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Up Close by Rick Dana Barlow
Gaining access to vendor pricing offered to hospitals via contracts not negotiated by the GPO so that the GPO’s consulting arm could help the hospitals reduce and manage expenses more effectively wouldn’t ordinarily make the list of despised infractions. Until now. In one of its final acts as an independent manufacturing company before acquirer Boston Scientific Corp. swallows it whole and eliminates the brand name, Guidant Corp. took issue with how MedAssets Inc.’s consulting unit Aspen Healthcare Metrics conducts its business in cardiac rhythm management. Guidant includes in its product contracts a binding confidentiality clause/non-disclosure agreement that prohibits customers from revealing the prices Guidant negotiates with them. In the course of assisting hospital clients to reduce and manage costs, Aspen obtains that pricing data to develop programs to help the clients save money. Guidant cried foul and sued Aspen, claiming that the prices paid by hospitals for its cardiac rhythm management devices is confidential. Aspen and its parent company MedAssets disagreed, arguing that those hospitals own and control that pricing data, particularly when that data is contained in the hospitals’ accounting systems. The Minneapolis federal court issued a summary judgment on February 2, siding with Guidant’s position that Aspen had "wrongfully induced hospitals to breach certain obligations of confidentiality in Guidant contracts" because those hospitals revealed their pricing to Aspen. A jury trial was scheduled to begin on May 15 to determine damages in the case but in the 11th hour that day Guidant and Aspen agreed to settle the case out of court. Shortly after the settlement was reached, John Bardis, chairman, president and CEO of MedAssets, agreed to sit down with Healthcare Purchasing News Senior Editor Rick Dana Barlow to discuss the implications and ramifications of the case. Due to legal restrictions and the terms of the settlement with Guidant, Bardis declined to discuss any specific details of the case or the settlement itself and confined his comments to how this issue impacts Aspen, MedAssets, hospitals in general and the healthcare industry as a whole. HPN: Aspen and MedAssets reached a ‘mutually accepted’ settlement with Guidant over ‘court issues regarding pricing confidentiality.’ How will this decision impact healthcare facilities who have signed contracts that include pricing confidentiality clauses and how will it affect the inclusion of such clauses in future supplier contracts? BARDIS: Because the terms of the settlement with Guidant are confidential I can’t speak about the settlement. But putting that aside there is a broader awareness now in the industry of the larger issues of pricing transparency and in allowing market forces to act and create price competition in the high-end medical device category. As a result, beliefs have changed, and subsequently attitudes are changing. It’s a very important first step in making permanent change for the better. Hospitals are now becoming completely aware of what’s at stake here when they sign these confidentiality agreements. I think these confidentiality clauses can hold hospitals hostage to pricing dictates of vendors who keep that price away from the very doctors and patients who are involved in the procedure and therefore, without the ability to compare those prices, hospitals simply find themselves subject to the dictate of a particular company and not true, efficient market forces. This has resulted, and continues to result, in a dramatic negative financial impact on U.S. hospitals, and ultimately, in dramatic and highly accelerating increases in costs for healthcare, particularly for private payers who are bearing the burden of these dramatic cost increases. But the feds would have to get involved here, too, because of Medicare so it can’t be limited just to private payers, right? The feds are paying a dear price for these increases. But those increases are even accelerating further beyond what the fed costs are at the private pay level. So you’re correct in saying that both are affected. However, General Motors last year had a 20 percent increase in their healthcare costs and so did we. In no small part, those costs, in fact, are being accelerated by these particular business practices that we’re talking about. These are wonderful products that can positively change the lives of patients. But these business practices are speeding us to a financial disaster. How do these pricing confidentiality clauses affect group purchasing, expense management consulting and hospital control over pricing information? The truth is that most hospitals have not been aware of the true implications associated with signing confidentiality agreements like the ones that some vendors have been promoting throughout the industry. Not to mention the fact that some vendors have been stamping invoices confidential, suggesting that the very closed receipt file now that hospitals own – that information, in itself, is confidential and subject to the specific vendor’s approval for dissemination. And is this limited to physician preference product vendors, such as implant companies? By and large, the grand majority of those agreements come from the vendors in those particular segments. [For the record, MedAssets does not negotiate national contracts with PPI (physician preference item) vendors; it handles local agreements through Aspen.] Can Aspen continue to legally gain access to vendor pricing via hospital clients in order to offer its services? The methods that Aspen is able to employ in helping hospitals manage their pricing information is more than adequate to enable the hospital to create competitive pricing matrices and a competitive environment of all products that they buy. Our hospital clients are now more aware to review boiler plate confidentiality agreements in working with medical device vendors. What I would also say is that our methodologies are unique to Aspen, in terms of the application of software as an enabler for hospitals to identify correct pricing for themselves. Having said that, the real value in clinical service line consulting that drives costs where they ought to be is the professional capacity to interface with physicians, hospital administrators and department heads in a way that actually achieves the results, as opposed to actually simply identifying them. That’s where Aspen’s real strength is. But we, in fact, have built an outstanding series of software solutions that enable Aspen to perform all service for hospital clients. You’ve been quoted as saying that you’d rather pursue this matter through public opinion and public policy as a more successful preventive measure than through the courts. How does that work? It’s not like the Senate or other federal agencies are big GPO fans, unless you’re counting on their desire to rattle vendor cages over perks to customers that drive up healthcare costs overall. What can you reasonably achieve in the court of public opinion? First of all, I would respectfully disagree that the government is not a fan of GPOs. I think what you’ve had is a couple of very prominent senators whose staffs have raised issues with GPOs. I think that those issues have been largely resolved. Having said that, there are many congressmen and senators who have stood up and supported the GPO industry, as have hospitals who have many voting professionals who work within them in raising their voices in support of the GPO industry. The hospital industry, which is a primary conduit for the establishment of competitive product pricing in this country, has made their voice very clear in their support of group purchasing organizations. Having said that, this is not a group purchasing organization issue. This is a national issue around transparency and efficient markets that ultimately benefit the maximum number of consumers in the United States when it comes to the application of healthcare. Without transparency it is virtually impossible for us to maximize the efficiency of any market in healthcare, and healthcare medical device products are at the top of that list. It would be very hard for us to, first and foremost, ask U.S. hospitals to be transparent in their pricing for consumers approaching hospitals for services, when in fact the hospitals’ hands are being tied behind their back by pricing agreements like those that certain physician preference item vendors have been promoting for cardiovascular products that consume the grand majority of reimbursable dollars for those cardiac procedures. So I don’t know how a hospital can ever create efficiencies and an efficient pricing market for their own services when in fact they’re being disallowed to even know or disseminate the price of the products which in and of themselves consume the grand majority of the revenue they receive both from the federal government and from private payers. It is a bit ironic, isn’t it? Yes, and it’s unfortunate that we have watched this happen to the point of pain now where U.S. hospitals are crying out and saying that these confidentiality agreements not only are restricting their ability to actually communicate with their physicians and their patients and their payers but the byproduct of that restriction of communication is an elimination of their capacity to create competitive, efficient markets so that fair pricing may actually emerge when these purchases are made. You’re quoted as saying, ‘hospitals should be careful in signing any supplier agreements without first gaining their legal counsel’s opinion regarding any confidentiality clauses that impact the hospital’s rights to own the purchase price data, and their right to share that information with physicians, patients, consultants and any other parties they need to share the data with in the course of their business.’ If hospitals are relying on organizations like MedAssets to negotiate contracts for them, shouldn’t this be your job instead of theirs? Shouldn’t you be negotiating these clauses out of contracts or work with companies that don’t use them? Why? I think we have to play a role. Bear in mind that MedAssets Supply Chain Systems, our GPO subsidiary, does not sign, nor will it ever plan to sign any national agreements that it receives fees from any vendor that would be in the physician preference product category. The reason for that is that we would be enormously conflicted in attempting on a local basis to drive prices to a more efficient level if at the same time we’re receiving fees from the very vendors who we think have been the most substantial aggressors on this matter. So the first thing is that those agreements are local. They’re not national. And secondly, companies like Guidant, first and foremost, sell to physicians. And in doing so they oftentimes have a stronger relationship with the physician than the hospital does. And as a third-party contractor for the hospital, in the majority of cases in not-for-profit hospitals across the country, by description the physician, under the existing confidentiality clauses, may not know the price. Then what you’re saying is that hospitals may not be working with MedAssets in negotiating their own agreements and because of that they may be subjecting themselves to these clauses? That’s correct. And MedAssets has never been on the front end of these negotiations. Had we been I assure you we would have done a better job, frankly, of ensuring that the restrictions were not in place. MedAssets is going to look at this and make sure that hospitals either understand what they’re signing with these confidentiality clauses or work to remove the confidentiality clauses from the contracts MedAssets negotiates for them? That’s correct. But I will say once again that every situation we’re brought into is one that has existing agreements that likely have these confidentiality clauses. What we are then called in to do is manage under circumstances that have existed and have created ultimately substantial pricing problems in relationship to reimbursement for these products. At least until the contract expires and you can renegotiate, correct? Until it expires or the hospital takes some action. Now, you asked me the question about public policy and what we were doing about it and how that makes sense in relationship to the settlement. We were prepared – and remain prepared – to do what is ever necessary from a legal perspective to protect our rights and to protect the rights of our customers and our hospitals. That would include communication both to hospitals and to policy makers and activity at the policy level, both with lawmakers and organizations who are responsible for their constituents in the hospital and healthcare sectors around these issues. We will direct resources to ensure that the American public and U.S. hospitals are aware of these confidentiality clauses and the implications of these confidentiality clauses so that they can make good judgments as to whether or not they wish to sign them. Furthermore, communicating with the federal government just what kind of impact on prices these confidentiality clauses have and the subsequent effect on the cost of healthcare to the American taxpayer and the American business and the substantial effect that it is having on the growing number of uninsured in America. Should hospitals reference pricing confidentiality clauses in their RFP process? Should they negotiate them out? Why? The first and most important thing is that hospitals need to be aware of the confidentiality clauses and the implications of signing them. Once the hospitals are aware of the implications of signing them, then at that point in time, in my view, they’re on even ground. They assume the risk. Exactly. But up to now, what we have found is that most hospitals, certainly at the chief executive level, don’t fully appreciate the situation as to the restrictions signing these confidentiality clauses have placed on their hospitals. I can give you many examples of conversations I’ve personally had with chief executive officers of large health systems who once, and for the first time, they were made aware of these confidentiality clauses and the implications of those confidentiality clauses, reacted very strongly and in a very negative way toward those confidentiality clauses, and most significantly, the impact that those confidentiality clauses are having on the ability of that chief executive officer and their institutions in using the information. The media have helped to let people know. Up until now, until you wrote articles people didn’t know. They really didn’t know. Does that represent a failure of the CEO, the CFO, the supply chain manager, the hospital lawyers for missing or overlooking these clauses or simply signing them without knowing the implications? I’m not in a position to judge that. I can only say that when you take into account that certain medical device companies have spent millions and millions of dollars on cultivating physician relationships and that they have drawn the physicians into believing that what they’re told by certain medical device sales representatives is more accurate than what they’re being told by executives from the very hospitals they practice in that the industry has been largely outflanked by the marketing efforts through the personal interfaces of sales representatives with physicians. Now physicians have had a tendency in this space to be more cooperative with medical device manufacturers and supportive of their efforts. At the same time they use the strength of that relationship to, in many cases, strong arm the hospital into utilizing products at prices they aren’t in a position to negotiate effectively because of the physician relationship with the device manufacturer and the confidentiality clause. It is really a two-pronged strategy that has been employed against hospitals and ultimately against all of us that has prevented the transparency and has enabled prices to be at the extraordinary levels in comparison to the cost of actually building those products. When a hospital signs a contract with a vendor who really owns all the data and information stemming from that contract? Who should? Has that been determined? Has this case determined it? Why? In my opinion, it’s unfathomable that an American hospital system could spend $40 million on cardiovascular rhythm management products and not own the very pricing that’s on the invoices that they’ve paid. As a taxpayer, it’s unfathomable to me that I’m paying enormous taxes as both a person, a head of household, a business owner and I can’t know the price that I’m paying for products that are implanted in my own body. As a business owner, it is absolutely ridiculous that my healthcare costs went up 20 percent last year, and I can’t know the price of a medical device that is implanted in my body. And by the way, I have a hip implant so I’m in that place. I’m not allowed to know. And at the same time, I’m completely aware of the fact that my surgeon has a financial relationship where he receives money from the medical device company whose product is in my body. But I just don’t know how much. I’m sure that makes for some interesting conversations with that surgeon post-surgery. Absolutely. And we’ve had them. My point is that at the end of the day it’s only fair that those of us who are actually paying for healthcare are in a position to know where the money is going, how much and to whom specifically? If you ask me what makes sense it certainly makes sense that we as purchasers of healthcare and supporters of U.S hospitals should first and foremost help the hospital in creating an efficient and transparent market out of the most expensive components that they buy for case management and implant procedures – and that’s the implant. Secondly, if there are physicians – and there are in many cases – those who are receiving money in some form of grant from a device manufacturer that at a minimum as a service to patients and to the general public, that information must be disclosed so that the patient can understand on what basis the physician is choosing to use a particular product that is implanted in the body of a particular patient. It’s only fair. At least when I go to buy a car from an automotive dealer I understand why he wants to put parts from that automotive manufacturer in my car. At least I know it. You also know about the manufacturer’s suggested retail price, as well as how to get the invoice price, the wholesale price, along with the standard dealer markup so that you can negotiate. That’s correct. Last year in the United States there were over 15 million new cars bought by 15 million individual decision makers. The cardiovascular rhythm management business, in other words, the implantable defibrillator, is a $10 billion market. There are only 2,000 electrophysiologists in the United States and about 13,000 cardiologists. The electrophysiologist is the individual that actually, for the most part, implants the defibrillator. That means that the average electrophysiologist implants somewhere around $5 million a year of defibrillators and at 75 percent gross margin, that’s $3.7 million in gross profit per EP. That certainly enables you to understand the reason why the sales representative is so heavily incented to control the relationship with that electrophysiologist. But my point is there were thousands
and thousands of those implants last year and there were only 2,000
individuals, for the most part, who did the implanting. So it was
impossible for the consumers to have access to the pricing, whereas with
15 million new cars bought a person on a mountain in Dahlonega, Georgia,
can know the price of the car just as well as Bill Gates can. And they
buy that car at about the same price. It’s an unbelievable comparison.
And I’ll tell you, fascinatingly, the average price of an implantable
defibrillator in the United States is about $26,000. Last year the
average new car price purchased in the United States was $28,000. But
that’s where the similarities end because it costs about $7,800 to make
that defibrillator; it costs somewhere round $25,500 to make that car.
Put an implantable defibrillator on the hood of a $28,000 car and ask
yourself the question of which of these actually has more raw material
in it. And technology. Now that’s completely different, for example, than the constituents within the healthcare services sector that receive an implant. The patient doesn’t know the price. In fact, the patient doesn’t usually know the product. Neither does anybody else who is considered a third party in that process. So I would tell you that I think our business activities with our clients are extremely transparent. And frankly if it weren’t and they were dissatisfied it would be very easy for them to fire us. I think that we have to remember that hospitals in this country, by and large, are not-for-profit and they are a public trust. We all owe it to our hospitals to do whatever we can to ensure that they’re around for years to come to service the communities that they were designed to service. They can’t play by the rules that others play by. They’re obligated to care for anybody that walks in their door. That costs money. Furthermore, that is absolutely counter to how the rest of the for-profit industry works. Managed care companies do not insure patients that don’t pay them. But hospitals do so every day. Hospitals reinvest every year three times at a minimum the amount of money that they make. They actually borrow three times their cash flow every year to reinvest 100 percent of it into the community. I don’t know anybody else in the world that does that. So a hospital’s mission and their business practices, in my opinion, deserve the support of the American public, legislators and business. What that means here is that we owe them our best effort to help them in their battle to reduce costs and provide transparency so that markets can be efficient. It’s your brother, it’s your sister, it’s my brother, it’s my sister, it’s my mother, it’s my father who, when they walk in the door, whether they have insurance or not, that hospital’s going to take care of them. My managed care company isn’t going to do anything for my brother or my sister or my mother or my father if they can’t pay. What it does say is that hospitals aren’t pure businesses, as some would classify them. Yes. Well said. And I think they deserve our support. Any additional thoughts? In the supply chain today inside the healthcare system I consider this the No. 1 issue. If we can’t solve this we’re going to get run over. HPN
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Historically,
group purchasing organizations have faced stiff opposition from a number
of fronts regarding a variety of subjective accusations, including
allegations of anticompetitive and monopolistic practices, failure to
deliver on expense and revenue management claims and siding more with
manufacturers for the lucrative administrative fees, as opposed to their
hospital member customers.
