyond simple assurances that the products went where they were supposed to go.
- Conducting formal or informal market surveys or reviews. These can be done by company personnel or third parties.
- Developing and maintaining a program to address and confront grey market activity and build it into day-to-day business.
- Educating internal and external partners on the risks of the grey market and this illicit supply chain.
- Partnering with customers and listening to what they are seeing out there, and then reacting to it.