Infection Control Today - 01/2003: IC BUSINESS

GPOS Maintain Their Value to Healthcare Industry as SenateInvestigates Charges of Anticompetitive Practices

By Kelly M. Pyrek

Asgroup purchasing organizations (GPOs) continue to come under fire from theSenate Judiciary Committee's Antitrust Subcomittee, at least one industry grouphas a kind word for the beleaguered purchasing entities. Last summer the MedicalDevice Manufacturers Association (MDMA) praised Premier, Inc., one of thelargest hospital GPOs, for creating a proposed code of conduct to addressanticompetitive practices. The Medical Device Manufacturers Association (MDMA)is a national trade association representing the medical device industry.

Sen. Herb Kohl (D-Wis.), chairman of the Senate Judiciary AntitrustSubcommittee and Sen. Mike DeWine (R-Ohio), ranking member, demanded during anApril 30, 2002 hearing that GPOs produce a code of conduct within 90 days inresponse to concerns that life-saving medical devices were being shut out ofhospitals by anticompetitive business practices of leading GPOs. According tothe MDMA, the Health Industry Group Purchasing Association (HIGPA), the GPOindustry association, failed to adopt meaningful changes to its members'corporate practices in the code of conduct it submitted to the subcommittee.Novation, a leading GPO, was noticeably absent from the process, the MDMAreports.

Joe E. Kiani, MDMA board member and chairman of MDMA's GPO Task Force stated,"I commend Premier for taking all of the feedback constructively to beginto make its necessary course correction. Through the dedication of Senators Kohland DeWine and the willingness of Premier to embrace positive change, we nowhave a GPO code of conduct that could offer an important tool for restoringcompetition and innovation to our healthcare system."

Lawmakers said they were deeply disturbed by allegations of conflicts ofinterest in the business practices of GPOs that surfaced in a series ofinvestigative articles by The New York Times. Reports alleged GPOs acceptedsizable fees paid to them by manufacturers, a practice critics say stiflesproduct innovation and threatens patient safety. Lawmakers have threatenedcongressional action if GPOs do not reform their policies. Suspecting that GPOshave strayed from their original purpose of obtaining the best medical productsat low prices for healthcare organizations, Kohl and DeWine have asked theFederal Trade Commission and the Department of Justice to open investigationsinto whether GPOs had violated federal antitrust laws.

GPOs are buying consortiums originally designed to leverage the purchasingpower of hospitals, allowing them to obtain discounts on medical products,supplies and equipment. One estimate places the GPO market for hospitals atbetween $148 billion, growing to $257 billion by 2009. Data from HIGPA estimatesthat group purchasing saves hospitals an estimated $19.2 billion, or roughly 15percent of total purchasing costs.

Industry critics contend GPOs exist to restrict open market competition inthe healthcare marketplace. They say because seven powerful GPOs dominate thepurchasing activities of 85 percent of hospitals, only the largest andbest-connected medical product manufacturers thrive and benefit from GPOs'benevolence.

Accusations against GPOs include stock holdings by GPO executives,sole-source contracts awarded to manufacturers who paid special fees andcollusion between the buying groups and large manufacturers to exclude smaller,innovative manufacturers and to keep prices high. Venture capitalists say theyare reluctant to finance upstart medical technology companies because of theanticompetitive business practices of GPOs, according to Times articles.

Eugene Schneller, PhD, professor and director of the School of HealthAdministration and Policy at the Arizona State University College of Business,says GPOs have their rightful place in healthcare. Pointing to the fact that upto 80 percent of every healthcare supply dollar is acquired through grouppurchasing, Schneller says GPOs can lower prices, offer price protection,provide improved quality-control programs, reduce contracting costs and monitormarket conditions. He adds, however, that the ethics required in this kind ofbusiness practice can be a slippery slope.

"We must be mindful of the relationships GPOs may have had withmanufacturers that might appear to be unethical and rethink the purchasingprocess," Schneller says. "There are some manufacturing groups thathave said GPOs shouldn't have any relationships with any manufacturers in theproduct design process. There are GPOs that have decided to vertically integrateand make investments in companies that manufacture certain products, and therehave been some objections to that. The auto industry does this kind of thing allthe time. Ford will make an investment in a company that will manufacture partsfor its vehicles. I don't think it's an unusual relationship."

Schneller says the MDMA's code of conduct is more restrictive and preventsGPOs from entering into relationships that will trigger marketplaceefficiencies.

"The MDMA says if you have 2,000 doctors saying they want (a particularproduct), the GPO ought to have it. I'm not sure you want to stock somethingnationally for only 2,000 doctors. It may be that those 2,000 doctors want aproduct that is inferior. It may be lower cost but it may not be higher quality.One of the advantages of GPOs is that they force a discipline of standardizationwithin the industry and that's important for safety and efficacy and not justcost."

The proposed code of conduct for GPOs submitted by the MDMA is designed to"create an environment where fair competition and innovation may exist andhopefully thrive in the medical device market." The code reads, "Thispurpose can only be achieved if GPOS are neutral and do not have conflicts ofinterest. Otherwise the free market, open competition and clinician choice willbe threatened."

The code dictates the following pro-competition principles:

• GPOs will not accept any type of renumeration from a vendor

• GPO executives and employees will not serve on any vendor's board

• GPOs will not create incentives for hospital purchasers to select certain products over others through bundling

• GPOs will not enter into private labeling arrangements with manufacturers

• GPOs will not promote one vendor over another

• GPOs will not enter into sole-source contracts with manufacturers

• GPOs will not discourage or penalize participating hospitals for evaluating or utilizing medical products or technologies that are not on contract

• GPOs will not give any renumeration to any hospital employees

The code also contains fair-contracting and pro-transparency provisions, andcalls for oversight measures to ensure compliance. In addition to finalizing thecode, MDMA will continue to work with Premier, Congress, other federal agenciesand all relevant parties to ensure a continued commitment to fairness andcompetition in the hospital supply marketplace.

MDMA president Larry R. Holden called Premier's proposed code of conduct"a step in the right direction and one that brings us closer to an industrysolution." He noted that a code of conduct is just a code and that it is upto all involved parties to ensure that Premier's conduct matches its code. Healso noted the reluctance of other GPOs to adopt similar pro-competitionpolicies, however, and urged other GPOs to join Premier immediately in workingwith the Senate and MDMA to find solutions. Holden added, "We appreciatethe progress made to date and look forward to continuing to work with the Senateand others to press the valid market access concerns of innovative medicaldevice manufacturers."

Schneller believes GPOs still have value.

"I don't see 5,000 hospitals in this country going out and purchasing bythemselves," he says. "I think that would create chaos in the market.During the last several months there has been tremendous concern about GPOs andthe extent to which they provide value. The questions being raised by the Senateare, 'Do hospitals get the lowest cost for their products through grouppurchasing?' 'Do GPOs allow new technologies to get into the marketplace?' Forexample, if I design a new kind of syringe or medical product, what are mychances -- given what's happened in the industry with some very large companiesand group purchasing contracts -- that I get my new product seen? That issue hasraised a lot of questions about GPOs and what and how they contribute to thehealthcare industry."

Schneller continues, "With time, two large GPOs have emerged, Novationand Premier, so you have two organizations that are very much involved in afairly large proportion of what's happening in healthcare purchasing. Has thesize of these GPOs created current problems in the marketplace or does itcontribute to there being more efficiencies in the marketplace? Manymanufacturers are trying to sue GPOs because they say they have been cut out ofthe industry. I think there's a good deal of evidence that GPOs have served astechnology incubators because of their interest in bringing new products totheir membership and they've contributed to the diffusion of newtechnology."

Schneller draws the parallel between medical product technology and computertechnology.

"If I invented a new computer operating system, I'd probably have a heckof a time getting past Apple and Microsoft. You can argue that these two huge,standardized platforms make it difficult for any new software platform. Thisdebate is not a unique discussion to healthcare."

Schneller is the author of a white paper funded by Novation that examined theextent to which hospitals saved money by being part of a GPO versus securingtheir own contracts. "We found there's about a 44 percent cost avoidance bygoing with the GPO. The organizations we looked at tended to be large,integrated healthcare delivery networks. The numbers might be different if welooked at smaller hospitals. Big or small, does a hospital really want to takethe time to deal with bids?"

Schneller says that while hospitals can achieve cost savings through GPOs,buying groups often require various levels of purchasing compliance from theirmembers. "Some GPOs are more restrictive than others. Some GPOs want fullcompliance in exchange for good prices. The compliance issue continues to becontroversial. Hospitals tend to purchase commodity goods through GPOs at fairlyhigh levels. As you get into clinical preference items, there is much lesscompliance because physicians may have strong product preferences. One of thecriticisms has been that some GPOs are more restrictive than others in terms ofwhat they require of their members to stay in compliance with their contract.GPOs have tiers based on compliance; one hospital may get a much better pricethan another hospital because of its willingness to comply with contractrequirements. GPOs say, 'If you are willing to comply we will go out andnegotiate with a vendor and get a better price on a trainload than a carload.That's a reality in any industry."