A trade group representing 130 small and medium-sized manufacturers of medical devices is alleging that various fees levied by purchasing groups violate anti-kickback laws and discriminate against its members.
The Medical Device Manufacturers Association said in a Feb. 7 letter to HHS' inspector general's office that the group purchasing industry, in general, and hospital alliances Novation and Premier, in particular, should be investigated for abusing a 1991 regulatory "safe harbor" through a complex system of charges to suppliers.
The regulations define a set of business practices, or safe harbors, that won't violate the kickback provisions of the Medicare and Medicaid fraud and abuse statutes. Those provisions bar any form of remuneration to induce the referral of Medicare or Medicaid business.
The 1991 safe harbors permit purchasing groups to legally charge manufacturers an administrative fee of 3% or less on the products they sell under contract to hospital members without the arrangement's being considered a kickback. The MDMA alleges that when other charges are factored in, manufacturers sometimes have to pay far more than 3% to sell their products through group purchasing organizations.
The MDMA singled out special licensing fees some manufacturers pay to GPOs to participate in their private-label programs, fees paid to GPO subsidiaries for special marketing services and warrants for stock allegedly paid by some companies.
"If a manufacturer paid a hospital, it would be a violation of the anti-kickback statute, but put a group purchasing organization in between and somehow that's OK," said Stephen Northrup, executive director for the Washington-based association. "What is the GPO doing? Laundering money to make it a nice clean transaction?"
The MDMA asked the inspector general to investigate the fee practices of GPOs and modify the safe harbors to reduce alleged anti-competitive behavior.
As of late last week, the inspector general had not responded to the MDMA, Northrup said. In any case, stepping outside a safe harbor isn't necessarily a law-breaking act.
"The 3% safe harbor isn't an absolute cap on GPO fees," said James Jaynor, a partner in the healthcare practice of McDermott, Will & Emery's Chicago office. In principle, a GPO could legally exceed 3% in fees if it provided special notice to its customer hospitals, he said.
Purchasing groups, through their trade association, affirmed the legality of their business practices.
Robert Betz, executive director of the Health Industry Group Purchasing Association, suggested that MDMA members may be seeking regulatory intervention to ease their unhappiness with the highly competitive-but perfectly aboveboard-market for medical supplies.
"The groups are hard-nosed," Betz said. "It's our job to squeeze every nickel until it screams, but that's not illegal."
He said outside counsel is now reviewing the MDMA's letter to the office of the inspector general and will prepare a point-by-point rebuttal. "Anytime somebody goes to OIG with serious allegations, we're going to respond in a very serious way."
At its core, the MDMA's beef seems to be that GPOs are anti-competitive because it is so hard for small companies to win contracts with them. That kind of problem is usually considered to be more suitable for review by antitrust cops than fraud-and-abuse watchdogs. And if recent history is any guide, the MDMA can expect disappointment on its plea.
Less than two years ago, the U.S. Justice Department launched an informal inquiry of GPOs to determine if their contracting practices involving safety needles and related products were anti-competitive. No action was taken outside of information gathering, according to several GPOs.
As for the latest development, Premier, a San Diego-based purchasing group for about 1,800 hospitals, categorically denied the MDMA's allegations.
Novation, an Irving, Texas-based group that buys for nearly 1,500 hospitals, declined to comment for this article.