The Senate Judiciary Subcommittee on Antitrust, Competition Policy and Consumer Rights billed its September 14 hearing as the rather vanilla "Hospital Group Purchasing: How to Maintain Innovation and Cost Savings," but such a GPO101 title really didn’t put the latest – and seemingly final – public meeting’s content about the healthcare group purchasing industry into the proper context, nor did it do it any justice.

Unlike the first hearing back in the spring of 2001, which revisited much of the subject matter covered in the sensationalistic The New York Times "investigative" series (anticompetitive behavior leads to dying babies; ergo, GPOs kill babies) and gave the marginally inquisitive senators a Cliffs Notes tutorial of GPO practices, this one aimed right for the jugular.

Armed with a so-called discussion draft of the "Medical Device Competition Act of 2004," the subcommittee’s leaders instead took a harder line with GPOs, asking pointed questions about what, besides legislation, would make them behave after nearly three years of self-administered voluntary regulations. As it turns out, according to the senators, nothing.

That’s because the subcommittee formally introduced its bill, spearheaded by Sen. Herb Kohl (D-WI), the ranking member and original chairman of the group, on Friday, October 1. Essentially, Kohl’s Medical Device Competition Act," supported by Sen. Mike DeWine (R-OH), Kohl’s successor as chairman when the Republicans took control of the upper chamber of Congress after the 2002 elections, stipulates three primary requirements. First, it directs the Department of Health and Human Services to establish rules forbidding GPO practices which are unethical, anticompetitive, or prevent needed medical devices from access to the hospital marketplace. Second, it prevents GPOs from accepting fees from hospital suppliers unless HHS certifies that the GPO does not violate these rules. Third, it bans vendor fees that exceed three percent of the price of the good or service sold.

"We strongly be- lieve private sector compliance programs are the most efficient and effective way to advance best practices in hospital supply purchasing." - Robert Betz, HIGPA

Not surprisingly, the Health Industry Group Purchasing Association vigorously opposed the bill, calling it "counterproductive" to the association’s ongoing work with the subcommittee as well as to the desired effects on the market and the "wrong avenue" to provide healthcare facilities with access to the "best products at the best prices."

Ultimately, HIGPA argues that the market should be left to its own devices.

"We strongly believe private sector compliance programs are the most efficient and effective way to advance best practices in hospital supply purchasing," said HIGPA President and CEO Robert Betz, Ph.D., in a prepared statement. "Hospitals and healthcare providers are the real test of the seriousness of the industry’s Code and accompanying compliance program. If the GPO’s provider members are unhappy with the way their contracting agent is operating they can freely switch to a different GPO or purchase on their own."

Of course, opponents counter that leaving the industry to its own devices is precisely why Congress and other federal agencies are scrutinizing GPO activities.

Three witnesses appeared before the subcommittee during the most recent hearing, which began with 20 minutes worth of opening statements, followed by a 20-minute recess and then reconvening for another hour’s worth of questions by the subcommittee chairman and return volleys by the witnesses.

Taking off the gloves
Kohl and DeWine clearly had their own agendas, as did each witness appearing before them. Certainly, the pretense of a fact-finding mission, which underscored the previous two public hearings, was gone.

Kohl began by praising the subcommittee’s work and commending the efforts of the leading GPOs to change their business practices but quickly questioned where the industry needs to go from here.

"We are pleased that we have made a real difference, but we also realize that two primary tasks remain. First, how can we be certain that these considerable gains will remain when the spotlight of a Senate hearing room fades away? The GPO codes of conduct are entirely voluntary and, at present, not backed with any sanctions or enforcement mechanisms. We need to be sure that these reforms will not be reversed. Second, how can the industry continue to improve in those areas that still need work?" Kohl noted.

Kohl then highlighted the "legislative proposal" known as the Medical Device Competition Act as the way to "assure that our reforms are truly permanent." The subcommittee drafted the legislation after eight weeks of discussions with the GPO industry. Whether the GPO representatives knew that those discussions were being used to craft a bill remain unclear.

"The purpose of this legislation is simply to create a regulatory framework so that improper business practices never return to this important industry," Kohl stated. He affirmed that the subcommittee also was willing to consider "with an open mind" any non-legislative proposals by the GPO industry.

"However, it is essential that any such measure have teeth," Kohl urged. "In other words, any industry plan must include real and meaningful sanctions if any GPO violates ethical principles or the rules of free competition. In an industry as important to health and safety as the purchasing of medical equipment for critically ill patients, half-measures which do not assure that the best medical devices are available for patients are simply not acceptable."

Meanwhile, DeWine acknowledged the difficulties in balancing the needs of the hospitals and patients with the needs of the GPOs and small manufacturers. "These are business practices with the potential to save significant money in certain circumstances but, unfortunately, they sometimes make it harder for legitimately innovative products to reach the market," he said.

"The Subcommittee still hears complaints – principally from small medical device manufacturers with arguably cutting edge products – that they are unable to negotiate a contract with GPOs," DeWine continued. "I’ll be honest: It is often difficult to assess the credibility of certain complaints from medical device manufacturers and the GPOs’ responses to such complaints.

"On one hand, I certainly don’t believe that every small medical device manufacturer that fails to win a contract with a GPO has a legitimate complaint. We all know that competition for contracts produces winners and losers and sore losers ought not hamper free competition," he said. "On the other hand, these complaints have been continuous and steady and appear to have at least a degree of credibility. This makes me wonder if the GPOs, indeed, are all living up to their pledge to decrease or stop some of these controversial business practices."

"Any industry plan must include real and meaningful  sanctions if any GPO  violates ethical principles  or the rules of free competition." - Sen. Herb Kohl

DeWine indicated that the subcommittee was considering three potential solutions to bring the issue some closure. First, it could simply stop any further action and rely on the industry’s voluntary codes of conduct to work. Second, it could transfer oversight of the GPO industry somewhere else, such as the HHS Department, as stipulated by the proposed legislation. Third, he recognized that a "voluntary-plus" approach might be a viable option but that it lacked any discipline with real consequences. "Most troubling is the fact that there is really no mechanism to discipline GPOs that don’t follow their own code," he said.

HIGPA to feds:
Leave well enough alone
Representing the GPO industry, HIGPA’s Betz highlighted how his organization and its members fully cooperated with the Senate subcommittee and with the Department of Justice and the Federal Trade Commission in their reviews, which he said found no need for further regulation. He also reiterated in abbreviated form the various reform measures that HIGPA and GPOs adopted and enacted since the first hearing in April 2001.

The bottom line, Betz argued, was that any legislation was "unnecessary.

"We return to the Subcommittee again today, not because hospitals are unhappy with the current system of group purchasing, but because some manufacturers aren’t able to capture the sales they desire," Betz said. "We are here today because a small, yet vocal, group of medical device manufacturers would like to have Congress intervene in the marketplace in favor of ‘small’ suppliers, at the expense of healthcare providers and the patients they serve every day.

"We are here today because these manufacturers and their trade association cloak their arguments as being in the best interests of patients," he continued. "They would have you believe that patients, and even healthcare workers, are being harmed because hospitals are being denied the ability to purchase their products. This is simply not true. It is the clinicians making decisions about the most appropriate medical devices to use – through the GPO process – that are the real advocates for patients."

Furthermore, Betz noted, GPOs are not responsible to profit-seeking suppliers but to their member providers. "What some self- interested, profit-maximizing companies are urging is to give hospitals less power in the procurement and supply chain," he warned. "Make no mistake, if Congress weakens the ability of GPOs to negotiate the best deals for their provider members – as is proposed in the draft legislation – patients will not be better served. Rather, the cost of healthcare will increase and manufacturers that would like to see GPOs severely weakened will realize greater financial success."

Small vendors to feds: Legislated access leads to more sales
Joe Kiani, chairman and CEO, Masimo Corp., which manufactures a line of pulse oximetry products, represented the aggrieved small manufacturer community beset by alleged anticompetitive GPO practices.

Early on, Kiani admitted, he wasn’t in favor of legislation because he wanted to give the codes of conduct a chance. Now, more than two years later, he noted that the codes, by and large, haven’t worked after all. "Although, progress has been made in some areas – due largely to the persistent efforts of this Committee – both the industry code of conduct and the individual GPO codes do not adequately address many of the anticompetitive contracting practices that have denied patients and caregivers access to innovative technology and have increased the cost of healthcare," he said. "In addition, some of the codes have not been implemented in a timely, honest and effective manner. Finally, hospitals, and the federal government in its role as a primary funder of healthcare services, are continuing to pay more than they should for effective healthcare products and medical devices, because of these types of anticompetitive practices."

Kiani said he fears that when the subcommittee closes the book on its GPO investigation without any legislative fixes that the GPOs would "revert back to their old ways."

Rather than continue to highlight the plight of small manufacturers trying to gain access to hospitals seemingly locked into GPO contracts with larger manufacturers, Kiani instead moved to promoting his own company’s products and noted how the subcommittee’s efforts persuaded Premier to relax its sole-source and bundled arrangements to incorporate Masimo’s technology. "We have seen our annual sales to Premier members increase more than 10 times to over $10 million a year," he said.

Furthermore, he noted that investors have supported his company largely due to the innovative technology it developed but he fears those investors will turn away if they can’t generate a return for their money because the company is denied access to potential customers.

The dominant vendors control the GPOs by offering large payments in exchange for exclusivity, according to Kiani. "Not only do the GPOs help the largest vendors keep competition out by not awarding contracts to competitors and creating bundling roadblocks, but the GPOs even waste millions of dollars of what might be taxpayers’ money each year actively promoting those dominant vendors’ products through GPO salesmen. There really is a fatal flaw in the current system that can only be fixed with legislation and permanent oversight." Kiani also added that GPOs would benefit from legislation because it would free them from pressure exerted by larger manufacturers to pull their fees if they don’t receive exclusive contracts.

Antitrust attorney to feds: Voluntary self-regulation works only on paper
Billing himself as an unattached third party beholden to neither the GPOs nor the small manufacturers, antitrust attorney David Balto with the law firm of Robins, Kaplan, Miller & Ciresi LLP, came down squarely on the side of legislation because he said he believes voluntary self-regulation simply doesn’t work.

Balto told the subcommittee that the codes of conduct are inadequate for three reasons. "One, they are not consistent industry wide and they are ambiguous," he said. "Two, there are no enforcement mechanisms for noncompliance; and, three, there is no enforcement entity."

"The Subcommittee still hears complaints – principally from small medical device manufacturers with arguably cutting edge products – that they are unable to negotiate a contract with GPOs." - Sen. Mike DeWine

In fact, he indicated that sole-source contracts, exclusive-dealing relationships and bundling or rebate programs are not necessary for hospitals to obtain costs savings and can cause market inefficiencies.

Even though self-regulation may work in a number of different environments they must have several critical elements to work anywhere, particularly in the GPO industry, according to Balto. "First, there must be clear and unambiguous rules. Second, there must be an enforcement entity. Third, the entity must be able to impose significant penalties. Finally, there must be a system of due process with transparent decisions," he said. "Although the GPOs efforts to self regulate may be laudable, they are clearly insufficient to cure the competitive problems in the market. Their efforts at self-regulation lack each of these critical elements. Simply put, these voluntary codes of conduct have no teeth."

Balto also argued against individual private litigation to cure the competitive ills facing the industry. "Private litigation is not the answer for the competitive problems in this market because it is too time-consuming and too cost-prohibitive," he said. "In addition, any individual antitrust case serves only to address the conduct of specific companies with regard to market practices for a specific product which have adversely affected a specific plaintiff. Such litigation does not, and cannot, address problems on an industry-wide basis as could legislation and regulation."

Balto took a final swipe at the safe harbor rules by which GPOs legally are able to operate in the way that they do. "The current situation is not what Congress envisioned or intended when it implemented safe harbors in Medicare’s anti-kickback provisions for GPOs," he said. As a result, "the statute should be amended so that GPOs do not automatically enjoy the special status of a government safe harbor. The safe harbor should be earned and granted only after sufficient oversight and approval by the Department of Health and Human Services."

Balto summed up the industry’s efforts to date this way: "Nice try. Nice work. But it’s not enough. It’s time to regulate."

Opening Pandora’s Box
Following the opening statements and a lengthy recess, Sens. Kohl and DeWine grilled the witnesses for further clarification.

Both legislators took Betz to task for the industry’s codes of conduct lacking a mandatory enforcement mechanism that would ensure GPO compliance. As Betz tried to emphasize that HIGPA members, in particular, must be in compliance, Kohl persisted in asking whether HIGPA would expel non-compliant members, which Betz admitted nearly happened once, or whether those GPOs would go out of business, over which neither Betz nor his organization truly have any control or influence.

DeWine then turned to Kiani to put his testimony on the hot seat. "I’ve spoken to a lot of hospitals in Ohio and they talk about the importance of having GPOs working for them to get the best pricing," he said. "If GPOs were really cutting off access to technology why wouldn’t these hospitals be demanding that technology or why would they not leave the GPO?

"They don’t seem to have these concerns about new technology getting through either so what’s the deal?" DeWine asked. "These are smart people. These are good people that want the best for their patients. Why don’t they see what you see?"

Kiani replied that hospitals simply need to read the fine print in their GPO agreements because what they don’t know is the problem. Furthermore, he clarified his side’s position on GPOs. "They believe what we’re seeking is to get rid of GPOs," he said. "We want to assure that GPOs are actually working for hospitals and not the dominant vendors." HPN