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Up CLose by Rick Dana Barlow When the Medical Device Manufacturers Association debuted back in 1992 to serve as a "strong and independent voice" for the little guy, those self-described entrepreneurial and innovative companies, it knew it had to be scrappy to battle the establishment. During the 1990s, it fought successfully against legislation to levy "user fees" on the healthcare industry and participated in developing the FDA Modernization Act of 1997. But to hospitals and the healthcare supply chain at large these two "victories" paled in comparison to the war it would wage at the start of the millennium – chipping away at the alleged anticompetitive business practices of group purchasing organizations that had gone unchecked and unchallenged since the passage of the safe harbor exemption to the Medicare anti-kickback statute was enacted in the late 1980s. When Mark Leahey assumed MDMA’s executive director post several years ago, the association’s surgical strikes against certain GPO practices already had emerged in Congressional hearings, media coverage and federal government investigations.
After the initial hearings in 2002, Leahey’s predecessor left office, Congressional power changed parties and the initial intensity about the issue seemed to fade. But Leahey seemed to give MDMA the infusion it needed to push the issue harder and farther, despite efforts on the GPO side to appease legislators and investigators with codes of conduct and ethical initiatives touting competitiveness and transparency. MDMA fired its latest salvo, widely criticized and dismissed by GPOs, calling for the repeal of the safe harbor exemption based on a study it commissioned that showed it would save the industry – and Medicare – money in the long run. MDMA released the study in mid-June, following its annual conference. Leahey agreed to answer some questions about MDMA’s agenda and motives, as well as several key components of the study, by Healthcare Purchasing News Senior Editor Rick Dana Barlow. HPN: The primary thrust of MDMA’s study is that by eliminating group purchasing organizations’ safe harbor exemption from the Medicare anti-kickback statute, which would no longer permit them to collect administrative fees from contracted vendors, hospitals collectively could save nearly $5 billion and the Medicare program alone could save $2.5 billion per year. But how realistic is it to believe that the safe harbor will ever be eliminated? LEAHEY: We hope Congress will protect the Medicare Trust Fund by repealing the safe harbor because hospitals and Medicare would realize huge savings. But whether Congress acts or not, the fact is that the current GPO system needs to be reformed. And that is reason why the Senate Judiciary Subcommittee has been investigating the GPOs for four years. In addition, the Connecticut Attorney General, Richard Blumenthal, submitted written testimony to the Senate on March 15, 2006, stating, ‘My investigation of GPO abuses and irregularities was spurred by credible and now well-documented reports of GPO misuse of their purchasing power and the member hospitals’ failures to accurately account for GPO revenues. Evidence from my investigation, and yours, supports aggressive congressional action addressing such anti-consumer abuses.’ MDMA agrees. MDMA believes that GPOs have the potential to provide significant value to the healthcare system. Aggregating volume in exchange for discounts makes sense. However, the problem with the current model is the fact that the GPOs are compensated by the very parties they are charged with aggressively negotiating with. In addition, the ‘cost plus’ administrative fee structure creates a perverse incentive. Under this model, the GPO generates more revenue the more a hospital pays for supplies. This system actually creates a disincentive for GPOs to negotiate for lower prices. It also creates reporting problems for Medicare. Given the rising cost of healthcare in this country, inaction is not an option. Sens. DeWine and Kohl understand this reality, and that’s why they have dedicated nearly four years to this issue in a bipartisan fashion. On page 7 of the study, MDMA references patients and caregivers who have been harmed by ‘substandard medical devices, which could be replaced by higher quality devices, at comparable or lower prices, if the incentives of GPOs were properly aligned with member hospitals.’ How do you define the term ‘substandard?’ If these products truly are considered ‘substandard’ and lead to the harming of patients, what are they doing on the market? What are hospitals doing buying them? And why has the FDA cleared them for marketing? The issue is not about defining substandard vs. superior, it is about ensuring that patients and caregivers have access to the best products at the best price. Based on the Senate investigation and four hearings, The New York Times, the Los Angeles Times, the CT AG and various others, this has not always been the case. For example, Masimo’s pulse oximeter was deemed by dozens of independent studies to be superior and less expensive than Tyco Nellcor’s pulse oximeter. It was even proven that the clinical review committees of certain GPOs gave the Masimo product higher marks, but initially Masimo was not awarded a GPO contract. It was only after Masimo testified before a Senate Subcommittee that a contract was awarded. And given Masimo’s growth over the past few years, there was certainly a demand for the product. It should not take a congressional hearing for an innovative company with a better product at a better price to gain access to patients and caregivers. Furthermore, in one example, the study didn’t accuse one company’s product of being substandard but merely stated that the end users thought the competitor’s product was ‘superior.’ Semantically, at least, isn’t that a big difference? Semantics is not what drives this issue. What drives this issue is the fact that the Senate subcommittee, The New York Times and others have demonstrated that better products at better prices continue to be excluded from the marketplace. MDMA strongly believes that this is due in large part because the current GPO funding mechanism provides little incentive for GPOs to actively negotiate on price because it will ultimately reduce how much they generate in fees. In simplistic terms, this study’s conclusions are based on two key assumptions. Here’s one: On page 17, ‘To estimate the budgetary impact associated with eliminating the GPOs’ safe harbor exemption from the anti-kickback statute, one must articulate the nature of the contracting among member hospitals, GPOs, and medical suppliers in a but-for world. For the purpose of my calculations, I assume that hospitals would receive rebates from medical suppliers directly but for the safe harbor exemption.’ Furthermore, on page 20 the study states: ‘In reality, if hospitals were compensated directly by medical suppliers, then hospitals would likely capture 100 percent of the fees net of expenses.’ What are the incentives for suppliers – including MDMA members – to offer equivalent, if not better, fees and rebates, to hospitals directly without ‘volume-buying’ tactics or the keen business sense and negotiating savvy of a hospital materials manager? Repealing the GPO safe harbor from the Medicare anti-kickback statute would not eliminate ‘volume buying,’ MDMA is not proposing the GPOs modify any of their contracting practices. The only change would be the GPOs’ funding source. The current system has an inherent conflict of interest. Furthermore, vendors manage their businesses by margins. Therefore, if a vendor is not required to pay the GPO fees, they can pass those savings on directly to the hospitals. A truly open and competitive marketplace would force the hand of any supplier not willing to pass these savings directly on to the hospitals because their competitors would already be doing it. If the safe harbor exemption were eliminated what would motivate vendors to continue offering rebates but just ‘eliminating the middleman,’ so to speak and paying them directly to hospitals? Why wouldn’t they eliminate the rebates? Respectfully, I think this question is based on a false premise. Vendors would not eliminate rebates to hospitals if the GPO safe harbor was repealed. As the two 2005 Health and Human Services Office of Inspector General audits of GPOs found, vendors pay rebates directly to hospitals and over 97 percent of these rebates were accurately reflected in the hospitals’ Medicare cost reports. However, the HHS OIG found that the situation was much different when GPOs entered into the equation. The HHS OIG found that the majority of hospitals they audited did not properly reflect the GPO administrative fee receipts in its Medicare cost reports. This highlights the need to repeal the GPO safe harbor to gain greater accuracy in the cost reports, especially in light of the recent changes by the Centers for Medicare and Medicaid Services (CMS) moving from a charged-based system to a cost-based system when calculating reimbursement rates in the inpatient setting. But aren’t the hospital cost reporting errors a hospital problem? Why should GPOs be held accountable for improper accounting methods and not hospital CFOs who are responsible for balance sheet accuracy? Should GPOs be training hospitals to record these rebates properly? The bottom line is that no problem would exist if the perverse incentive structure was modified. Are MDMA members willing to pay hospitals the administrative fees they now send to GPOs should the safe harbor be eliminated, rendering GPOs unable to collect administrative fees? Why? Have MDMA members expressly agreed to do this? If the GPO safe harbor was repealed, the administrative fees would be eliminated. In addition, manufacturers no longer paying the fees to the GPOs would lower the prices of the products accordingly for the competitive reasons mentioned above. Additionally, hospitals don’t exactly receive GPO services for free. Any fees that a GPO charges a vendor are not internalized by the vendor. They are added to the price of the product. As Sen. DeWine stated during the last hearing, ‘a cost is a cost is a cost’ and ‘somebody is going to pay for it.’ I would just assume that if a GPO is truly working in the best interest of its member hospitals, it would support a system that directly reduced the cost of goods for its members. Here’s the other key assumption that appears on p. 18: ‘GPOs would still negotiate contracts with medical suppliers on behalf of member hospitals, but GPOs could not receive rebates from the medical suppliers. I assume that hospitals would pay the GPOs their operating expenses to stay in business plus a competitive return on those expenses equal to 13.5 percent.’ Why do you believe hospitals would be willing to pay GPOs upfront for all the services they now gain access to and receive? Whether hospitals know it or not, they are paying for the GPOs services today! They’re just not paying for it directly: they pay for it in inflated prices for products because suppliers need to recoup the huge fees charged by vendors (in some cases in excess of 18 percent, according to the Government Accountability Office Report). What the hospitals actually pay the GPOs would be dependent on the value that a hospital saw from its GPO and the services it provided. Rather than eliminating the safe harbor exemption why wouldn’t it be more effective and efficient to emend it with a requirement that regardless of product or service GPOs must contract with at least one ‘smaller’ supplier in addition to its relationship with the larger vendor – akin to the government’s ‘disadvantaged’ or ‘minority-owned’ supplier program? Essentially, that’s the crux of MDMA’s argument, is it not? That selected vendors are competitively at a disadvantage with GPOs that apparently favor the larger vendors? Why not just redefine what it means to be ‘disadvantaged,’ expanding it beyond gender and race to include economic or competitive discrimination, too? I must challenge your premise that this issue is somehow about MDMA. It’s not. The Senate Judiciary Subcommittee, in a bipartisan fashion, has examined this issue closely for four years. The GPOs have had four years to change their practices. And now, after four years, the Senate Subcommittee – not the MDMA – drafted legislation to repeal the safe harbor. As for MDMA, we support an open and free healthcare marketplace. This is the only way that quality will be enhanced and costs reduced. Clearly the current structure is not working and it needs to be fixed. This problem will not simply go away by redefining a few terms, as you seem to be proposing. The problem is quite simple, and it’s not semantics: The current GPO system creates an inherent conflict of interest for the GPO to negotiate for the best products at the best price. When their revenue source is derived by the companies whose products they are supposed to be evaluating independently, a conflict exists. The Senate Subcommittee, in a bipartisan fashion, is looking for ways to resolve that conflict. So long as the GPOs collect tens of millions of dollars annually from the largest suppliers, patients and caregivers will continue to be denied the best products at the best price. The GPOs get paid the fees to drive marketshare. We need to eliminate these fees so the GPOs stop working for the dominant suppliers and start working for their member hospitals. HPN
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