If the Medical Device Manufacturers Association was hoping to reinvigorate its ongoing debate, political tit-for-tat and in-the-media discourse with the group purchasing industry then the strategy fell a bit short.

If anything, the MDMA’s recently released study that called for the elimination of the GPOs’ safe harbor exemption from the Medicare antikickback statute reignited old flames left smoldering from a handful of Capitol Hill hearings and numerous media reports during the last four years.

MDMA touted the much-ballyhooed study during its annual conference in mid-June. The study hypothesized that removing GPOs’ legal protection to collect administrative fees from contracted vendors "would likely reduce the federal government’s healthcare expenditures" and "be revenue neutral under the most conservative assumptions" but "would generate large savings for the federal government under more realistic assumptions."

Rather than attack the GPOs directly, MDMA wisely applied its economics theories and appealed to the very organization it is hoping will crack down on the group purchasing industry’s alleged excesses: The federal government.

The safe harbor was created two decades ago with the promise that volume buying by private and public hospitals and government facilities and programs would reduce costs in the healthcare system. MDMA alleges that certain GPOs have exploited loopholes in the regulations for profit that has blocked competition among vendors for access to providers and actually has driven healthcare costs higher.

The Health Industry Group Purchasing Association, which released its own pro-GPO study last year, dismissed MDMA’s effort with a tersely worded official statement intended to close the door on further comment even though several polite swipes seemed to indicate that this is far from over. "Many of the assertions in the study are based on false assumptions, old arguments and outdated information," HIGPA stated. "As this study was funded by the MDMA, the tone of the report and the information presented is not at all surprising to HIGPA and reads more like an opinion paper supporting a particular agenda rather than an objective look at the GPO industry.

"HIGPA’s primary focus is not engaging in circular debates around the unfounded accusations of organizations that clearly do not have a firm grasp on the realities of GPOs’ contributions to the efficiency of the healthcare supply chain. Rather, HIGPA and its members will continue to focus on our consistent priorities of cost reductions within the supply chain, patient safety and continuing to work with thousands of our healthcare provider partners in addressing the emerging needs of physicians, patients and member hospitals."

Furthermore, HIGPA blasted the study as "conspicuously biased and calls into question whether MDMA has any genuine interest in what is best for our healthcare system or if the association is simply promoting an agenda that protects the interests of a very small group of high-margin medical device companies."

HIGPA Chairman Al Lobiando told Healthcare Purchasing News that he doesn’t find the study credible because it’s "numbers just don’t add up," and "it lends no credence to the fact that substantial changes [by GPOs in the industry] have occurred."

Lobiando defended the vendor-paid administrative fees to GPOs because of the process efficiencies they reward. "There are certain efficiencies to suppliers that affect the fees they pay," he said. "Admin fees are paid because suppliers don’t have to write thousands of contracts. They work with GPOs to do that with individual providers. So there’s an inherent operational efficiency for them. There’s also an inherent efficiency for hospitals."

Furthermore, Lobiando criticized the study’s assertion that GPOs control the contracting process. "The concept that GPOs contract and hospitals blindly follow the contracts is not the case," he said. "It’s really the other way around. Hospitals decide what contracts GPOs will sign. Contracts are products of the hospital and the GPO."

Hunter Kome, a spokesperson for Premier Inc., agreed. "Two of the key drivers behind the establishment of GPOs were the rapid growth of large for-profit hospital chains and the proliferation of mergers leading to huge, multinational companies that can dominate product categories within healthcare," he said. "Even if it had the staff and expertise to do so, it would be virtually impossible for a single hospital or healthcare system (five hospitals is average) to negotiate market-leading pricing or receive the sort of pricing that the large for-profit chains achieve. Cooperative purchasing is common throughout all sectors of the economy, as are seller-paid fees. The facts speak for themselves: Hospitals find value in group purchasing. That’s why virtually all of them belong to a GPO."

Lobiando also criticized two key assumptions in MDMA’s study – one as "highly unrealistic" and the other as "wild" and "grossly misstated."

One key assumption is that if and when GPOs lose safe harbor protection for administrative fee collection then they will have to charge hospitals for their services for which hospitals will be more than willing to pay directly.

"It’s highly unrealistic to assume that GPOs will be supported through the members," he said "It will be very difficult to collect from members. Hospitals aren’t paying for it now. That’s part of the voodoo economics and mathematics of this. Competitive friction is being created. Hospitals are free to buy what they want to buy."

One reliable group purchasing source close to the matter who asked not to be identified, concurred that hospitals will not be willing to pay for GPO services. "I can drive a locomotive through that assumption," he said.

The other key assumption is that if vendors no longer have to pay GPOs administrative fees for their services then they will be more than willing to pay those fees to hospitals directly, which apparently can be used to fund the GPOs.

"There’s no guarantee or indication that admin fees would be going back to the hospital," Lobiando said. "We don’t think that’s realistic either. The funding mechanisms for GPOs are really for hospitals – even for the larger GPOs with shareholders. A large part of the admin fees are returned in cash distributions. Other parts are invested in areas on their behalf. Those areas include studies and technologies that hospitals can’t afford on their own nor have the antitrust freedom to survey their peers."

The group purchasing source also argued that eliminating the safe harbor exemption would indeed affect product pricing. "GPOs keep pressure on vendors to hold prices – and price increases – down," he said. By removing safe harbor protection, what will happen to prices? Will they reduce prices by three percent to offset the lack of an incentive to pay the standard administrative fee? "These are profit-maximizing firms," he added.

"Average manufacturer profit margins exceed 16 percent, according to SEC filings," Kome noted, "while average hospital profit margins are less than 5 percent, according to [consulting and market research firm] Sg2. Our focus is on holding down the cost of healthcare for the nation’s not-for-profit hospitals while helping them continuously improve quality. Maximizing the profits of manufacturers is not our focus, but they are ably represented on that front by others."

Axing the safe harbor?

Hypothetically, what if MDMA’s study were to sway Congress enough to eliminate the safe harbor exemption? Then what?

"Now you’d have GPOs scrambling with a major disruptive influence because GPO operations are underfunded," Lobiando predicted. "Who’d benefit from this? The hospital isn’t. Neither is the healthcare system. What would it cost to replicate GPO services on an individual basis at each facility?"

Lobiando argued that the potential disruptions aren’t worth it and would wind up costing hospitals and Medicare money. "Transferring the cost of admin fees paid by the supplier to the hospitals does nothing for the budget," he said. "Even if MDMA’s assumptions are 100 percent correct there’s no benefit because this is all revenue neutral."

If anything, however, regional GPOs and local integrated delivery networks (IDNs) stand to gain the most from the potential misfortune any changes to the safe harbor exemption brings to the larger national GPOs, said the group purchasing source. Eliminating the safe harbor definitely would stop GPOs from serving as actual, if not presumed, agents of contracted manufacturers, he added.

Depending on whom you ask, eliminating the GPOs’ safe harbor exemption either is a pipe dream or a distinct possibility.

"Politics is very difficult to handicap," Lobiando admitted. "But we think this has a low probability and don’t expect any legislation to be introduced."

Much of HIGPA’s confidence rests on the political process in Congress. Any legislation introduced by the Senate antitrust subcommittee would be referred to the finance committee, which doesn’t have time to dedicate to something like this that isn’t high on the priority list before the current session ends in October, according to Michael McShane, HIGPA’s vice president of government relations.

The group purchasing source indicated that personal politics may play a greater role than the political process itself. That’s because Sen. Mike DeWine (R-OH), the antitrust subcommittee chairman that’s been driving the GPO inquiries, is enmeshed in a tougher-than-expected re-election bid.

Although he questioned MDMA’s timing of the release – well after the HIGPA study and relevant Congressional hearings – he praised MDMA Executive Director Mark Leahey’s efforts to keep the issue alive on Capitol Hill. In addition, he argued that the group purchasing industry’s "trust us" approach is ringing hollow and may be wearing thin.

At the same time, he noted that MDMA seems to be getting smarter with its tactics, despite the "glaring holes" in the study’s methodology and assumptions.

Ultimately, the group purchasing source doesn’t believe the safe harbor will be eliminated but will be modified to establish caps on administrative fees paid to certain classes of GPOs versus those paid to hospitals directly. "Remember that government facilities enjoy those same administrative fees, too," he noted, "so they may be excluded," which will create more tension.

"The big issue is going to boil down to where the fees are paid and not to whom they are paid," he said.

"Each GPO works with its members in its own unique way," Kome said. "Some already pass through 100 percent of administrative fees and charge back for their services. Premier provides complete transparency for its members relative to fees. They know exactly how much Premier’s services cost. This year, Premier will distribute approximately 65 percent of fees to its shareholder hospitals, with the remainder funding our operations."

Where to go now?

Short of eliminating the safe harbor and cutting off GPO funding from vendors, Lobiando said he feels what the group purchasing industry has done to date represents a reasonable solution. "We’ve taken some very substantial steps in terms of codes of conduct, changes in business practices and transparency," he said. "The HIGPA code went as far as it could without treading into antitrust territory. Where the HIGPA code left off the [Healthcare Group Purchasing Industry] Initiative picked up to emphasize public visibility, best practices and how companies measure up."

What if GPOs agree voluntarily or by government mandate to contract with at least one smaller vendor for every product or product category?

"We’ve already done that," Lobiando said. "But that will vary from GPO to GPO. If you look at the majors they all have programs that foster competition. Generally, they’ll include larger companies and have provisions for smaller companies. Overall, it’s much more inclusive than it’s ever been."

Said Kome: "We urge small companies to do business with us and our members. Competition drives down prices." HPN