GPOs Under Investigation:

Edition: July 2002 - Vol 10 Number 07
Article#: 1279
Author: Repertoire

At press time, pundits, apologists and naysayers were weighing in the hottest supply chain issue since, well, group purchasing organizations fell under the scrutiny of the federal government in the mid-1980s for accepting administrative fees from contract vendors. Various suggestions for how GPOs should conduct business – otherwise known as ''codes of conduct'' – were making their way around the industry. The GPOs themselves came up with one. So did the Medical Device Manufacturers Association, whose proposed code called for the elimination of administrative fees and sole-source contracts.


The flurry of activity followed Capitol Hill hearings in late April by the Senate Judiciary Committee's Subcommittee on Antitrust, Competition and Business and Consumer Rights, in which lawmakers grilled GPO executives about various ''excesses'' reported in a series of New York Times articles. Among those excesses were:


• In 2001, Novation and the hospitals that own it backed the electronic commerce company, Neoforma, with about $70 million in subsidies, stock purchases and loans. Neoforma has never turned a profit and has reported losses of $500 million since it was founded in 1996, reported the newspaper.


• Premier invited suppliers to attend a 2000 conference with this written offer: For $25,000, a company could buy not only advertising at the conference, but also a ''private dinner'' with two Premier vice presidents, and a ''small group meeting'' with hospitals.


• In 2001, salaries and benefits at Premier rose to $124 million, up 53 percent from $81 million two years earlier. Premier returned about 22 percent of its revenue in 2001 to member hospitals. VHA returned 20 percent last year and Novation's other affiliated group, University HealthSystem Consortium, about 40 percent.


The Senators gave GPOs 90 days to present a proposed code of conduct. It actually took the groups less than half that many days to comply. On June 7, the Health Industry Group Purchasing Association presented a preliminary code to the Senate and other trade associations for review and comments. HIGPA spokesman David McDonough said the association expected to reconvene its working group at the end of July to finalize the code.


On its first take, HIGPA called for GPOs to disclose to members the amount of administrative fees they receive from contract vendors based on total GPO purchases and those of the individual member.


In addition, the association called for GPOs to disclose any investments they make in companies with whom they contract. It also called for strict limits on gifts or other favors received from contract vendors.


Needless to say, the MDMA called for stricter measures. ''Offering hospitals a wide variety of products, in each category, should always be a principal goal of GPOs,'' said the association.


MDMA called on GPOs and their employees to refrain from the following activities:


• Accepting administration or marketing fees from vendors.


• Serving on any vendor's board.


• Creating incentives for purchasers to select certain products by bundling unrelated products or by encouraging the use of particular distributors.


• Entering into private-label arrangements with manufact-urers.


• Signing sole-source contracts.


MDMA's code called for GPOs to:


• Provide at least three bona fide sources (if available) for every product offered.


• Limit contract periods to two years.


• Publish to its members all


winning vendor bids as well as losing bidders' quotes.


• Enter into contracts with any vendor so long as the vendor has letters of interest from responsible clinicians of member hospitals that represent 2,000 beds aggregate.


McDonough said that HIGPA was concerned that if all of MDMA's provisions were incorporated into the final code of conduct, GPOs would be stripped of their ability to compete with each other, and hospitals would be left with little or no choice when selecting a GPO.


An Opportunity for Introspection
One observer – Lynn Everard, vice president of supply chain education and strategy for HealthCare Logistics, Coconut Creek, FL – said that the hubbub created by the New York Times articles offers GPOs an opportunity take a close look at their missions. ''GPOs started out lowering pricing, but then started playing God in the lives of companies,'' he says. Instead of sticking to negotiating contracts, they started investing in start-up medical device and pharmaceutical companies, he said. ''That's not a valid function of any GPO. They should be focused on identifying pricing opportunities.''


Although Everard maintained that he has no problem with GPOs branching out into programs such as clinical and operational benchmarking, he wondered if ''they're being done to justify their fees, or to create value?''


Hospitals are partly to blame for the debacle, he said. They have lulled themselves – with encouragement from GPOs – to believe they can get something (such as a portfolio of contracts, rebate checks, etc.) for nothing. ''Hospitals should be willing to pay for what they get,'' said Everard. ''This is all part of defining value and then delivering it. If you can do that, great. If you can't, then [the service] should probably go away.''


But the big question remains, will hospitals agree that their GPOs should suspend administrative fees and instead exist through member dues? ''We need to teach hospitals that it's OK to pay for something if it has value,'' said Everard.