Infection Control Today - 01/2003: IC BUSINESS

GPOS Maintain Their Value to Healthcare Industry as Senate Investigates Charges of Anticompetitive Practices

By Kelly M. Pyrek

As group purchasing organizations (GPOs) continue to come under fire from the Senate Judiciary Committee's Antitrust Subcomittee, at least one industry group has a kind word for the beleaguered purchasing entities. Last summer the Medical Device Manufacturers Association (MDMA) praised Premier, Inc., one of the largest hospital GPOs, for creating a proposed code of conduct to address anticompetitive practices. The Medical Device Manufacturers Association (MDMA) is a national trade association representing the medical device industry.

Sen. Herb Kohl (D-Wis.), chairman of the Senate Judiciary Antitrust Subcommittee and Sen. Mike DeWine (R-Ohio), ranking member, demanded during an April 30, 2002 hearing that GPOs produce a code of conduct within 90 days in response to concerns that life-saving medical devices were being shut out of hospitals by anticompetitive business practices of leading GPOs. According to the MDMA, the Health Industry Group Purchasing Association (HIGPA), the GPO industry association, failed to adopt meaningful changes to its members' corporate practices in the code of conduct it submitted to the subcommittee. Novation, a leading GPO, was noticeably absent from the process, the MDMA reports.

Joe E. Kiani, MDMA board member and chairman of MDMA's GPO Task Force stated, "I commend Premier for taking all of the feedback constructively to begin to make its necessary course correction. Through the dedication of Senators Kohl and DeWine and the willingness of Premier to embrace positive change, we now have a GPO code of conduct that could offer an important tool for restoring competition and innovation to our healthcare system."

Lawmakers said they were deeply disturbed by allegations of conflicts of interest in the business practices of GPOs that surfaced in a series of investigative articles by The New York Times. Reports alleged GPOs accepted sizable fees paid to them by manufacturers, a practice critics say stifles product innovation and threatens patient safety. Lawmakers have threatened congressional action if GPOs do not reform their policies. Suspecting that GPOs have strayed from their original purpose of obtaining the best medical products at low prices for healthcare organizations, Kohl and DeWine have asked the Federal Trade Commission and the Department of Justice to open investigations into whether GPOs had violated federal antitrust laws.

GPOs are buying consortiums originally designed to leverage the purchasing power of hospitals, allowing them to obtain discounts on medical products, supplies and equipment. One estimate places the GPO market for hospitals at between $148 billion, growing to $257 billion by 2009. Data from HIGPA estimates that group purchasing saves hospitals an estimated $19.2 billion, or roughly 15 percent of total purchasing costs.

Industry critics contend GPOs exist to restrict open market competition in the healthcare marketplace. They say because seven powerful GPOs dominate the purchasing activities of 85 percent of hospitals, only the largest and best-connected medical product manufacturers thrive and benefit from GPOs' benevolence.

Accusations against GPOs include stock holdings by GPO executives, sole-source contracts awarded to manufacturers who paid special fees and collusion between the buying groups and large manufacturers to exclude smaller, innovative manufacturers and to keep prices high. Venture capitalists say they are reluctant to finance upstart medical technology companies because of the anticompetitive business practices of GPOs, according to Times articles.

Eugene Schneller, PhD, professor and director of the School of Health Administration and Policy at the Arizona State University College of Business, says GPOs have their rightful place in healthcare. Pointing to the fact that up to 80 percent of every healthcare supply dollar is acquired through group purchasing, Schneller says GPOs can lower prices, offer price protection, provide improved quality-control programs, reduce contracting costs and monitor market conditions. He adds, however, that the ethics required in this kind of business practice can be a slippery slope.

"We must be mindful of the relationships GPOs may have had with manufacturers that might appear to be unethical and rethink the purchasing process," Schneller says. "There are some manufacturing groups that have said GPOs shouldn't have any relationships with any manufacturers in the product design process. There are GPOs that have decided to vertically integrate and make investments in companies that manufacture certain products, and there have been some objections to that. The auto industry does this kind of thing all the time. Ford will make an investment in a company that will manufacture parts for its vehicles. I don't think it's an unusual relationship."

Schneller says the MDMA's code of conduct is more restrictive and prevents GPOs from entering into relationships that will trigger marketplace efficiencies.

"The MDMA says if you have 2,000 doctors saying they want (a particular product), the GPO ought to have it. I'm not sure you want to stock something nationally for only 2,000 doctors. It may be that those 2,000 doctors want a product that is inferior. It may be lower cost but it may not be higher quality. One of the advantages of GPOs is that they force a discipline of standardization within the industry and that's important for safety and efficacy and not just cost."

The proposed code of conduct for GPOs submitted by the MDMA is designed to "create an environment where fair competition and innovation may exist and hopefully thrive in the medical device market." The code reads, "This purpose can only be achieved if GPOS are neutral and do not have conflicts of interest. Otherwise the free market, open competition and clinician choice will be threatened."

The code dictates the following pro-competition principles:

  • GPOs will not accept any type of renumeration from a vendor
  • GPO executives and employees will not serve on any vendor's board
  • GPOs will not create incentives for hospital purchasers to select certain products over others through bundling
  • GPOs will not enter into private labeling arrangements with manufacturers
  • GPOs will not promote one vendor over another
  • GPOs will not enter into sole-source contracts with manufacturers
  • GPOs will not discourage or penalize participating hospitals for evaluating or utilizing medical products or technologies that are not on contract
  • GPOs will not give any renumeration to any hospital employees

The code also contains fair-contracting and pro-transparency provisions, and calls for oversight measures to ensure compliance. In addition to finalizing the code, MDMA will continue to work with Premier, Congress, other federal agencies and all relevant parties to ensure a continued commitment to fairness and competition in the hospital supply marketplace.

MDMA president Larry R. Holden called Premier's proposed code of conduct "a step in the right direction and one that brings us closer to an industry solution." He noted that a code of conduct is just a code and that it is up to all involved parties to ensure that Premier's conduct matches its code. He also noted the reluctance of other GPOs to adopt similar pro-competition policies, however, and urged other GPOs to join Premier immediately in working with the Senate and MDMA to find solutions. Holden added, "We appreciate the progress made to date and look forward to continuing to work with the Senate and others to press the valid market access concerns of innovative medical device manufacturers."

Schneller believes GPOs still have value.

"I don't see 5,000 hospitals in this country going out and purchasing by themselves," he says. "I think that would create chaos in the market. During the last several months there has been tremendous concern about GPOs and the extent to which they provide value. The questions being raised by the Senate are, 'Do hospitals get the lowest cost for their products through group purchasing?' 'Do GPOs allow new technologies to get into the marketplace?' For example, if I design a new kind of syringe or medical product, what are my chances -- given what's happened in the industry with some very large companies and group purchasing contracts -- that I get my new product seen? That issue has raised a lot of questions about GPOs and what and how they contribute to the healthcare industry."

Schneller continues, "With time, two large GPOs have emerged, Novation and Premier, so you have two organizations that are very much involved in a fairly large proportion of what's happening in healthcare purchasing. Has the size of these GPOs created current problems in the marketplace or does it contribute to there being more efficiencies in the marketplace? Many manufacturers are trying to sue GPOs because they say they have been cut out of the industry. I think there's a good deal of evidence that GPOs have served as technology incubators because of their interest in bringing new products to their membership and they've contributed to the diffusion of new technology."

Schneller draws the parallel between medical product technology and computer technology.

"If I invented a new computer operating system, I'd probably have a heck of a time getting past Apple and Microsoft. You can argue that these two huge, standardized platforms make it difficult for any new software platform. This debate is not a unique discussion to healthcare."

Schneller is the author of a white paper funded by Novation that examined the extent to which hospitals saved money by being part of a GPO versus securing their own contracts. "We found there's about a 44 percent cost avoidance by going with the GPO. The organizations we looked at tended to be large, integrated healthcare delivery networks. The numbers might be different if we looked at smaller hospitals. Big or small, does a hospital really want to take the time to deal with bids?"

Schneller says that while hospitals can achieve cost savings through GPOs, buying groups often require various levels of purchasing compliance from their members. "Some GPOs are more restrictive than others. Some GPOs want full compliance in exchange for good prices. The compliance issue continues to be controversial. Hospitals tend to purchase commodity goods through GPOs at fairly high levels. As you get into clinical preference items, there is much less compliance because physicians may have strong product preferences. One of the criticisms has been that some GPOs are more restrictive than others in terms of what they require of their members to stay in compliance with their contract. GPOs have tiers based on compliance; one hospital may get a much better price than another hospital because of its willingness to comply with contract requirements. GPOs say, 'If you are willing to comply we will go out and negotiate with a vendor and get a better price on a trainload than a carload. That's a reality in any industry."

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