Senate asks for quicker GPO reform - News

Seemingly unable to escape the net of suspicion cast onto them first by small medical device manufacturers and later by the United States Senate, the group purchasing organization for the second time in two years was put on the defensive during a day of hearings on Capitol Hill. In the most recent hearing, held July 16, Sen. Herb Kohl, the Wisconsin Democrat and ranking minority member of the Senate Subcommittee on Antitrust, Competition Policy and Consumer Rights, who has stood out as the sharpest critic of GPOs, recognized the GPO industry's willingness to reform its business practices, but made it clear that he remained dissatisfied with the pace of progress so far. "After a year of investigation and oversight, we are pleased that our efforts have begun to make the marketplace more open for innovative competitors," Kohl said in a statement at the hearing. "We are concerned, however, that nut enough is happening, and that it is not happening quickly enough."

The panel first convened in April 2002 to investigate allegations that GPOs were, through the complex system of group contracting, denying small device manufacturers an opportunity to market their products to hospitals. Critics like Kohl and others have charged that the hospital market has been tightly controlled by GPOs by virtue of signing long-term contracts, bundled contracts and agreements that were renewed simply as a matter of course with incumbent contract holders. For their part, groups have denied those allegations, which Kohl called "anticompetitive and unethical actions." But despite those denials GPOs have signed on to a variety of codes of conduct, both through the Health Industry Group Purchasing Association, a GPO trade group, and as individual organizations.

Now, seeking to pair action with words, the Senate is not letting up in its focus on GPO business practices. "Some progress has been made, but more needs to be done," said a committee insider, who asked for anonymity. "And there has been substantially less cooperation from Premier and Novation." Together, Chicago-based Premier Inc. and Irving, TX-based Novation represent two-thirds of U.S. hospital contracting business or over $28 billion of purchasing.

Said Kohl, "We identified five major areas in need of reform in the GPO industry. The first was ending conflicts of interest such as investments by GPOs, or their executives, in medical suppliers with which they did business. The second was sole-source contracts in which one supplier has an exclusive deal for a product with the GPO. The third area was high commitment levels in which a hospital must purchase a very high amount (as high as 95 percent) from the GPO-approved vendor in order to get the best price. The fourth was bundling practices, giving substantial extra discounts to hospitals that buy a bundle of different products in one contract. The fifth area was high administrative fees, GPOs collecting payments in excess of 3 percent of the value of the products sold from suppliers. The GPO codes of conduct addressed each of these issues.

"The evidence we have received from medical device manufacturers, hospitals, the General Accounting Office, and the GPOs themselves, tells us that while some progress has been made with respect to each of these issues, in many cases much more needs to be done."

The attention has now begun to shift to the Safe Harbor laws that shield GPOs from penalty against federal and kickback rules, allowing GPOs to legally charge administrative fees. More importantly, challenges have been leveled to the fundamental GPO structure in which contracted suppliers, not hospitals, pay the fees to GPOs. Critics say that such a system has a built-in bias toward contract holders, effectively shutting out competition.

Kohl went on to say that "with respect to sole sourcing, Premier has promised to ban tiffs practice with respect to physician preference items, but has not done so entirely. Novation did not make the same pledge, and one-third of current contracts for clinical preference items are still sole-sourced. With respect to commitment levels, Premier has banned GPO imposed commitment levels, but left the door open to commitment levels initiated by vendors. Novation expressly permits commitment levels above 75 percent with consent of their clinical councils. With respect to administrative fees, Premier took the laudable step of capping administrative fees at 3 percent in all contracts. Novation has only agreed to a 3 percent fee cap for what it designates as 'clinical preference products' and their revenues from high administrative fees continue to rise. Finally, with respect to bundling, both GPOs still engage in this practice. The GAO reports that bundled contracts at one of the two largest GPOs still account for more than 40 percent of its revenue. Novation will not terminate its bundling program until 2004, at the earliest, although it could do so sooner flit wished."

A GPO Czar

Kohl said he would ask the Secretary of Health and Human Services Tommy Thompson to seek ways to make these reforms permanent including requesting the appointment of an officer to oversee the hospital group purchasing industry as a way of ensuring that GPOs comply with the new rules and leave hospitals the option of choosing the best product for each patient, regardless of GPO contract. That "GPO Czar" would derive power from the force of the Safe Harbor rules and be empowered to determine whether a GPO would qualify for Safe Harbor protection.

The matter of administrative fees is central to the GPO issue, not simply for the control the GPO industry can exert over the type of devices, supplies and equipment used to treat patients in the U.S., but for the enormous amount of cash that the GPO industry generates. While most GPOs return a percentage of administrative fees to member hospitals, there appears to be plenty left over to operate group purchasing organizations, all of which are non-profit, but privately held and under no obligation to disclose financial records. The Senate has asked for more transparency in that regard, but transparency has been slow to appear. For example, Premier posted a summary of its financial activities on its website, but few were aware that data had been posted or where it could be found. When that information was located, it showed that Premier earned a 42 percent profit margin in its most recent fiscal year (ended June 30, 2002). Premier said it took in $379 million in revenue mad generated net income of $159 million on those sales. The figures also show that the alliance distributed $137 million in cash to its 199 owners in that fiscal year (Premier has nearly 1,500 member facilities, but only 199 owners). The totals represented a 62 percent increase in net income for the alliance compared with 2001 figures.

Novation, meanwhile, defended its practices in an update delivered to the Senate panel by its president Mark McKenna. "Last year, you made it clear that you wanted to ensure that smaller vendors had an opportunity to participate in group purchasing programs, and that member hospitals had ready access to innovative technology," McKenna told the Senate panel. "We heard you and we have taken action."

McKenna described for the panel Novation's revised principles that cover seven core areas: innovative technology; sole-, dual- and multisource contracts; commitment; contract term; private label; vendor fees and business ethics and compliance. "Today, less than a year later, I am pleased to report that Novation has made substantial progress in all seven areas," McKenna said. "Indeed, in many cases we have gone well beyond the commitments it made to develop new operating principles." He said that participating Novation hospitals saved in excess of $1 billion through Novation contract negotiations and argued that those facilities further reduced their costs via $400 million in cash returned to those facilities between 1997 and 2002.

As to the question of small manufacturers, McKenna said Novation has "awarded 20 contracts (16 signed and four pending signature) to vendors outside the regular bidding cycle, and is currently reviewing a dozen additional products." He also said Novation has "revised its OPPORTUNITY Spectrum [commitment] program to re-emphasize that participation is purely voluntary; to eliminate any penalties for a hospital dropping out of the program; and to eliminate any requirement that members purchase capital equipment."

Novation, he said, has increased the number of dual-source or multisource contracts in six clinical preference categories that were previously offered under sole-source contacts. For example, in 2002, McKenna said that Novation had only one vendor of safety needles and syringes on contract. "Today," he said, "hospital members have a choice of four different vendors. More than 65 percent of Novation's medical-surgical contracts are either dual- or multisource agreements."

Not everyone on the Senate panel was impressed with Novation's claims. "There are more ambiguities in their actions and they won't get rid of sole-source contracting," complained one panel aide, who also questioned Novation's close ties to Neoforma, the San Jose, CA-based dot-com. "We asked Novation about their insistence in requiring manufacturers to participate ha their website," said the aide, "but we have had no response from them yet. McKenna shouldn't be surprised or disappointed that he came under more fire at the hearing."

Physician preference a key issue

Insiders interviewed for this article, said that the matter of physician preference items has emerged as a major challenge for GPOs. "The definition of physician preference is critical and it is important that the definition is tight," said an attorney involved in the matter. A materials manager of an integrated delivery network in the Southwest, who also requested his name be withheld, had a more urgent viewpoint: "Everything is a physician preference product," he said. "No materials manager at a not-for-profit hospital can out and out change the product because they got a better price. Not if you want to live you can't."

HIGPA has been just as unrelenting in its defense of group purchasing as the Senate and others like the Medical Device and Manufacturing Association have been critical of it. While the MDMA has kept up its volley and is calling for an end to the Safe Harbor provision for GPOs, HIGPA has steadfastly pointed in the other direction. Given that group purchasing empowers healthcare providers to negotiate discounts from suppliers at virtually no cost to those providers, GPOs are the real untold success story in health care, said Robert Betz, Ph.D., HIGPA's president and CEO in submitted testimony to the Senate subcommittee for the July 16 hearing. "Today, group purchasing organizations are showing how their contracting practices are transforming to accommodate small manufacturers to bring innovative products to the marketplace mad how GPOs benefit healthcare providers."

Betz' written testimony cited a May 2003 Lewin Group research study, which contained three separate analyses "which concluded that GPOs provide measurable savings as well as non-financial benefits to hospitals and health systems."

Not everyone agrees of course. Ted Almon, CEO of The Claflin Company, a Rhode Is land-based regional med-surg product distributor, and a longtime opponent of the GPO system, strongly favors an end to the Safe Harbor rules for GPOs. "Repeal Safe Harbor," he says, "That is what they have to do. Perception is reality and you cannot eliminate the perception of conflict of interest if fees are paid by the vendors. The easiest and fastest way to resolve this is to rescind Safe Harbor, which itself is anti-competitive because it doesn't apply to everyone."

Almon's solution: "Tell suppliers they can net fees out of charges to the hospitals and bill the member for contracting services. Hospitals should decide what services they want to pay for."

Says Almon, "HIGPA is reacting as if the very existence of their members faces an imminent threat, when in fact most stakeholders, whether industry insiders or regulators, believe (as do I) that GPOs serve an important role as consolidators of contracting activity within our channel. Elaborate arguments about what might happen if GPO's no longer existed are inappropriate and unnecessary. No one expects or even wants the GPOs to go away. Reform of the revenue model, which would facilitate open and fair competition and the economic incentives necessary to refine the efficiency with which GPOs provide their essential service, is a reasonable and non-threatening goal. It can't be accomplished with rhetoric. Only real business planning and effective change management can accomplish it, but it will be accomplished, if not by today's players, then by the future members of HIGPA."

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