People & Opinions

Leaders debate fundamentals of group purchasing

with Robert Betz, Ph.D. and Mark Leaheying

Editor’s Note: No matter which side you are on, the discourse over the value of group purchasing touches nearly everyone in the hospital industry and most of the professions that serve it. The often strident dialogue has reached the New York Times and the halls of Congress. Now, Health-care Purchasing News presents two views regarding the basic tenets of group purchasing truly from opposite ends: Robert Betz, who leads the top GPO trade group, and Mark Leahey, the head of a trade group that represents mostly small manufacturers, suppliers and would-be suppliers that have been at the center of the controversy.

HPN: Where do the strengths of the group purchasing organization system lie? The weaknesses?

Leahey: The fundamental weakness of the GPO structure is that it is not fulfilling its mission of managing healthcare costs while not harming quality. Theoretically, the strength of GPOs should be their ability to aggregate purchasing power resulting in decreased prices for the highest quality in medical devices. However the reality is much different. As the General Accounting Office reported in its latest study, hospitals purchasing medical devices through GPOs were often paying more than hospitals who negotiated directly with the manufacturer.

The real problem is that GPOs no longer evaluate the product first and then negotiate a price. They look at the market share and power of a manufacturer, how much a manufacturer is willing to pay in “fees,” analyze the fee generation potential within the membership, in some cases require them to sign up with a for-profit e-commerce system and THEN evaluate the product based on quality and price. In some cases, a GPO doesn’t even evaluate the product(s) and will rely on the manufacturer’s claim(s) of quality. This model helps the GPOs, not patients.

Betz: Group purchasing performs several essential functions for healthcare providers. First, GPOs offer aggregate buying power to obtain volume discounts. In an era when many hospitals have negative operating margins, reimbursements from both private and public payers are falling and overall expenditures are rising, this substantial cost savings is of critical importance. In a May 2003 Lewin Group report, nine out of ten (87 percent) hospital and health system executives report, “the absence of GPOs would lead to higher prices of between 10 and 35 percent for medical supplies—either industry-wide or within their own organizations.”

Second, GPOs provide comprehensive clinical reviews to evaluate new products when deciding which healthcare technologies will be used in their contracts. Third, GPOs create efficiencies in today’s healthcare system by streamlining and standardizing the purchasing process, which provides cost avoidance savings. Without GPOs, providers would face higher costs for nearly every product they purchase and would be forced to devote more resources to support personnel in order to provide the same functions as GPOs. Based on the average number of full-time hospital staff needed to supplant GPO services, if GPOs did not exist, a recent HIGPA-sponsored report estimated that the direct costs of adding a purchasing staff would amount to $198,000 per organization.

Fourth, GPOs create a competitive marketplace since GPOs compete with each other to offer the best products at the best prices. Hospitals and other healthcare providers voluntarily belong to GPOs and may choose to purchase a product through a competing GPO or directly from the manufacturer if the desired product is not available on GPO contract. It is important to remember that GPOs are the agents of providers, and therefore must fulfill the needs of their principles or cease to survive in the marketplace. The HIGPA GPO Code of Conduct has made the industry more transparent, while also strengthening and improving the delivery of products to healthcare providers. 
As to weaknesses, healthcare provider members are sometimes not playing an active role in the management and operations of the GPO. In this regard, individual GPOs should educate their healthcare provider members more about the benefits they provide and how to utilize the range of services offered by GPOs.

HPN: Do you agree that GPOs serve big suppliers to the disadvantage of small ones?

Betz: Disagree. GPOs foster competition between all suppliers by making them bid aggressively against each other in order to obtain large volumes at highly competitive prices, which is pro-competitive. GPO contracts are structured with active input from member institutions, with an eye on possible developments in a product category. Healthcare provider members are not required to participate in GPOs. If a product is not on a contract with one GPO, hospitals can choose to go to another GPO or purchase directly from the manufacturer. GPOs remain the advocates of their member institutions. If they ignore the needs or desires of these members, the GPO would quickly become irrelevant and no longer be used by its members. 

Leahey: Given everything that we have had to learn over the past three years, it appears that the GPO system serves to benefit the GPO system. GPOs disadvantage both large and small manufacturers alike, and more importantly, consumers, including patients. When two GPOs have the power to lock out 70 percent of the marketplace with a sole-source contract, every manufacturer other than the incumbent is disadvantaged. Beyond that, the bundling of unrelated companies that Novation engages in through its Spectrum program as well as the widespread GPO practice of bundling unrelated products, adversely affect companies that cannot offer a broad product line. The practice of bundling results in making decisions on what products will be utilized in direct patient care based on pricing, rebates, and other financial remuneration, instead of the merits of the product quality and related clinical outcomes, all which affect costs of healthcare across the entire system.

MDMA has always believed that a medical device should succeed or fail based on its own merits, not on those of other products within the company’s portfolio. This would ensure a truly fair and competitive system that could foster innovation, improve patient care and lower healthcare costs. 

HPN: Do you feel the GPO industry needs more reform?

Betz: HIGPA’s Code of Conduct, adopted by all of its industry members, addressed the concerns of those who believed GPOs needed to address potential conflicts of interests, cost savings and contracting practices. All of HIGPA’s U.S.-based GPOs have completed certifying their compliance with the Code to HIGPA, and their certification of compliance has been transmitted to the United States Congress.

The industry has traditionally tried to maintain the highest ethical standards and the HIGPA Code of Conduct was an effort to codify the highest standards within the industry. The Code was adopted by the Association on July 24, 2002. Since the adoption, HIGPA’s GPO members have embraced and incorporated these principles into their internal business practices.

It has been less than a year since the adoption of the Code and less than two months since certification of compliance, so therefore accusations that the industry has not self-regulated is without merit because it has not given the GPOs enough time to adopt the operating principles. The proposal of additional reforms should be contingent on the success of the Code after the full implementation of its principles.

Leahey: Congress did not create the “safe harbor” for the benefit of GPOs. But that is what happened. The GPOs seem not to realize this. HIGPA’s so-called Code of Conduct fails to address many of the concerns raised at the Congressional hearing last year. In addition, the individual codes of certain GPOs may look good on paper, but they are not being implemented in a timely fashion. They are all prospective in nature. As a result, innovative products are delayed in getting to the hands of the healthcare practitioners for the benefit of patients.

HPN: Who is the ultimate customer of GPOs? Why?

Leahey: In most business models, the customer or consumer is defined by whoever pays for and/or uses the product or service. The GPO model is unique in that the purchaser, user, and end-user all can be different. The end-user, the patient, is clearly the most important “customer.” If GPOs fail to ensure access to the best medical care, they fail the patient. Another customer would be the doctors who use the products on the patient. It is imperative that they have access to the technologies needed to improve patient outcomes. Hospitals would also be customers of the GPO. Manufacturers should not be the customers of the GPO; however, some could argue that the dominant manufacturer who pays for unfettered access to the market place is a customer of the GPO. The fees they pay to the GPOs account for the majority of the GPOs revenues. 

Betz: The patients in today’s healthcare system are the ultimate consumers of GPOs. GPOs are the agents of the healthcare providers, so therefore the GPO must provide the products hospitals desire.

HPN: Should the current system in which suppliers pay administrative fees be retained or replaced with a system in which hospitals pay for GPOs services? Why?

Betz: No, the current system should be retained. Some have proposed healthcare providers to finance the operations of GPOs. However, adding this additional cost burden would be detrimental to the financial stability of providers.

Currently, the GPO system relies, in part, on fees paid by vendors to finance the services the GPOs offer healthcare providers. These so-called administrative fees are generally based upon the purchase price that the healthcare provider pays for a product purchased through a GPO contract. The fee is only paid when a GPO’s provider-member utilized a GPO contract, therefore if GPOs did not provide desired products, GPOs would be put out of business. A substantial portion of this fee is returned to the provider-members after a GPO’s administrative costs have been covered. Without the ability to earn administrative fees, hospitals would be in a terrible situation. They would have to choose between diverting financial resources from the direct administration of patient care to fund the operations of GPOs or they would have to stop using GPOs altogether, thereby losing volume discounts and raising the cost of healthcare. Thus, without suppliers funding the ability of GPOs to offer their services, the hospitals as well as the patients in those hospitals would be much worse off than they are today.

Testimony from healthcare providers in a May 2003 Lewin report supports the GPO business model. Executives state future reliance on GPOs will continue to be strong—with close to two-thirds of hospitals indicating an expected increase in purchases through GPO contracts. 

Leahey: Any situation in which services provided to one party are paid for by another is subject to abuse. The financial incentives in place for GPOs (3 percent of the purchase price) actually reward a GPO for negotiating higher prices for medical devices. The higher the contract price, the more revenue the GPO generates. The other fees that are paid by a contracted supplier in addition to administrative fees are also a concern; these special fees are not necessarily reported back to the membership. Ideally, GPOs would earn their revenue from a percentage of savings realized by hospitals or on membership dues paid by the hospitals. The dues would be set based on the GPOs annual budget approved by its members. These fee structures would ensure quantifiable value to their members and justify the GPO business model.

HPN: Describe your “ideal” GPO system.

Leahey: The ideal system would be transparent, open and fair. Contacts would be awarded based on quality and price and not on any willingness to participate in for-profit ventures, pay higher administrative fees or engage in preferred company arrangements. GPOs would be funded by the hospitals that would pay the GPOs based on a percentage of savings or membership dues. 

If on the other hand, the GPOs were to continue to be funded by the manufacturers, they would have to meet certain disclosure requirements. For example, we would expect them to account for any and all remuneration from a manufacturer to a GPO (and in turn what the GPO passed on to the hospital), what went to the GPO’s operating expenses and what was funneled off into for-profit ventures, private arrangements, etc. 

An ideal GPO would also disclose product selection and contracting decisions to eliminate conflicts of interest or accusations of unfair contracting practices, such as preferential terms, i.e., corporate partnership arrangements that included financial incentives for utilization of a corporate partner’s portfolio, rendering another contracted supplier unable to compete on the merits of the products.

Betz: The operations of the current GPO world (as described previously) is the preferred system.

HPN: What is the best way to assure that hospitals get the best products at the best possible prices?

Betz: GPOs provide the best products to healthcare providers by employing clinical review committees, which assess products for the purpose of incorporating new and unique technologies into the GPOs’ purchasing contracts. The review committee consists of representatives of the hospitals that are participating members of the GPO. These committees cover a broad array of clinical and administrative areas, and comprise a range of clinicians, technicians, managers and others drawn from the member health systems themselves and outside experts. An April 2002 Lewin Report, entitled The Clinical Review Process Conducted by Group Purchasing Organizations and Health Systems, concludes that GPOs and health systems do employ clinical review processes, that includes committees comprised of practicing physicians and other clinicians, and that this review process supports timely adoption and evidence-based, cost effective use of healthcare technology.

Leahey: Open up the bidding process. Have each product selected based on the merits of that particular product and not on a bundle of products. Do not prohibit manufacturers of innovative products from communicating directly with the doctors or caregivers who use the devices. Base savings on actual volume of purchases and not market share commitment.

HPN: Group purchasing stymies innovation. Agree or disagree? Why?
Leahey: Hospitals should have the freedom to select products based on the needs of the patients and doctors without worrying about being financially penalized for those decisions. In the current state of affairs, we know of innovative medical devices that have not been able to penetrate the GPO blockade. The market leader in the GPO world, Novation, continues to utilize bundling schemes that prevent smaller manufactures that offer innovative products from entering the marketplace. In addition, they sole-source many products for a period of five years. If innovative manufacturers cannot get access to those hospitals for five years, they will cease to exist. The GPOs pooh-pooh this, saying that their hospital members can talk with manufacturers anytime. But we know better, and so does the GAO and so does the Senate Judiciary Antitrust Subcommittee; the structure of the program is such, that if a hospital wants to buy a new innovative product at a cheaper price, the savings they would enjoy with the new product would negated by the penalties they would have to pay for “noncompliance.”

Betz: GPOs are critical mechanisms for the most efficient and effective introduction of innovative medical devices into the hands of doctors, nurses and other clinicians. Because of their broad-based membership, GPOs have the ability to bring together the brightest medical minds in the country before purchasing decisions are made. GPOs work with their provider-members to institute a reasoned and comprehensive approach to product review. GPOs engage in very thorough clinical reviews of products and services. GPO members can chose to purchase inside their GPO arrangements, move to another GPO contract or purchase directly from a manufacturer. This competition, combined with the commitment of GPOs to patient care quality, inhibits the purchasing agent from engaging in arrangements with vendors, which would preclude their members from having access to the most innovative healthcare technologies. 

HPN: Some say that the national media “got it wrong” when it exposed problems with the GPO system. Do you agree? Why? What did it get wrong?

Betz: While there were some issues within the group purchasing industry that needed to be addressed, the national media did not present the public with all of the facts about the group purchasing industry. The most inaccurate claim of the media is that group purchasing exists amidst conflicts of interest because GPOs collect administrative fees from suppliers. GPOs’ main purpose is to serve hospitals, so if a hospital finds a GPO’s contract to be of value, they will utilize the contract to purchase supplies for their hospital. Only then is an administrative fee collected. In a competitive business world, GPOs only survive by meeting the needs of their clients – the hospitals.

The members of HIGPA adopted a Code of Conduct to address the concerns raised by some stakeholders. These included: conflicts of interest, contracting practices and cost savings. Possibly it’s now time for manufacturers and suppliers to adopt a Code of Conduct.

Leahey: That depends on who the “some” are in “some say.” The Senate Antitrust Subcommittee didn’t seem to think the media got it wrong. The GAO, the Federal Trade Commission, various state and federal agencies do not seem to think the media got it wrong. The sponsors of the distinguished Polk award for excellence in journalism did not think the media got it wrong. A number of hospitals have changed their relationships with GPOs and do not think the media got it wrong.

Let’s face facts. Certain GPOs did receive equity in companies in return for a GPO contract. Certain GPOs did accept substantial “special” marketing fees associated with a contract award. Certain GPOs did divert millions of dollars to e-commerce systems. Certain GPOs required manufacturers to list their products on the site as a prerequisite of awarding a GPO contract. The list goes on and on.

In fact, one could argue that there is a fair amount of information that the media has brought forth; for example, the fact that a certain GPO contract for one product required the manufacturer to pay fees on ANY other product that they sell to member hospitals even if is not on contract. Other GPOs collect double-digit fees through private label programs that add no value to the end-user, but serve as another vehicle for the GPO to generate additional fees (outside of the administrative fees) from the contracted supplier. 

HPN

Mark B. Leahey, Esq. is the executive director for the Medical Device Manufacturers Association, a national trade association that represents over 160 independent manufacturers of medical devices.

Robert Betz, Ph.D., is president and CEO of the Health Industry Group Purchasing Association. 

July 2003