Front and Center For GPOs

Edition: December 2003 - Vol 11 Number 12
Article#: 1731
Author: By Mark Thill

The events of 2002 and 2003 have brought GPOs out from under the political radar screen.

It's been a rough-and-tumble 20 months for group purchasing organizations (GPOs). Beginning in the spring of 2002, The New York Times published a series of damaging articles targeting GPOs. Soon thereafter, the U.S. Senate Subcommittee on Antitrust, Competition Policy and Consumer Rights conducted public hearings on group purchasing in Washington. Now the U.S. Federal Trade Commission, Department of Justice, General Accounting Office and even some state legislatures are in on the action.

Through it all, Robert Betz, president and CEO of the Health Industry Group Purchasing Association (HIPGA), has been a steady voice speaking out for the group purchasing industry. Recently, Repertoire asked Betz to speak about the past 20 months and their effect on GPOs and the supply chain at large.

Repertoire: Where are we today in terms of Washington's scrutiny of the group purchasing industry? Any predictions about how it will play out?

Robert Betz: The regulators and lawmakers are continuing their examination of the industry. In my view, this is an administrative issue at this juncture. In other words, the real action that's going to occur will be more on the agency side, not in the legislative branch. Congress has started the ball rolling, and we may have another hearing of the Senate Antitrust Subcommittee - probably tied to the release of the next report of the General Accounting Office. But the Federal Trade Commission, Department of Justice, General Accounting Office - this is where the action will be in the months ahead.

I think there will be activity in the states. In California, legislation [SB 749, which would have imposed restrictions on sole-source contracting, caps on administrative fees and restrictions on bundling of clinician-preference items] has been parked in the House Assembly, meaning the bill is on inactive status. Sen. Martha Escutia has said she wants to become more educated about GPOs, and she may hold hearings sometime around the first of the year. HIGPA has committed to working with her.

I think the opponents of group purchasing will develop model legislation at the state level, and the issue will fall on fertile ground with some state politicians, because of the concerns about controlling healthcare costs. However, I think all sectors of the healthcare supply chain - providers, groups, manufacturers, distributors/wholesalers - are in for further examination.

In another development, Seth Bloom, legal counsel for Sen. [Herb] Kohl [ranking member of the Subcommittee on Antitrust, Competition Policy and Consumer Rights], stated his concern that small GPOs must not take competitive advantage of the larger groups who are trying to live up to their codes of conduct. He also said that large manufacturers deserve scrutiny as well. I think that indicates that the Senate Antitrust Subcommittee has these issues next on their agenda.

Repertoire: Are the complaints lodged against GPOs in the past 18 months different than those brought against them in the past?

Betz: The thing that's different today is that GPOs no longer operate under the political radar screen. Due to consolidation in the industry, and in response to consolidation among manufacturers and distributors, groups have been discovered. They'll be front and center in this country's discussion about healthcare costs.

The other thing that's different is that selective practices of groups, which I would observe are routinely used in other industries, are being scrutinized. GPOs are clearly being held to different standards than other industries.

Repertoire: You made a strong statement in your July 16 statement to the Senate Antitrust Subcommittee when you said, "We return to the Subcommittee today not because hospitals are unhappy with the current system of group purchasing, but because some manufacturers are'nt able to capture the sales they desire." Do you stand by that statement?

Betz: There are a group of manufacturers - predominantly small ones - who are not capturing the sales they want. They believe that the way to increase sales is to attack the representatives of providers the groups. It's predictable and in some ways understandable. They're profit-maximizing companies.

I don't believe the issue is really about access, but rather about guaranteed sales. But that's just not the way this country works. GPOs represent non-profit organizations that are doing their best to take care of patients. From this their activities evolve.

Small, profit-maximizing companies feel they deserve more of the market. They're willing to go to court, to Congress, to the states, to the agencies. That's OK. But at the end of the day, one fact is undeniable: The GPO system delivers the best product at the best price.

Repertoire: How have the Senate subcommittee hearings and resulting publicity affected group purchasing and GPOs? How is group purchasing different today than it was one year ago? Two years ago?

Betz: You see three things. First, the hearings and resulting press coverage have helped raise awareness about GPOs for those inside and outside the healthcare industry. Second, there are a number of organizations -manufacturers, wholesalers, distributors and providers - that still want to do business with GPOs. We had 30 non-member manufacturers show up at our recent EXPO in Arizona. Why would they come if they didn't see potential business opportunities? Third, the individual practices of groups are more transparent today than they were, given the adoption of HIGPA's code of conduct and those of our individual members.

It's only been seven months since HIGPA put into force its code of conduct. This is not an industry that can turn on a dime, but we're already seeing the benefits of transparency. Today, every member of HIGPA has certified that they're in compliance with the code. If they want to remain in this organization, the'll have to re-certify that they're in compliance. No other sector of the healthcare industry has an enforceable code like ours.

Repertoire: How much of the criticism leveled against GPOs over the past two years was justified?

Betz: There were some business practices that needed to come to light. Fortunately, they involved only a small number of business practices and individuals. The practices have been addressed by the various codes adopted.

However, in fairness to the groups, some news reporting stepped away from the story and made allegations against individuals. Some people in

the media stepped over the line. Yes, some business practices needed to be examined. But our members have addressed those practices and the individuals involved. Yet we don't see reporting about that.

Repertoire: What is the most unfair charge leveled against GPOs?

Betz: In my view, the most unfair charge was that GPOs are more concerned about their bottom line than about the patients and getting the best products at the best price. That came as a shock to the professionals who work in group purchasing.

It's grossly unfair to question the motivation of dedicated people in the industry who are trying to provide for the patient. If they were only interested in their bottom line, why would they have all the clinical reviews, the patient care committees? They would just sit down with manufacturers and cut a deal. But that's not what happens.

Repertoire: How do GPOs need to improve?

Betz: They need to do a better job of communicating. Previously, they felt everyone should love them because they were on the side of the angels. Now they realize they have to communicate better with the provider community they serve, and with policy makers as well.

Repertoire: In your testimony of Sept. 26 before the Federal Trade Commission and Department of Justice, you clarified what HIGPA can and cannot do on behalf of its members. Can you recap that for us?

Betz: The people who write the laws have asked us to do things in violation of the antitrust law. They've asked us to talk about administrative fees, private label programs, bundling, etc. This is a per se violation of the antitrust laws. If they want to talk to individual organizations, they can. But they haven't given HIGPA a special exemption.

Repertoire: Is it the GPOs' responsibility to see that the playing field is leveled, that is, that small manufacturers have equal access to contracts?

Betz: I think the playing field already is level. But I would say, going back to an earlier point, that sales are not guaranteed once a GPO contract is captured. It's still the responsibility of the trading partner - not the GPO - to do the legwork, the marketing and selling of the products. The groups do not work for the manufacturer, the distributor or wholesaler. They work for the provider.

Groups don't get up in the morning and say, 'How can I lock out small manufacturers that have innovative products?' If they have innovative products and clinicians want them, the clinicians will get them, regardless of what the groups say. I think the field is competitive, even more so than a year ago.

Repertoire: You've said that the absence of GPOs would be harder on smaller manufacturers than their existence, because without GPOs, manufacturers would have to write thousands of contracts - and only the biggest ones can afford to do that. Would you maintain there are other ways in which GPOs actually help small manufacturers?

Betz: Many small manufacturers have told me that working with groups has been economically beneficial to their companies. In addition, groups regard the products of small manufacturers that are owned by women and minorities as a different category - one for historically underutilized businesses, or HUBs. Groups can provide enormous benefits for small manufacturers with truly innovative products.

Repertoire: In your Sept. 26 comments to the FTC and DOJ, you said that HIGPA regards the GAO study, which was released July 16, 2003, to be a "fair assessment of the industry." What are its most important findings? [The study says that GPOs collect roughly the allowable percentage of administrative fees - 3 percent. It also says that solicitations for bids typically are NOT limited to manufacturers already on contract. But it also pointed out that all GPOs do some sole-source contracting, and most do some sort of bundling.]

Betz: I believe the GAO gave a balanced portrayal of the GPO industry. Indeed, the GAO indicated the various tools GPOs employ to capture savings to providers. However, it's important to mention that these tools are employed in other industries. Additionally, it's the trading partners that lobby for certain types of contracts (sole-source, long-term contracts, etc.); it's not the GPOs spearheading the effort. This fact seems to be repeatedly overlooked in media, legislative and regulator inquiries.

Repertoire: Some charge that administrative fees discourage GPOs from pursuing the lowest possible price from their vendors. How would you respond to that?

Betz: Fees allow hospitals and other providers to devote more resources to the administration of direct patient care. Without the ability to earn administrative fees, hospitals would be in a terrible situation. They would have to choose between directing resources to patient care or to the operations of their group. They might have to stop using GPOs altogether.

But it's been shown that groups benefit providers. Without group purchasing, hospitals would lose volume discounts. And even though groups don't like this, the fact is, hospitals often belong to more than one group. If any of their groups are'nt performing, they'll be replaced.

Repertoire: You just came back from the HIGPA annual meeting. What was the prevailing attitude there about what's happening in Washington?

Betz: Our EXPO was great. We had our highest attendance ever. I think this speaks to the fact that people are feeling more comfortable with our code of conduct. They want to work with GPOs.

People were thrilled that hospitals in California weighed in so heavily against Senate Bill 749. But others were alarmed that the Senate Subcommittee and the FTC did not offer an opportunity for providers to testify at their hearings. It raises the question, "Do we really want to talk about this issue, or are political axes grinding?" People are saying, "We were told this was going to be a level and fair examination. So where are the providers?" HIGPA will continue to raise this issue.

Repertoire: Changing gears for a moment, what challenges do self-contracting IDNs pose to GPOs? What opportunities do they represent?

Betz: IDNs need to be viewed in a historical context. IDNs are what GPOs used to be, and what some still are. IDNs are doing important work. HIGPA has IDNs in its membership. We welcome IDNs as part of HIGPA. We're specifically interested in talking to them in a public policy context.

IDNs are going to manufacturers on certain items to see if they can get better pricing. On certain products, they can. And they'll continue to do it. Groups today struggle with the age-old question: Are IDNs competitors or customers? They're both. All the IDNs I know of have a relationship with a GPO.

Repertoire: What will GPOs look like in five years?

Betz: The wave of retirement for Baby Boomers will start this decade - in 2008. They'll start flooding into the healthcare delivery system, putting an enormous financial burden on the government, private payers and the healthcare workforce. Procurement organizations as well as their trading partners will have to rise to the challenge. We'll have to control costs while keeping the best products in clinician' hands.

The outlook for groups over the next five years depends on how much further Congress will get involved in the contracting practices of groups. In my view, hospitals are not going to be better served by this effort.

The likely outcome is that if groups are restricted from using certain contracting tools that are available to other industries, prices for healthcare providers will increase. Congress and the agencies need to be very careful that they're not exacerbating the problem.

Group purchasing is one of the real untold success stories in healthcare. I think healthcare costs would be so much higher if it were not for GPOs working in tandem with its partners. My prediction is that at the end of five years, group purchasing will still be standing, still being used as a vital tool in keeping costs down.

Repertoire: Besides monitoring events on Capitol Hill, please describe HIGPA's primary initiatives for 2004 and 2005.

Betz: First, we will continue to sponsor world-class educational offerings, which people look forward to because we get the tough issues out on the table. We'll continue to talk about policy issues and legal issues. Second, we'll move ahead with our Web-based directory, in which manufacturers can bring new products to the attention of our members or even notify us if a GPO is not in compliance with the HIGPA code of conduct.

We recently published disaster supply guidelines in conjunction with HIDA, HDMA and AHRMM; and we submitted comments to the Office of the Inspector General on pharmacy guidelines. HIGPA continues to work with HIDA on its supply chain advisory council, and we're drafting comments for the counterfeit drug task force.

By the beginning of 2004, we intend to have an aggressive monitoring program to follow developments in the 50 state houses. This is something the membership has asked for. Eventually, HIGPA may even develop state-level advocacy programs.

I think that HIGPA will become the recognized standard-setter for best ethical standards in the industry, as detailed in the HIGPA code of conduct.

Finally, let me offer a 30,000-foot observation. The HIGPA leadership is committed to further developing the association's mission and vision, and to making sure that our value statement is in accord with what will serve the healthcare providers. I'm proud to be part of this effort.