Senate counsel hands GPOs mixed grades on early reform

by Curt Werner

Stories of patients who were deprived of potentially life-saving new technologies prompted the United States Senate to launch a probe of the hospital nation’s group purchasing organization industry last year, says a top attorney for the congressional panel that has investigated the GPO issue. “Hospital purchasing is a complicated and dense area to get into, but one of our highest priorities is to be sure that Americans get the best care at the best price,” said the attorney, Seth Bloom, in remarks delivered to a group of GPO, provider and supplier executives during a lively presentation in Orlando at the Health Care Executive Forum, an event sponsored by the Florida-based consulting firm, NCI. Clearly, those in the audience had simultaneously the most to gain and the most to lose through reform in the group purchasing system.

Bloom, a veteran antitrust lawyer, is the key legal counsel for Sen. Herb Kohl, the Wisconsin Democrat who is now co-chair of the Senate Antitrust Subcommittee, along with Ohio Republican Mike DeWine. That panel heard testimony last spring that focused on claims voiced by small medical device manufacturers that the group purchasing system has effectively shut them out from contracts and sales to U.S. hospitals. The one-day hearing led to a series of GPO-authored Codes of Conduct that are now in effect and provide the current framework for the reformed business practices pledged by GPOs.

“We heard disturbing stories about patients who didn’t receive the best care because of the lack of innovative products that were available, but weren’t in the hospital marketplace,” said Bloom. “We saw this as a classic antitrust issue.”

He flatly denied that the federal lawmakers were on a mission to cripple the GPO industry, while bowing to some advantages offered by the GPO system. “We’ve never been on any kind of crusade against GPOs and we know they have a job in the marketplace,” he said. “The GPO system enables hospitals to avoid the expense of having large purchasing departments, promotes standardization and in fact, can be good for small companies that want to get into the system.”

Bloom also brushed aside criticism from some in the industry that the Senate subcommittee was intent on eliminating the GPO system through legislation. “Our approach to the GPO system is to mend it, not end it. We do not want to see the GPO system go out of business,” he said flatly.

At the same time, he reminded the audience that exploitation of the system won’t be tolerated, and that the government has at its disposal legislative remedies to keep abuse at bay. “Groups exist because Congress exempted them from the anti-kickback law through Safe Harbors, and these amount to special rules for the industry,” he said. The Safe Harbor laws exempt group purchasing organizations, under certain limits, from anti-kickback rules, which allows GPOs to collect administrative fees. Fees in excess of 3 percent are subject to disclosure. But perhaps more important is the fact that suppliers, not providers, pay the fees. The flow of that revenue stream has been closely scrutinized by lawmakers and others. Calls have gone out to end that practice and compel providers to pay ad fees. To date, however, no specific alterations to the ad fee structure have been proposed.

In particular, Bloom said the enormous influence of large GPOs like Premier and Novation, groups which combine to represent the purchasing needs of as much as 70 percent of the nation’s hospitals, was influential in drawing the subcommittee’s attention to conflicts of interest, anti-competitive contracting practices, sole-source contracts, bundling and contracts that span as long as five or seven years, as well as administrative fees “when they create incentives that can raise prices.”

Said Bloom, “Conflicts of interest can result in profiteering instead of delivering the best product at the best price.” He portrayed conflicts of interest and the workings of the tightly knit GPO system as examples of how such conflicts stymie investment and, ultimately block innovation in medical products. Bloom explained how little venture capital funding found its way to small, innovative medical device companies, even during the boom times of the late 1990s, because investors were worried that no matter how strong a product had been developed, it might find few hospital buyers because of restrictive group purchasing arrangements. 

The various codes of conduct that were written by individual GPOs and by the Health Industry Group Purchasing Association, group purchasing’s trade group, in response to a stern admonishment from Kohl appear to have quieted the furor. While the HIGPA code addressed ethical issues, the GPO-written codes went further by capping ad fees at 3 percent, pledging to end the practice of bundling unrelated products and reducing reliance on sole-source contracts. “The initial stage completed has been a significant accomplishment,” said Bloom.

But he also said that the next two years would be a time when GPOs will be looked at carefully for their adherence to the codes. “We want to give the codes of conduct a chance to work,” he said. “It all depends how vigorously and speedily they are implemented, though so far I am encouraged by the reports we have read.”

At the same time, he told the group he was “somewhat troubled” by contracting practices involving so-called clinical preference items, loosely defined as high-tech, high-cost, lower-volume products historically selected and ordered by physicians without regard to GPO agreements. In recent years, GPOs have begun to exert influence over the acquisition of these items, commonly orthopedic implants, cardiac devices and the like. Often, new technological developments in these product segments come from small manufacturers that have strong science, but little marketing expertise or GPO connections. Said Bloom, “We would like to see GPOs address the clinical preference question today. We can’t afford to wait and fall behind with regard to new technology. But suppliers should not just sit back and wait for GPOs to come to them. Hospitals should put themselves in the shoes of the small, innovative device manufacturers and ensure they have a fair chance at the market.”

HPN

March