Premier Seizes Initiative

Edition: December 2002 - Vol 10 Number 12
Article#: 1389
Author: Repertoire

After months of taking it on the chin, Premier Inc. seized the initiative by publishing a 50-page report on its business practices and the practices of the GPO industry in general. The report, by business ethicist Professor Kirk O. Hanson, executive director of the Markkula Center for Applied Ethics at Santa Clara University in California, identifies the best ethical standards for GPOs, some of which go beyond those established earlier this year by the GPO industry and by Premier itself.

Hanson’s report was commissioned in March of this year by Premier CEO and Chairman Richard Norling, prior to the highly publicized Senate hearings on GPO practices, and immediately following some damning articles about GPOs in The New York Times.

Hanson was given full access to Premier personnel and records, and he sought input from Premier employees, members and contracting companies, as well as from federal officials and others. He reviewed his findings with a panel of four other independent ethics experts.

Overall, the report recommends significant changes in the policies and practices of GPOs. "At the center of these recommendations is concern for the ethical conflict of interest which may arise if GPOs play multiple and conflicting roles in the contracting process for hospital supplies and services," says Hanson.

Inherent Tensions

Many ethical dilemmas occur because of the “inherent tensions” in the GPO industry, says Hanson. Among those tensions pointed to in the report:

· The tension between good medical outcomes and cost control. In some cases, increased spending might improve medical outcomes, yet the hospitals and the GPOs as their representatives are obligated simultaneously to help control medical costs, says Hanson.

· The tension between the unit cost of goods and services and their total cost in use after assessing their effectiveness in use, technological capabilities and data on medical outcomes.

· The tension between standardization of medical procedures (and therefore supplies and equipment) and the need to rapidly adopt technologies that improve medical outcomes. Standardizing equipment in operating and hospital rooms can save lives, says Hanson. Having clinicians work on equipment with which they are familiar reduces errors and improves performance. Standardization also helps reduce inventory and materials handling costs. Yet, at some point, improved technology or opportunities for reduced cost by switching vendors or products warrants paying the “costs” in dollars and errors to adopt improved products and technologies.

· The tension between whether to adopt technological and other performance innovations based on initial information and vendor representations, or to wait for performance data based on actual use.

· The tension between the cost and other advantages of working with “familiar vendors” and the need to direct buying to vendors with the best prices and the latest technologies. Supply chain research demonstrates the benefit of having stable, long-term supply relationships in serving hospitals and the ultimate customers, patients, says Hanson. Nonetheless, these advantages can be harder to document than the advantages of small but real price breaks and incremental improvements in technology.

· The tension between being a private for-profit organization, which must sustain its own financial strength, and being owned by nonprofit organizations.

· The tension between negotiating stable multi-year contracts and buying on the spot market. It is often possible to secure at one moment a particular supply or service on the spot market at a lower price, says Hanson, adding that vendors are also often willing to undercut the GPO negotiated price in a particular market or at a particular moment in time.

· The tension between being solely a GPO or being an organization that takes on a variety of other functions designed to improve members’ supply chain management and overall performance. With these other activities comes the possibility of conflicts of interest and more complex relationships with vendors and potential vendors.

Ethics Principles

Next, Hanson develops a number of ethical principles upon which best practices could be based. Among those principles are:

· GPO management and the Board of Directors should share the responsibility for maintaining an effective ethical management system.

· A GPO’s first obligation is to serve its members’ interests, which includes the twin goals of good medical outcomes and cost containment.

· GPOs should provide ongoing assistance to their members in critical supply chain issues, such as product safety and efficacy.

· A GPO should ensure that its employees and non-employee directors and advisors do not have conflicts of interest that would compromise the decisions they make on behalf of the hospitals.

· A GPO should avoid conflicts of interest arising from ownership of equity in vendors or other business relationships with vendors, where these relationships do not directly serve the members and their interests.

· No contracting decision should be based primarily on the amount of administrative fees or fees for other services paid by a vendor. Total value to the members must be the criterion.

· A GPO employee or non-employee director or advisor should recuse himself or herself from any decision that represents a conflict of interest or may appear to be a conflict of interest.

· A GPO should seek broad engagement and input from member hospitals and their employees, particularly clinical staff, in contracting and technological assessment decisions.

· No vendor should be permitted to own or control a GPO.

· GPOs should conduct ongoing studies on the value they create for their members.

· GPOs should make all contracting decisions based on the interests of the members.

· GPOs should create a process for evaluating products and services that is as objective as possible.

· GPOs should provide members with maximum choice in purchasing, consistent with capturing maximum value from the contracting process and aggregation of demand.

· GPOs should provide hospitals with a greater range of choice in those areas where the individual choice of products or services by the clinician is strongly related to good medical outcomes.

· GPOs should write contracts of the shortest duration feasible when all economic considerations are included, thereby providing future opportunities to adopt breakthrough technologies and to improve the products and terms of contracting.

· GPOs should promote the use of minority and women owned vendors where practicable.

Kirk Hanson is a longtime researcher and writer on business ethics and a professor of organizations and society at Santa Clara. Before joining the Markkula Center, he taught business ethics in the Stanford University Graduate School of Business for 23 years. He was the founding president of The Business Enterprise Trust, a national organization created by leaders in business, labor, media and academia to promote exemplary behavior in business organizations.