Policing the GPOs

Edition: November 2004 - Vol 12 Number 11
Article#: 1988
Author: Repertoire

The latest chapter in the GPO saga opened Oct. 1, as two U.S. senators introduced legislation that would institute federal oversight of group purchasing organizations.

As late as Sept. 14, the issue had still been up in the air. That’s when members of the Subcommittee on Antitrust, Competition Policy and Consumer Rights of the U.S. Senate Judiciary Committee held a meeting on proposed legislation, entitled the “Medical Device Competition Act of 2004.”

The legislation was introduced almost three years after the Sub-commitee began investigating GPOs’ business practices. The first of the public hearings followed a series of articles in The New York Times, which painted the picture of an industry rife with conflicts of interest and intent on locking out small manufacturers in favor of large ones.

The GPOs had maintained they didn’t need outside regulation, and that the Codes of Conduct instituted by the Health Industry Group Purchasing Association (HIGPA) and its individual members were enough to ensure that GPOs behaved appropriately and in the best interests of all involved. But a vocal group of manufacturers, led by the Medical Device Manufacturers Association (MDMA), believed that without legislation, GPOs would backslide into some uncompetitive activities.


“Some practices engaged in by certain hospital group purchasing organizations have had the effect of reducing competition in the medical device and hospital supply industries by denying some suppliers and device makers access to the hospital marketplace,” notes the legislation. It cites a “compelling public interest in having the Secretary of Health and Human Services (HHS), in consultation with the Attorney General and Federal Trade Commission, engage in oversight and supervision of the current Federal health care program anti-kickback exemption (also known as the safe harbor) provided to group purchasing organizations.”

If signed into law, the legislation would:

• Require that Health and Human Services regularly certify that personnel who negotiate contracts with manufacturers on behalf of healthcare providers are in compliance with the regulations. The regulations broadly define “purchasing agent” as any individual or entity “that negotiates and implements contracts to purchase hospital supplies or medical equipment, devices, products or goods or services of any kind for any group of individuals or entities who are furnishing services reimbursable under a Federal healthcare program.”

• Restrict the amount of fees paid to purchasing personnel or GPOs to 3 percent of the purchase price of goods or services provided by contract vendors. That fee would be restricted to include “only those reasonable costs associated with the procurement of products and the administration of valid contracts” and would not include “marketing costs, any extraneous fees or any other payment intended to unduly or improperly influence the award of a contract based on factors other than the cost, quality, safety or efficacy of the product.”

• Require that HHS, in conjunction with the Attorney General and Federal Trade Commission, promulgate final regulations specifying contracting, business and ethical practices that are “contrary to antitrust law, to ethical standards, or to the goal of ensuring that products necessary for proper patient care or worker safety are readily available to physicians, healthcare workers and patients.” Such regulations would take into account “the compelling public policy goals” of encouraging competition and innovation among medical products manufacturers, reducing the cost of healthcare through the aggregation of buying power and “the potentially detrimental impact of certain anticompetitive contracting practices.”

A Need for Oversight

“There needs to be some sort of solution, whether legislative or non- legislative, to make sure that changes (in the GPO industry) remain in place when our investigation goes away,” said Jeff Miller, chief counsel to Sen. Herbert Kohl (D-Wis.), who is the ranking Democrat on the Subcommittee, speaking with Repertoire, one week before the legislation was introduced. “Enough has occurred in this industry – either that we have uncovered or others have – that we’re concerned that when our investigation ends, some of the good gains that have been accomplished won’t be lasting,” said Miller.

“Once our oversight is lifted, one wonders what will happen,” added senior counsel Seth Bloom. “What happens if there’s a management change in a GPO? There are no assurances under a voluntary code. So you have to not only ask, ‘What has been going on in the industry that has led us to this conclusion?’ but also, ‘What about the future?’”

It’s conceivable that a non-legislative, third party organization with enforcement authority could monitor GPOs and handle complaints, said Miller. “But if the GPOs don’t come to us with an offer of what that would look like, legislation is a credible alternative.”

Problem Already Solved

But in the GPOs’ minds, they already had come up with a credible alternative – their own Codes of Conduct. “HIGPA’s Code is unprecedented in the healthcare supply chain industry, and the only mandatory one within the industry,” says HIGPA president and CEO Robert Betz in his testimony at the Sept. 14 hearing. “The adoption and implementation of the Code underscores the group purchasing industry’s commitment to improving healthcare and advancing technological innovation at the most manageable cost to providers of care and their patients. Ultimately, it has provided greater accountability to hospitals and other providers.”

Betz says highlights of HIGPA’s compliance program include the following provisions:

• All GPO members must adopt the HIGPA Code of Conduct into their business models in order to remain a member.

• All HIGPA members must certify compliance with the Code of Conduct on an annual basis.

• Each GPO must designate a compliance officer to assure that the organization is abiding by the provisions of the Code.

• In addition, HIGPA has created an Internet-based “Exchange”, enabling manufacturers of healthcare devices and equipment whether contracting with a GPO or not to promote new and innovative technologies directly to GPO members.

Consequences of Non-Compliance

During the hearing, Betz was asked what happens to a GPO that fails to adhere to HIGPA’s Code of Conduct. He responded that a member in Florida had come close to being expelled from the association for failing to take the Code of Conduct seriously. Faced with that possibility, the organization came into compliance.

But skeptical, Sen. Kohl and Sub-committee Chairman Sen. Mike DeWine (R-Ohio) pressed the issue.

“Even if it’s true that they could be expelled, a GPO could continue to do business,” said Kohl.

“Yes, indeed they could,” Betz replied.

Responding to a question by DeWine about the “real world consequences” of expulsion from HIGPA, Betz said, “The reality of the situation is that [a GPO expelled from HIGPA] would face pressures in the marketplace. If you were a manufacturer, wouldn’t you want to do business on a long-term basis with somebody that is open and compliant with the industry’s Code of Conduct?” He added that hospitals want to know their GPOs have the highest ethical standards, too.

Kohl challenged Betz about the effectiveness of self-regulation, posing this question, “Isn’t it true that it wouldn’t be unreasonable to be quite worried, given past history, that in the absence of something concrete, such as legislation, there is a chance - call it large or small - that we could come back in a year or two, or three, four or five, to discover that we are back where we started?”

Betz replied, “I would disagree with the whole basis of your observation. I think current remedies do exist.” He also said that the Federal Trade Commission and Department of Justice already could bring action against GPOs who violate the spirit of safe harbor.

Betz also cited a July 2004 report by the Federal Trade Commission and the Department of Justice, titled “Improving Health Care: A Dose of Competition”, which indicated that current remedies are indeed sufficient. According to the report, an existing statute called Health Care Statement 7 – “does not preclude Agency action challenging anticompetitive contracting practices that may occur in connection with GPOs. The Agencies will examine, on a case-by-case basis, the facts of any alleged anticompetitive contracting practice to determine whether it violates the antitrust laws.”

Speaking with Repertoire after the hearing (but prior to the introduction of legislation), Betz said that HIGPA would like the chance “to continue the discussion, to work cooperatively, to build upon the living document we have created, to see enhancements or potential enhancements to the Code, and to see if there are ways to strengthen the effectiveness of our Codes.

“That’s the course we set on two years ago when we made our commitment in front of the United States Senate,” he said. “We delivered repeatedly for the Senate. I think we should be given the ability to stand on our track record. They want to work toward a mechanism that would make the changes permanent. But I would argue that the industry is different today.”

Time’s Past for Self-Regulation

Not surprisingly, not everyone agreed with Betz. One naysayer at the Sept. 14 hearing was David Balto, partner in the Washington, D.C.-based law firm Robins, Kaplan, Miller & Ciresi LLP, and former policy director of the Bureau of Competition of the Federal Trade Commission. “The industry’s efforts at self-regulation have fallen far short,” said Balto. “The time for effective self-regulation has passed. Congress should act to regulate anti-competitive activities.”

Also appearing before the Subcom-mittee was Joe Kiani, president and CEO of Masimo Corp. in Irvine, Calif., who testified on behalf of the Medical Device Manufacturers Asso-ciation. Having appeared in previous Subcommittee hearings on group purchasing, Kiani believes that his company - which makes pulse oximeters - has been locked out of GPO contracts in the past because of collaboration between GPOs and Nellcor, a Tyco Healthcare company that also makes pulse oximeters.

The good news, Kiani told the Subcommittee on Sept. 14 is that Masimo has secured contracts with Premier, Novation and other GPOs. “As a result of the Premier contract, just about every children’s hospital in the country gained access to Masimo technology,” he said.

Kiani said the bad news is that bundling continues unabated among some GPOs. Still others are protecting big companies, such as Tyco, at the expense of their smaller competitors. “The Codes of Conduct have not worked,” Kiani told the senators. “Many GPOs continue to engage in anti-competitive practices, which get in the way of the best products getting into the patients’ hands, at the most competitive prices. I’m convinced that the Codes of Conduct won’t work.”

As he had challenged Betz, DeWine challenged Kiani about his testimony. “Hospitals in Ohio tell me how important it is for GPOs to keep working,” said DeWine. “Certainly they are aware of the need to provide the best quality of care. Certainly…they believe they’re using the best devices. If GPOs were in fact cutting off access to new technology, why wouldn’t hospitals be demanding this technology? Why wouldn’t they be leaving GPOs?”

Kiani responded that in many cases, hospitals are unaware of new technology, adding that some GPO contracts prohibit hospitals from even looking at technology that competes with that of its contract vendors. “I do believe that it’s what hospitals don’t know (about new technology) that makes them say what they say,” said Kiani.

Modest Improvements Not Enough

Mark Leahey, executive director of the Medical Device Manufacturers Association, told Repertoire immediately after the hearing that the industry has seen some modest improvements over the past two years. “But Congress wouldn’t have held its third hearing if conditions had dramatically improved,” he said. GPOs are still bundling unrelated products and forcing their vendors to participate in the GPOs’ e-commerce exchange.

In some senses, conditions have actually deteriorated, said Leahey, citing one GPO that insists it and the incumbent vendor must approve a member hospital’s request to buy products from a non-contract vendor. He adds that bundling has actually grown in importance among some GPOs.

“So are GPOs really working in the best interests of the hospital, or have they evolved to working for manufacturers, who pay their salaries?” asked Leahey. “Hospitals should not need permission from their GPO or incumbent vendor to buy a product. [GPOs] have known for two years what steps are necessary to open up the marketplace. But they’ve shown an inability to really modify their behavior. Short of legislation, they’ll be back to their old tricks.”

MDMA supports legislation, but believes the proposed legislation could be tougher. “We’d like to see a prohibition against bundling of unrelated companies and products,” said Leahey. “We’d like to see a prohibition from [forcing members to] participate in companies or e-commerce platforms in which the GPO has an interest, which is how they are finding ways to circumvent administrative fees.

“We don’t think GPOs need to close their doors,” said Leahey. “But they need to scale back to their original charge of aggregating volume for prices. Once they do their evaluations and determine which products are on contract, it’s up to the hospital to determine which products they want to purchase. The GPOs should stand down.”