Under pressure from a Senate panel, the embattled group purchasing organizations industry has circled its wagons and drafted a working document that attempts to broadly address a bevy of criticisms and complaints of, at best, sloppy business practices.
The big question: Will the long-disgruntled small equipment manufacturers and, most important, the Senate Judiciary antitrust subcommittee, buy into the proposed code of conduct?
Thirty days into an order by members of the Senate subcommittee to clean up its act within 90 days or face possible legislative remedies, the industry late last week shipped its working draft of a code to the subcommittee's staff (May 6, p. 6). In the remaining weeks, the document, a copy of which Modern Healthcare obtained, will be shared with a variety of trade associations, including the group representing the medical device manufacturers. It is merely a first step, group purchasing industry officials cautioned.
Ranking it as a colossal achievement simply to get members of a highly competitive industry to meet and agree on a draft code, officials said that antitrust concerns largely handcuffed them from delving into the specifics of fees and practices in the working document.
"We wanted to be mindful of competing business practices, so we didn't get into individual company business models. That is not to say that individual (GPOs) won't look at it, and our company is not beyond continuous improvement," said Mark McKenna, a member of the working group that drafted the code and president of Novation, the nation's largest GPO.
Industry officials said they have drafted a code of "best practices" that was readily and wholeheartedly adopted by the 26 GPOs represented in the working group of 22 individuals. The draft outlines six broad areas of concern that were raised at the April 30 subcommittee hearing. Short of spelling out practices, the working draft sets guidelines for GPOs as they go about their business of brokering a substantial but untold portion of the estimated $173 billion that the nation's hospitals spend yearly on supplies.
"I would say if GPOs operate under this scheme, we will be a lot more comfortable that there aren't third-party influences," said Dave Zimba, vice president of corporate contracting at six-hospital West Penn Allegheny Health System, Pittsburgh, a member-owner of healthcare alliance Premier. "Will it by itself cause us to get the best pricing? I'm not sure." Although not privy to the draft, Zimba was apprised of its major points.
David McDonough, a spokesman for the Health Industry Group Purchasing Association, said the document "outlines the principles we think should ultimately be in the GPO code of conduct." The group plans to share the document with "a variety of interested parties" and will consider their advice, he said. The HIGPA, whose members include 30 GPOs and about 130 suppliers and distributors, coordinated the working group, and its board of 15 approved the draft guidelines.
The draft takes broad brush strokes and refrains from setting limits on GPOs' controversial administrative fees. It does not categorically prohibit GPOs from holding equity stakes in companies that are also under contract with them. Rather, it leaves the door ajar for investments when it "demonstrably benefits the GPOs' members by creating a source of a clinical preference item or service where there is otherwise no other source, or very limited sources." In the rare situations where that is the case, the GPO must immediately disclose its equity interest to members in writing and then continue to do so at least yearly. The apparent loophole appears to apply especially to e-commerce, an outside activity in which the two industry giants, Novation and Premier, are heavily invested.
But the draft stays mostly silent on the issues of bundling of products and sole-source contracting-practices that are the bane of small equipment manufacturers and were a concern raised by Sen. Herbert Kohl (D-Wis.), the subcommittee chairman. Small equipment manufacturers allege that their innovative products are locked out of the marketplace because of sweetheart deals between the GPOs and large suppliers that have done business with them for years. They also take great issue with the administrative fees the GPOs levy on suppliers, characterizing them as kickbacks.
The device manufacturers, which planned to submit to the subcommittee their own ideas on what a code of conduct should address, want to see an end to sole-source contracting. Most important, they want to see an end to "the abusive nature of administrative fees," said Larry Holden, president of the Medical Device Manufacturers Association, Washington. "They are finding a way to go around the protections Congress gave them," Holden said.
Short of eliminating certain contracting practices, the working draft attempts to address the concerns with the assurance that the groups will fully disclose their fees and practices to their members. Conflict-of-interest policies, the largest section of the code, strictly prohibit GPO employees who can influence contracting decisions from accepting any gifts or favors from vendors above a nominal value of $50 per instance or $100 per year. Nonemployees, such as hospital workers who take part in the decisionmaking process, must disclose the gifts and excuse themselves from any decision affecting the particular vendor.
Along the same lines, GPO employees in a position to influence contracting decisions cannot hold stock in participating vendors; nonemployees can, but they must disclose their financial interest and excuse themselves from any negotiations related to the vendor.
As a volunteer member of the materials council for Novation, Terry Turner, director of hospital purchasing at University of Utah Hospitals and Clinics, Salt Lake City, said he would have no problem abiding by the code-as long as it's within reason. For example, he wouldn't want to have to cash out of his retirement plan, he said.
"My biggest concern would be that the code becomes so prohibitive and destructive as to keep us from being able to get to a (contracting) decision," Turner said.
The working draft also calls for greater transparency in the contracting process. Hospitals should be able to communicate directly with vendors regardless of whether the vendor has a contract with a GPO, according to the document. Hospitals also should be able to purchase items from outside vendors without fear of retribution. Suppliers charged at the subcommittee hearing that some hospitals have been punished for speaking with vendors who do not have group contracts.
The two groups whose members testified at the hearings-Novation and Premier-categorically denied those charges.
Although Novation and Premier have borne the brunt of the scrutiny, other GPOs recognize that the industry itself has been challenged. As far as many of them are concerned, the guidelines would merely codify practices they already have in place. John Bardis, president, chairman and chief executive officer of MedAssets HSCA, said as written, the draft code will not change any policies at MedAssets, but it nevertheless represents a big step for the industry.
Similarly, Consorta, Rolling Meadows, Ill., conducts business well within the guidelines, said John Strong, president and CEO and a member of the working group. "We carefully evaluate all contracting opportunities, including small and large manufacturers. We don't bundle products together, and we accurately report back to all members, so we don't do anything outside the law," Strong said.
But the laws and regulations that created and protect the industry, which run along two tracks, appear to be at stake. One track runs to a safe harbor that was completed in 1991 and falls under the purview of HHS. A congressional exception to the antikickback statute passed in 1986 and 1987 and final in 1991 cleared the way for GPOs to levy administrative fees on vendors as long as the fees collected were fully disclosed to provider members when they exceeded a 3% threshold. The law essentially immunized GPOs against fraud when they are negotiating goods and services reimbursed by Medicare and Medicaid.
`Safety zone' addressed
The second track runs to the "antitrust safety zone" established for GPOs as part of statements issued in 1993 and 1994 by the U.S. Justice Department and Federal Trade Commission addressing the agencies' antitrust enforcement policies regarding mergers and joint activities in the healthcare arena. The 1994 policy statement that specifically addressed hospital joint purchasing arrangements said group purchasing contracts would not be challenged if two criteria were met: that purchases could not exceed 35% of market share, and that the cost of the products and services jointly purchased should not exceed "20% of the total revenues from all products or services sold by each competing participant in the joint purchasing arrangement."
The two criteria are ambiguous and subject to much interpretation.
"These market share numbers are being tossed around loosely," said Bud Bowen, president of Amerinet and a member of the working group. "Even on the best day, about 50% of what hospitals buy goes through a group contract."
Nevertheless, it all appears to be a moot point for the Senate subcommittee. A congressional source familiar with the GPO hearings said it's clear the industry should be reviewed whether or not it operates in the safety zone. In addition, the safety zone needs to be reviewed, the source said. All group practices are up for discussion, even the administrative fees, which fall under the safe harbor umbrella.
"We're not on a crusade to eliminate GPOs, but we would just like them to go back to their original purpose, which was to gain, through volume discounts, cost savings for hospitals," the source said. "We're concerned with allegations that some people have strayed from the original mission."