If the group purchasing industry thought that establishing and implementing voluntary codes of conduct and self-regulating business operations would douse the controversy over alleged anticompetitive practices that ignited on Capitol Hill two years ago, then it was wrong. Uncomfortably wrong.

Rather than shut the door on further government involvement in healthcare group purchasing activities the aftermath of the Congressional subcommittee hearings in the spring of 2002 merely opened the gates of scrutiny that much wider.

When that first hearing concluded with commitments from the group purchasing industry to behave, the Health Industry Group Purchasing Association (Alexandria, VA) developed an industrywide Code of Conduct supported by its members, which comprise the largest group purchasing organizations in the nation, and certified that each member GPO would comply. Many of the leading GPOs also developed their own individual codes that included more regulatory teeth than HIGPA’s code, which the association argued was limited in scope by the very antitrust laws they were compelled to follow.

Now, two years later, the Senate Judiciary Subcommittee on Antitrust, Competition Policy and Consumer Rights still isn’t happy. Just a few weeks after the media learned that the Department of Justice issued administrative subpoenas to myriad provider and supplier organizations that conducted business with Novation, the group purchasing industry’s leading player, as part of its ongoing investigation of the company, the subcommittee released a discussion draft of potential legislation to govern GPO activities and scheduled a general oversight hearing about GPO compliance with their code of conduct for September 14.

In a Sept. 2 letter to the subcommittee leaders, two days after the draft was circulated, HIGPA Executive Director Robert Betz, Ph.D., reiterated his group’s commitment to continue working with the subcommittee and other federal agencies but rejected any legislation that adversely affected the group purchasing industry.

"The unintended consequences will be higher costs at the expense of patient care," Betz wrote. He remained solidly behind "continued self-regulation as the most effective tool to accomplish our shared goals" and expressed that HIGPA’s ongoing compliance program, which includes codes of conduct and certification, as a "solid example of the industry’s good faith effort to address industry business practices now and for the future."

Short-sighted
But the subcommittee contended that the industry’s efforts simply didn’t go far enough.

"We were happy with Premier’s code, thought Novation had made progress with its code, but that there were still some significant shortcomings, and believed the trade association code did not address many of our concerns," said Seth Bloom, counsel for Sen. Herb Kohl (D-WI) on the Antitrust Subcommittee. "We had varied reactions to the four other GPO codes of conduct. In summer/fall of 2003, Senator Kohl sent letters to Premier and Novation asking for strengthening of certain provisions. While there have unquestionably been reforms, device manufacturers continue to complain about anticompetitive conduct."

Even though the timing of the subcommittee’s action may raise eyebrows (it emerged during the final stretch of a presidential election campaign and during increased involvement by the Federal Trade Commission and the Department of Justice), Bloom insisted that their decision was "based on our evaluation of the best course of conduct rather than any action by FTC and DOJ."

In fact, the subcommittee has engaged in an ongoing dialogue with group purchasing industry representatives for the past two years, which includes several public hearings, numerous private meetings and many letters going back and forth, according to Amanda Flaig, press secretary for Sen. Mike DeWine (R-OH), chairman of the Antitrust Subcommittee.

The discussion draft, completed on August 31, circulated to the group purchasing industry for comment two weeks ahead of the hearing, and leaked to the media, outlined a stronger course of action by the federal government over GPO activities, something the industry had hoped to avoid.

"By aggregating purchases, hospital group purchasing has the potential to reduce the cost of acquiring medical equipment and hospital supplies so long as such purchasing is done in a manner consistent with antitrust law and free competition," the draft discussion stated. "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."

Furthermore, the discussion draft noted a "compelling public interest in having the Secretary of Health and Human Services, in consultation with the Attorney General and Federal Trade Commission, engage in oversight and supervision of the current federal healthcare program anti-kickback exemption (also known as the safe harbor) provided to group purchasing organizations…This oversight and supervision should ensure that the safe harbor does not shield conduct that harms competition in the hospital supply and medical device industries." The document also provides a projected timeline of implementation and enforcement of the so-called "Medical Device Competition Act of 2004," which was spearheaded by Sen. Kohl and produced to prevent 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."

Looking for closure
Aside from recruiting HHS, along with the AG’s office and the FTC, the proposed Act specifically called for a cap on administrative fees that GPOs can collect from suppliers at 3 percent. It defined administrative fees as "those reasonable costs associated with the procurement of products and the administration of valid contracts, and does 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."

Should the Act emerge from the subcommittee discussions as a bill it will carry Sen. Kohl’s name because he has been driving the process forward, Flaig noted. Kohl is the ranking Democratic member of the subcommittee who had served as chairman in 2002 when the process began. DeWine assumed the chairmanship once control of the Senate changed parties last year. "Sens. DeWine and Kohl work very closely together and do speak with one voice on this issue," Flaig said.

Bloom highlighted the logic behind the wording of the proposed fee cap based on the value of product sold. "Excessive administrative fees can lead to a contract being awarded based on the fee to be gained rather than what is the best product at the best price," he said.

While the easiest and quickest solution might seem to be the abolishment of the group purchasing industry’s safe harbor, Bloom indicated that wasn’t on the table. "We are not seeking to eliminate the safe harbor," he said. "We want to ensure federal healthcare regulators will oversee the industry to ensure that it does not violate competition principles or ethical standards. Our basic goal is to ensure that needed medical devices are not blocked from the hospital marketplace, and that physicians and their patients have access to the best medical devices at the best prices."

Neither is it the subcommittee’s aim to ban the use of sole-source contracts with suppliers, even though that strategy represents a fundamental tactic among low-price, volume-buying purveyors, including retailers.

"Our proposal does not ban sole-source contracts," Bloom contended. "It simply authorizes the HHS to prescribe certain practices that harm competition, without specifying what they are. Several GPO codes of conduct – most notably Premier’s – have voluntarily banned sole-source contracts for medical devices.

Our goal is to ensure that hospitals have choices of the best medical devices," he continued. "Sole-source contracts may interfere with that choice, as well as make it impossible for physicians to have access to the best products. We heard many stories of physicians being unable to obtain the products they needed to treat patients – for example, heart pacemakers or safety needles – because of sole source GPO contracts. Further, sole-source contracts could destroy competitive markets for medical products by entrenching the creation of dominant suppliers. In the long term, this will lead to higher prices for hospitals and consumers."

But such logic doesn’t threaten the non-healthcare retail market or even set a precedent for anti-competitive regulations outside of healthcare, Bloom assured. Why? Follow where healthcare facilities derive a significant portion of their reimbursement. "Healthcare is a different marketplace from retail establishments like Costco," he said. "Healthcare is reimbursed by the federal government under the Medicare program. If the market is not competitive, federal tax dollars go towards paying inflated prices. Further, healthcare products impact the lives and health of citizens. Our work will have nothing to do – and set no precedent – for the contractual arrangements that Costco or Wal-Mart enter into."

The subcommittee viewed the hearing, scheduled for Sept. 14, as a form of closure, according to Flaig. "It’s a chance to put everyone in the same room and hear what they have to say," she said. "The subcommittee doesn’t want people telling it what it wants to hear or what it has already heard. It wants to gather information and assess what’s been going on for the last two years. The hearing is designed to wrap up the process. It’s time for the subcommittee’s oversight to end and for a more appropriate agency to have that responsibility."

The Act, however, does not specify how HHS would fund these additional responsibilities. Such determination would have to be made by both Houses of Congress should the Act progress to a full floor vote.

Don’t connect the dots
While the renewed scrutiny of GPO practices, including the Justice Department’s administrative subpoenas issued to Novation and a number of its providers and suppliers, comes on the heels of the government’s accounting fraud crackdown of Tenet Healthcare Corp., HealthTrust Corp. and various pharmaceutical companies, it should not be viewed as an extension of that process, nor should GPOs – including Novation – be included within that illustrious group, according to HIGPA’s Betz.

"There’s no connection," Betz said. "In the beginning, two years ago, there were people who believed there was an Enronesque situation in the healthcare supply chain. They haven’t seen it yet. They have discovered issues that warranted cleaning up this industry and this industry is different now than it was years ago when the safe harbor was written so it has been a useful exercise."

Novation officials declined to comment on the subpoenas, save for acknowledging their receipt by the GPO and its business partners. They did, however, along with Betz, reinforce the fact that the DOJ inquiry does not indicate any evidence of misconduct. It’s simply an extension of the agency’s research, Betz noted. "They want to follow the money, and as well they should," he said.

"But after two-and-a-half years of investigation by the government where is the huge smoking gun?" Betz asked. "It’s about an industry that’s not well understood. It’s about an industry whose customers are paid on the average cost per case per DRG. Costs can’t be manipulated that much and it doesn’t affect what the government as a payer is going to pay them anyway. People went looking for something and they’re not happy that they haven’t found anything."

Betz doesn’t think the current investigations ultimately will tarnish the credibility of GPOs nor question their value or viability.

"Not one government entity has yet to refute the fact that group purchasing saves money for supplies – not one has said that," he noted. Betz also indicated that a number of federal agencies engage in their own group purchasing practices, even adopting the private sector models of group purchasing and distribution as their own.

Betz also lashed out against the boilerplate framework of the legislation. "If people are going to throw out a piece of legislation that treats all GPOs the same – because all of them have different business models – then this industry is going to oppose it," he said. "They have a commitment to serve hospitals and patients to get the best products at the best price. If anybody affects that ability to function they will oppose it."

If anything, Betz said he finds it curious that a payer – namely, the government via Medicare – feels the need to influence clinical decisions involving products, which may set a dangerous precedent for private payers to do the same.

Betz also reiterated that administrative fees are legal. "There isn’t anything illegal about collecting those fees so long as GPOs are disclosing them to the hospital members," he said. "It’s up to the hospitals to make decisions with that information." HPN