Medical Device Daily Washington Editor

While the conduct of hospital group purchasing organizations (GPOs) has generated substantial controversy over the past few years, the Senate subcommittee charged with oversight of the industry is not currently planning to do more than keep up its annual review of GPO practices.

Despite the sometimes-contentious testimony provided by the four witnesses at the March 15 hearing, the chair and ranking member of the Senate Judiciary Subcommittee on Antitrust, Competition Policy and Consumer Rights ended the session by offering assurances that they were not poised to gut the so-called “safe harbor“ created by Congress in 1986. However, Chairman Mike DeWine (R-OH) and ranking member Herb Kohl (D-Wis) did not rule out reintroducing S. 2880, a 2004 bill that would impose federal oversight on GPOs should the industry's self-policing mechanism fail to produce the desired state of affairs.

DeWine opened the hearing by remarking that “this is the most extensive investigation this subcommittee has done“ and that to industry, it may seem “much too extensive.“ However, he pointed out that “complaints of ethical violations . . . and a more general complaint that the GPO system sometimes decreased the flexibility of hospital purchasing departments“ necessitated the continued scrutiny.

DeWine stated further that voluntary codes of conduct have “helped matters somewhat,“ but that he and Kohl had nonetheless felt compelled to draft the Medical Device Competition Act of 2004 (S. 2880) designed to ensure “the permanence of the industry's reforms.“

S. 2880 would charge the Department of Health and Human Services (HHS) with drafting rules for the GPO industry, prescribing “principles of competition [and] ethical standards.“ A GPO that deviated from such rules could lose its exemption, but the subcommittee opted to hold the bill when GPOs formed the Hospital Group Purchasing Industry Initiative (HGPII) in July 2005.

DeWine said that he had called the hearing to examine “whether the initiative has been effective“ and “what future steps“ might be necessary. Among the steps were resubmission of S. 2880 to the Senate, repeal of the safe harbor, and charging HHS with responsibility for policing individual GPOs for compliance with company-specific codes of conduct.

DeWine closed his remarks by noting that many hospital administrators in his home state “are confident that their GPOs are saving them money,“ but that government should nonetheless “promote vigorous competition, which will ensure that GPOs both save money and allow new and improved technologies to get to the market.“

In his opening remarks, Kohl insisted that “any industry plan must include real and meaningful sanctions,“ and expressed his “disappointment“ that no GPO sent a representative to appear on the panel.

Dick Bednar, senior counsel with the law firm Crowell & Moring (Washington), testified that his work as coordinator of HGPII assured him that Congress can expect “an ethical culture of compliance“ from member GPOs. The former Army debarring officer stressed that the HGPII was not “a hastily prepared quick fix,“ stressing that “the countless hours of study, reviews, reflection and consulting“ with ethics experts demonstrate that “the GPO Initiative is . . . a permanent institution, dedicated to the continuous improvement of policies and practices in the industry.“

Bednar stated that the GPO initiative included six ethical principles, including the requirements of developing a written code of business conduct and training employees “as to their personal responsibilities under the code.“ He argued further that participation in the initiative “will become a key criterion for hospitals and other providers when selecting membership in a GPO.“

Incentives called 'perverse'

Other panelists were not so optimistic. S. Prakesh Sethi, PhD, of the Baruch College at City College of New York decried the initiative's lack of “external monitoring mechanisms“ and lack of specifics on ethical standards.

“I don't think this initiative amounts to anything,“ Sethi said. He blasted the industry's “financial incentives [that] are so perverse“ that the initiative “cannot possibly remedy this situation.“ He made the case that “a code of conduct is doomed to failure“ until “we have realigned these financial incentives so that the hospitals, and not the vendors, are once again the GPOs' only clients.“

Mark Leahey, executive director of the Medical Device Manufacturers Association (Washington), took a similarly dim view of the initiative, charging that GPOs continue to engage in market behaviors that “excludes innovative, cost-effective technologies.“ Citing the case of Masimo v. Tyco Healthcare, Leahey alleged that “for a particular product category, the supplier was paying 15.5% in fees to the GPO in exchange for a sole-source contract,“ but that the fee payments would have amounted to 4% in a more competitive arrangement.

“GPOs claim they can fix the problem themselves, but the evidence suggests otherwise,“ Leahey added.

The testimony of Mina Ubbing, president and CEO of Fairfield Medical Center (Lancaster, Ohio), suggested a more favorable view of the impact of group purchasing. Ubbing said that her employer, a 222-bed acute-care facility, saved more than $1 million per year by purchasing a substantial portion of its equipment and supplies from Amerinet (St. Louis), which also provides “education, assistance in negotiating for non-Amerinet products, and benchmarking“ of unspecified aspects of Fairfield's performance.

According to Ubbing, the cost in salaries to bring purchasing operations in-house would be “at least $400,000.“ However, she admitted that Amerinet requires Fairfield to obtain a waiver to purchase from other vendors, which provide “about 37%“ of the hospital's equipment and supply needs.

Sen. Charles Schumer (D-New York) was a late addition to the hearing, announcing that he was “burning up“ over “industry people who are making record profits“ and the prospect that hospitals that band together to save money may “end up looking like the bad guys.“

He insisted that GPOs are “making a real effort“ to tighten down on unethical practices and characterized the elimination of safe harbor as “throwing out the baby with the bathwater.“

However, DeWine assured Schumer that the committee's purpose was “how to fine tune“ the operations of GPOs rather than do away with them altogether. Kohl added that he did not think it sounded right for the GPO industry to suggest that Congress should “go away“ and forsake its oversight of the industry.

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