Group Yell

Edition: February 2003 - Vol 11 Number 02
Article#: 1447
Author: Mark Thill

To say that the group purchasing industry is experiencing growing pains is putting it mildly. Indeed, the events of 2002 attest to some pretty bad times: Senate Subcommittee hearings, damning (and to some, damned) New York Times articles, and the jockeying of all parties to look their very (innocent) best.

But the discomfort that GPOs and others were feeling as the New Year opened may more accurately be called “grown” pains, that is, the pains associated with having gotten too darned big. Nor are GPOs the only ones hurting. So are manufacturers, distributors and hospitals themselves, according to observers. And there’s more hurt to come.

Group hug? Hardly. It might be time for a “group yell” instead.

Progress or Window Dressing?

During Senate hearings last April, manufacturers accused GPOs of locking innovative technologies out of the market and getting into bed with big market-share-leading manufacturers, from whom they get millions of dollars of administrative fees. The themes were echoed in a stream of articles in the New York Times.

But that was then. Recently signed contracts appear to reflect some changing times in the industry. For example:

· Both Broadlane and Premier awarded three-year agreements to Irving, Calif.-based Masimo, one of the GPO industry’s loudest detractors, for its pulse oximetry technology.

· Novation awarded new supplier agreements for needles and syringes in two categories: standard (Franklin Lakes, N.J.-based BD and Mansfield, Mass.-based Kendall Co.), and safety (BD, Kendall, Abbott Labs of Abbott Park, Ill., and Portex Inc., Keene, N.H.).

· Premier signed 18-month agreements for exam and surgeon gloves with a variety of manufacturers: Adenna Inc (Santa Fe Springs, Calif.); Allegiance Healthcare Corp (McGaw Park, Ill.); Broadline Medical Systems (San Leandro, Calif.); Cypress Medical Products (McHenry, Ill.); Forever Fresh Global Inc (Detroit); Medgluv Inc (Pompano Beach, Fla.); Medline Industries (Mundelein, Ill.); Tradex International Inc (Cleveland); and World Healthcare Systems (Chattanooga, Tenn.). For surgeon gloves, Premier contracted with Allegiance Healthcare Corp (McGaw Park, Ill.) and Maxxim Medical (Waltham, Mass.).

While these events have given hope to some, others remain skeptical. Michael Leahey, the newly appointed executive director of the Medical Device Manufacturers Association, is one of them.

Washington, D.C.-based MDMA comprises 160 manufacturers of medical devices, diagnostic products and healthcare information systems, including Masimo and Retractable Technologies, (the Little Elm, Texas-based manufacturer of safety syringes, whose CEO, Tom Shaw, has led a crusade against GPOs and big companies such as Becton Dickinson for several years). In June 2002, the association called for GPOs to adhere to a strict code of conduct, which would prohibit GPOs from (among other things):

Asking for or accepting any type of financial value or remuneration of any form (such as administration fees, marketing fees, advertising fees, research grants, etc.) from vendors.

Creating incentives for hospital purchasers to select certain products over others through bundling or tying together unrelated products, or directing or encouraging the use of particular distributors of products.

Entering into private-label arrangements with manufacturers.

Entering into sole-source contracts with manufacturers.

Discouraging or penalizing participating hospitals for evaluating or using medical products or technologies that are not on contract.

Entering into contracts with manufacturers that exceed two years in duration.

Incorporating terms into their contracts that require a supplier to use an e-commerce vendor (independent or affiliated with the GPO) for the purpose of selling product, or else face penalties.

OK for a First Step

Speaking with Repertoire, Leahey calls the codes of conduct drawn up by the Health Industry Group Purchasing Association, Novation and Premier “important first steps in opening up the hospital market to fair and open competition.” (At press time, AmeriNet, Consorta and MedAssets were completing work on their own codes of conduct.)

“But I emphasize the words ‘first step,’” says Leahey. “Before there can be any meaningful improvements, the GPOs must come to grips with the serious conflicts of interest that have arisen in the marketplace.”

GPOs claim to be third-party brokers, he says. “But since their salaries are, in effect, paid for by the manufacturers with whom they contract, they wind up protecting the market shares of incumbent vendors. We believe that the GPOs’ reason for being is to provide hospitals with products – not to pick winners and losers in the marketplace.”

Leahey expresses “cautious optimism” about the contracts that Masimo has secured. (Masimo itself was not available to be interviewed for this article.) But he has reservations.

“I often ask myself if the Masimo situation is the exception that proves the rule, that GPOs actually delay the introduction of innovative products,” he says. “What took [the GPOs] so long? Independent studies showed that the Masimo product was superior to that of competitors, and also that it was actually offered at a lower price. Yet [Masimo] could not obtain a contract until after a major newspaper – the New York Times – wrote about the issue, and after the U.S. Senate conducted hearings. It should not take these drastic measures for companies to sell their products to hospitals.”

Small Manufacturers Skeptical

It would be safe to say that GPOs have a long way to go before passing muster with the members of MDMA, many of whom are small manufacturers.

“MDMA has many concerns related to group purchasing,” says Leahey. “One is that physicians still cannot reliably obtain innovative products to help their patients, simply because an administrator is worried about compliance issues with the GPOs.

“A very serious related issue continues to be incentive contracts. In some cases, contracts that have current incentives tied to purchases made four years ago prevent the hospitals from buying the best products at the best price because of the financial penalties.

“And, third, of particular interest to policy makers is the lingering concern that GPOs not only do not save money for the healthcare system, but may actually increase costs without adding value to the system. A [General Accounting Office] study concluded: ‘A hospital’s use of a GPO contract did not guarantee that the hospital saved money. GPOs’ prices were not always lower and were often higher than prices paid by hospitals negotiating with vendors directly.’”

In addition, Leahey continues to be troubled by “the continued use of bundling schemes coupled with financial incentives to choose an incumbent vendor over a newcomer, such as Masimo.”

“The bottom line is that GPOs should not be in the business of steering purchases to one company or another,” he says. “They should negotiate straightforward contracts and then let their member hospitals decide which product they want.”

If there is a silver lining to this dark cloud, it may have presented itself in November, when MDMA hosted a Technology Forum in Alpharetta, Ga., with MedAssets HSCA, the St. Louis-based purchasing group. Eleven MDMA members, including Masimo and Retractable Technologies, showed their products to materials managers on MedAssets HSCA’s advisory committee. Also on hand were clinicians, including OR nurses, laboratory managers and clinical resource managers.

In addition, MDMA’s Leahey expressed satisfaction that Premier and Novation – the two GPOs on the hot seat – have “at least acknowledged that problems exist that must be addressed.”

Manufacturers’ Quandary

But addressing those problems – while necessary – will probably only bring on new ones, says Michael Richardson, director of business development for healthcare, Strategic Pricing Group, Waltham, Mass.

For example, if GPOs open up their sole- or dual-source contracts to a variety of small manufacturers, the effect on GPOs’ fees could be disastrous (if they fail to get the same level of compliance), he says. Furthermore, if GPOs reduce the length of their contracts, they may erode the commitment from their members.

“Many hospitals have spent a lot of time and effort supporting the GPO initiatives, and working through sometimes painful conversion processes,” says Richardson. “They are not too keen on making wholesale changes. So some are asking, ‘Why would we make a wholesale change for an 18-month contract?’”

Meanwhile, manufacturers – particularly those with sole-source contracts – are preparing for the worst. Most are convinced that they won’t have what they had in the past, says Richardson. “If [their current contract] is sole-source, they’re convinced it’ll go dual; if it’s dual, they think it’ll go multi-source.”

That could lead to plenty of disenchantment. For example, what’s a manufacturer to do who has extended an aggressive price on a sole-source basis to a GPO’s members for five years, only to see the contract opened up to its competitors?

“It’s only logical that if you deeply discount your product to gain market share, you will have to raise prices if you are forced into a more competitive situation, because your cost of sales increase significantly,” says Richardson.

“You haven’t had a price increase in five years. So now what do you do? How far can you move your pricing up?”

Such changes will even affect the people whom manufacturers place in the field, says Richardson. For example, manufacturers with sole-source contracts can afford to put more “contract implementers” in the field, rather than more aggressive sales reps, he says. One company with whom he recently spoke has an array of nurses and other clinically trained people in the field. “They may not have superior sales skills, but they are fine at working with clinical people and implementing contracts,” he says. Now, that same manufacturer is wondering if it will have to drastically change its mix of people in the field, replacing those with a clinical focus with others using a more traditional sales approach. The effect on their field force could be dramatic.

It’s ironic, says Richardson, that manufacturers of physician-preference products who have avoided GPOs will be relatively unaffected by all these developments, while those who made the commitment to work with GPOs “are really nervous now.” Those manufacturers of physician-preferred products who chose to use their GPO portfolios to set “price ceilings” rather than “price floors” are feeling pretty smart right now, he adds.

Plenty of Blame to Spread Around

Providers themselves can shoulder some guilt, having failed to articulate their purchasing and contracting needs and then pursuing them, suggests Lynn Everard, vice president of supply chain education and strategy for Healthcare Logistics Services, Coconut Creek, Fla.

“Why was it that hospitals needed the New York Times to ride to their rescue?” he asks. “Why was it that member companies of MDMA couldn’t get the attention of hospital purchasers or GPOs? If you take a market and put the buying decision in the hands of only a few, the only result you can have are monopolistic tendencies. There’s no other outcome.”

The problem extends beyond just GPOs and providers, he says. No one to date has truly defined the GPO’s role in the supply chain.

“One can question whether or not GPOs are agents of the hospital or brokers,” says Everard. “The preponderance of evidence suggests they are brokers, paid a commission, as opposed to an agent, paid a stipend or salary. Administrative fees are, in my opinion, nothing more than sales commissions.”

And in their bid to aggregate volume to attract suppliers, GPOs have, in effect, stifled innovation and competition, says Everard. “The market is not wide open; there are a fixed number of prices; most-favored-nation clauses kick in, handing suppliers an excuse not to offer lower prices; and smaller companies can’t get anyone to pay attention to them,” he says.

Pricing has become downright convoluted. For example, rather than extend their lowest prices to all GPOs (and expose themselves to the rigors of “most-favored-nation” clauses), manufacturers often hold back on discounts, preferring to pass money back to providers in the form of rebates, he says.

Unfortunately, “when you look at the time and effort that companies put into tracking rebates, etc., all of it has a cost, which is borne by hospitals,” says Everard. “It is covered in the cost they pay for products.”

Administrative fees muddy the water, too, he adds. “The only fees going to GPOs should be membership dues paid by hospitals,” says Everard. It’s simple: Money paid for value delivered.

“Every time you introduce another complication, you just add cost to the chain,” he says. “In the end, it’s not just about helping hospitals. It’s about helping all of us have a supply chain that’s reasonably priced, so that hospitals can spend more of their money on patient care and less on widgets. If we do the things we need to do, manufacturers can still make a lot of money, only they’ll do it differently.”

The Codes of Conduct

“One of my challenges for GPOs is this: Show me that you have bona fide, certified, professional procurement people handling your bidding and ensuring that it takes place according to professional standards,” says Everard.

GPOs should institute checks and balances in order to prevent wrongdoing by their employees. “If you’re a buyer for an organization that has a pass-through of $20 billion, the temptation for wrongdoing is incredibly high,” he says.

Meanwhile, Everard questions the value and substance of the codes of conduct that several GPOs and the group purchasing association have put on the table over the past few months. “These codes are designed to do one thing – change perceptions,” he says.

“I don’t believe a GPO is entitled to play God for startup companies,” says Everard. “I don’t believe GPOs should invest hospitals’ money in anything…. If they have that much money, it’s simple to decide they should return it to their members.

“I’m not against the principle of cooperative effort or bringing volume together. I just think there’s too much. Size creates power, which creates temptation, which creates a huge mess. In the end we all pay for it. I’d rather see an environment that’s more clear cut, with fewer incentives for GPOs to make money.”

Coming Next Issue: GPOs Speak Out

In March, Repertoire talks to GPO executives about the past year, and what’s ahead in 2003.