Group purchasing organizations are breathing a big sigh of relief now that a Senate committee has given them 90 days to come up with a voluntary industry code of conduct or face legislation to reform the way they do business.
Instead of being relieved, the GPOs should take the Senate hearing, a call by two senators for a federal antitrust probe and an investigative series by the New York Times as a wake-up call.
A reading of the Times series, past Modern Healthcare reporting and a transcript of the Senate hearing left me with a mixed response. There is the feeling that the big GPOs, Novation and Premier, have become too entranced by their own financial muscle and have strayed too far from their central mission of saving hospitals money on supply purchases. Of course, I don't really know what has happened, because these organizations refuse to be open about their businesses, and when they are, they talk in an arcane lingo that leaves the observer less rather than more informed. Opening up this world to more public-or at least member-scrutiny ought to be Article One of the GPO Code of Conduct.
The other feeling is that the Times series paints too dark a portrait of GPOs. Premier and Novation aren't the Mafia or Big Tobacco, but that sure is the impression you get from the dramatic tension of the coverage. And if they are so nefarious, why would any hospitals continue to be members? Nevertheless, the series and the hearing raised some serious allegations of conflicts of interest, sky-high fees charged to suppliers, the freezing out of certain suppliers and sweetheart deals greased with big dollars. Those charges demand a response, and, as you can read on the facing page, Richard Norling, Premier's chief, has committed his organization to working on the problem.
Perhaps the most serious charge against Novation and Premier is that they don't save hospitals money. The General Accounting Office has produced a preliminary study suggesting that they don't. Aiding that conclusion is anecdotal evidence from hospital systems that have dropped out of the buying groups. The GAO study, however, covered just two supply categories in a single market, so the GPOs are justified in calling the study flawed. The GAO has promised a full nationwide report.
If it turns out to be true that the buying groups don't save as much money for hospitals as they claim, one reason might be some of the outside ventures they have pursued, such as Web operations, venture capital funds and technology research. Of these, the venture capital funds seem to carry the biggest potential for conflicts of interest. Meriting a further look, for example, would be Premier's role in funding American Pharmaceutical Partners, an injectable generic drug company with which it contracts. Evidence has been raised about some Premier executives' stock holdings in that company.
Those executives aren't alone. Other GPO officials have owned or continue to own stock in or sit on the boards of supplier companies. So here's Article Two of the GPO Code of Conduct: No GPO official should have a financial incentive to choose one company's product over another's.
Another serious charge facing the GPOs involves their administrative fees. Congress' 1986 decision to exempt GPOs from federal antikickback laws was based on an assumption that the fees charged to vendors would not be abusive, that being defined as fees in excess of 3% of sales. Premier says it doesn't have fees that exceed the guidelines. Novation has acknowledged that about 30% of its contracts exceed the limit, and reports are that it charges fees of more than 10%. Article Three of the GPO Code of Conduct should be: Fees will cover the real costs of administering the contract and nothing else.
Premier has hired Kirk Hanson, a former Stanford University professor and business ethicist, to review the group's entire business model. His report is due in September. Given the new mandate by Congress, he should hurry.