* "In summary, for the hospitals we studied, a hospital's use of a GPO contract did not guarantee that the hospital saved money: GPOs' prices were not always lower and were often higher than prices paid by hospitals negotiating with vendors directly."
* "In fact, there were several instances in which individual hospitals using large GPOs' contracts paid prices that were at least 25 percent higher than prices negotiated by hospitals on their own, and smaller GPOs also sometimes offered better prices."
* "The data on hospital purchases in our study market raise questions about whether GPOs--and especially large GPOs--achieve price savings consistently, as expected."
* "In addition, the limited number of purchases from small manufacturers in our study market suggests the need to examine data from additional markets, given small manufacturers' concerns that GPOs' practices inappropriately limit their access to potential purchasers."
Using the Study to Gain Accounts
Distributor and DMIA Board member George W. Smith, CDC, believes the GAO study already has had a positive impact on his business. The same week that results of the study were released, Smith and salesperson Sandy Gallegos were making a presentation to the materials manager of a county hospital. Smith, vice president of sales and partner of Colfax, Calif.-based Tully-Wihr Co. (he works in the firm's Hayward, Calif., office), says the manager was unhappy with the performance of one of the companies serving the hospital through Premier, a major GPO. Premier's forms management contracts are "committed," meaning member hospitals are required to purchase a vast majority of most of their documents (including custom continuous forms, unit sets, envelopes, labels and electronic forms) from one of Premier's two vendors, Bannockburn, Ill.-based Moore North America Inc. and Dayton, Ohio-based Standard Register.
Tully-Wihr never had sold products to the hospital, but the large distributorship managed to get in the door to make a presentation. Smith downloaded the PDF version of the GAO's findings from Print Solutions' web site and used it during the presentation. As soon as the materials manager mentioned his current printing vendor, Smith read a summary paragraph from the GAO testimony. "It had a powerful impact," he says. "Whatever the reservations they had foreseen with us were negated." Tully-Wihr won the account.
Lee Ryden echoes the feelings of many distributors when he says, "My response [to the GAO findings] is it's about time somebody woke up." Ryden is owner and president of distributorship Ryden Business Forms, Escondido, Calif. As soon as he received information posted by DMIA on its members-only broadcast email system, he downloaded the PDF version of the GAO testimony. Then, he forwarded it to a top official at a hospital he sells to. "It's my way of saying 'I told you so' without saying it," Ryden says. His company is a major printing supplier to the hospital, despite the hospital's selection of Premier as its GPO.
The report could be a valuable sales tool, if presented properly, distributors say. Ryden suggests copying the report and sending it to an operations manager or controller with a sales letter that says something like, "This particular issue has been brought to light by the U.S. government. If you don't have a copy, I thought you might want to read it." He warns distributors that they must present the information "in a non-sour-grapes" fashion.
Why Government Attention?
Distributors, including many who oppose government regulation of business, find themselves cheering on the GAO's findings and the potential for any action that could force GPOs to change the way they operate. So just how did the Senate subcommittee on antitrust begin to look into GPOs?
The Senate began intensively investigating the industry last fall, according to a Congressional source. The scrutiny was propelled in part by complaints from members of the Medical Device Manufacturers Association. They maintain that their products aren't getting a fair shake in hospitals because GPOs lock up contracts with only the largest manufacturers. (Premier has contracts with Moore and Standard Register for forms management. Novation, the nation's largest buying group formed in 1998 as a combination of GPOs VHA [serving community-owned hospitals] and University HealthSystem Consortium [serving academic health care centers], has contracts with Moore and Dayton, Ohio-based Relizon.) Critics of the GPO system say restricting doctors' access to devices of their choice can be disruptive--possibly even life-threatening--in certain situations.
In addition to concerns about patient care, the Senate subcommittee wants to ensure fair competition in the marketplace to encourage innovation. At the same time, senators are cognizant that taxpayers finance Medicare and Medicaid payments to hospitals and other health care organizations. Therefore, members of Congress reason, they have a stake in determining whether hospitals are overcharged for supplies.
Potential Conflicts of Interest
The Senate also is concerned about possible conflicts of interest in the GPO industry. A series of articles in the New York Times earlier this year disclosed that a few top executives at GPOs received lucrative stock options from the very companies whose products they supplied to hospitals through purchasing contracts.
According to a March 26, 2002, article in the Times titled "When a Buyer for Hospitals Has a Stake in Drugs It Buys," Premier helped to set up pharmaceutical firm American Pharmaceutical Partners in 1996 and invested a small sum of money. In return, according to the newspaper, Premier received American Pharmaceutical stock worth $46 million when the company went public last year.
In an April 30 statement before the Senate Subcommittee on Antitrust, Competition, and Business and Consumer Rights, Sen. Herb Kohl (D-Wis.), subcommittee chairman, cited those conflicts of interest, as well as GPO Novation's "demands that medical suppliers it contracts with sell their products on a for-profit e-commerce site in which Novation has a substantial interest and in which many of Novation's senior executives hold personal stakes." (Novation's forms management contracts aren't "committed," meaning member hospitals aren't required to purchase documents from Moore or Relizon. The hospitals, however, receive monetary incentives for doing so.)
"These practices are appalling and cannot be tolerated," Kohl said in the statement. "We cannot accept a situation where a decision on which medical device will be used to treat a critically ill patient could conceivably or even theoretically [be based on] the stock holdings of a GPO executive."
In addition to those concerns, the fundamental structure of GPOs has raised some eyebrows on Capitol Hill. These buying groups aren't financed by hospitals, but by the suppliers GPOs do business with. This means GPOs, which generally are owned by member hospitals, receive "administrative fees" from their suppliers based on the amount of that supplier's products sold to hospitals. In turn, GPOs return some of those fees to the hospitals.
Distributors have noted for years that payments to hospitals amount to "kickbacks." GPOs prefer the term "rebates." The GAO testimony notes, "The extent to which a hospital buys using the GPO's contracts may affect the share of the administrative fees that the GPO returns to the hospital."
The supplier-financing of GPOs was made possible when the Social Security Act was amended in 1986 to allow GPOs to accept administrative fees from vendors. According to the GAO, the fees "would otherwise be considered 'kickbacks' or other illegal payments to the GPO." Congress approved the exemption from antikickback rules, believing the exemption would allow GPOs to help hold down health care costs. At the same time, the exemption helped transform the GPO landscape and led to the creation of mega-GPOs such as Premier, which has $14.8 billion in annual purchasing volume.
The GAO's report explains that administrative fee regulations state that "fees are to be 3 percent or less of the purchase price, or if not fixed at 3 percent or less, the amount or maximum amount that each vendor will pay." An article published March 4 in the New York Times disclosed "Novation acknowledges that about 30 percent of its contracts exceed 3 percent of sales, and a hospital official who buys through that group complains that some fees are now 'up in the teens.'"
In written testimony, top Premier executives lobbied in April against changing federal law that would shift the cost of group purchasing from sellers to hospitals. In the testimony, top Premier officials said, "If seller-financed administrative fees were shifted to hospitals as a new cost, the impact on public and private payers would be direct and immediate."
A Grace Period for GPOs
The Senate stopped short of legislative action in April. Instead, it gave the industry time to develop a "code of conduct." According to Lynn Becker, Kohl's press secretary, June 7 was the deadline for the GPO Working Group (coordinated by the GPOs' Washington, D.C.-based trade association, Health Industry Group Purchasing Association) to submit a draft proposal of the code to the Senate subcommittee.
The subcommittee plans to respond to the code early next month, she says. In addition, Sens. Kohl and Mike DeWine (R-Ohio), the ranking minority member on the subcommittee, wrote to the U.S. Department of Justice and the Federal Trade Commission "to request that they re-examine guidelines that protect GPOs from federal antitrust scrutiny in most cases."
In an April 30 statement to the subcommittee, Kohl made it clear that he wants the industry to regulate itself. "The industry should clean up its own house, and we believe they want to," he said. But he left little doubt that legislative action could still result, adding, "But without quick and effective self-regulation, we will have to consider congressional action."
For now, no one knows how--or if--the code of conduct will affect GPOs. In the long run, consumer groups and critics of the GPO system ultimately may succeed in reforming the industry.
In the short term, printing distributors and others are cheering on the GAO study. For some, it may be the right tool to open doors that previously were slammed shut.
Katherine House, a freelance writer in Iowa City, Iowa, is a frequent contributor to Print Solutions. Email us your comments at bholt@printsolutionsmag.com.
Different Spins on the
Study
Following the release of the United
States General Accounting Office (GAO) pilot study, critics and supporters of
the group purchasing organization (GPO) system were eager to put their spins on
the issue.
For the GPOs themselves, damage control
began on their web sites with references to a New York Times series on GPOs and
the GAO study. The association representing group purchasing organizations,
Washington, D.C-based Health Industry Group Purchasing Association, touted the
results of a study completed by a consulting group that substantiated the
industry's claims that GPOs save hospitals money and improve their efficiencies.
According to the study, respondents said they enjoyed average savings of 10-15
percent through their use of GPO contracts.
Officials of buying group Premier said
May 1 that a well-known business ethicist had been working with the company
since March to identify the "best ethical standards for group purchasing
organizations, including how GPOs are funded, how purchasing decisions are made,
[and] relationships with supplier companies, including equity relationships...."
AmeriNet, the nation's third-largest GPO with $5.2 billion in annual purchasing
volume, distanced itself from Senate criticism by issuing a press release that
said, in part, "AmeriNet Conflict of Interest Policies strictly govern
individual ownership of stock in companies with which AmeriNet does business."
The release also highlighted relationships AmeriNet has with smaller, innovative
medical technology firms.
Here's a selection of quotes from
companies and organizations on both sides of the issue:
Medical Device Manufacturers
Association:
"As innovators of advanced medical
technologies that improve the quality of life, we urge the Congress to examine
the unintended anticompetitive consequences of the GPO system....GPOs may have
saved some hospitals money. But the system lost its integrity. Only Congress can
restore it."
--From March 4 press release, "GPOs Were
Intended to be Anti-inflationary; Now They're Just Anticompetitive"
VHA (affiliated with Novation, the
nation's largest GPO):
"The New York Times recently published
articles on the group purchasing industry and how groups like VHA's supply
subsidiary Novation conduct business on behalf of hospitals. Despite the
questions raised in the articles, we remain strong in our belief that group
purchasing is good for health care and that our operational practices are fair,
open and sound."
Sen. Herb Kohl (D-Wis.), chairman of
the Senate Subcommittee
on Antitrust, Competition, and Business and Consumer
Rights:
"We all support the basic purpose of
GPOs: to hold down health care costs with volume purchasing. But the GAO study
raises serious doubts as to whether GPOs are doing a satisfactory job achieving
this goal. In many cases, hospitals can get a better deal if they go outside the
GPO contract. It seems like sometimes GPOs may produce the worst of both
worlds--little savings and fewer choices."
Health Industry Group Purchasing
Association:
"GPOs enable hospitals to save up to $20
billion each year through lower product prices. Additionally, GPOs provide
valuable cost-avoidance savings to hospitals and other providers by helping them
standardize and streamline their purchasing, as well as reduce the number of
non-clinical staff that hospitals must employ to negotiate purchasing
contracts."
--From "The Basics About Group Purchasing Organizations" on
www.higpa.org
GAO to Conduct More Detailed
Study
The United States General Accounting
Office (GAO) is preparing a more in-depth study of group purchasing
organizations to supplement the pilot study. A Senate antitrust subcommittee
requested the pilot study and heard its results April 30 during a hearing.
According to GAO officials, the subcommittee requested an expanded study that
will concentrate on more products and geographic areas. (The pilot study
concentrated only on pacemakers and safety needles.) At press time, no deadline
for the expanded study had been established.
