T he drug industry is almost never shy about expressing its opinion. The industry "hired an army of 623 lobbyists in 2001 to promote its agenda in Congress," a new report from the consumer watchdog group Public Citizen reported.
That may be true, but few if any of those lobbyists seem to be weighing in on hospital group purchasing organizations. Although the relatively clandestine industry has received a hailstorm of public scrutiny in recent months, it's not because of complaints from drug manufacturers. By contrast, the drugmakers' brethren on the medical surgical side, small-device manufacturers, are apoplectic over the business practices group purchasers use to negotiate discounts on behalf of their member hospitals.
Spurred largely by chronic complaints from the medical device industry, a Senate panel has ordered the group purchasing industry to clean up its act by July 30 (May 6, p. 6). To address those concerns, GPOs submitted the first draft of a proposed code of conduct to the senators earlier this month (June 10, p. 8). Critics say the draft barely made a dent in resolving their grievances (See related story, p 15).
"The proposal was a joke," said Phillip Zweig, a spokesman for Little Elm, Texas-based Retractable Technologies, a small needle manufacturer with a longstanding grievance against GPOs. "I just think it's an insult to the whole process. I don't think anyone takes it seriously. They are going to have to do a lot better."
On the other hand, representatives of the pharmaceutical industry, which provides a lion's share of GPO business, said the issue has not even made a blip on their radar screens.
"We don't have any particular position and nothing on it, frankly," said Clay O'Dell, a spokesman for the Generic Pharmaceutical Association, a Washington trade group.
Jeff Trewhitt, O'Dell's counterpart at Pharmaceutical Research and Manufacturers of America, a Washington trade group representing some of the largest manufacturers of branded, innovative drugs, similarly said he had no opinion on the subject of hospital groups. "We at PhRMA have not tracked that and have not gotten involved because, basically, they are talking about business practices of individual companies. Basically what we do is educate and lobby on behalf of the companies," Trewhitt said. Nevertheless, PhRMA was one of many trade associations that received a copy of the draft code of conduct, said David McDonough, a spokesman for the Health Industry Group Purchasing Association, which spearheaded the drafting.
It's not as if pharmaceutical contracting is an insignificant part of what GPOs do. Citing a 1999 study, the HIGPA noted that pharmaceuticals averaged 12.25% of all nonlabor costs in hospitals-a $21.9 billion drug tab. The same study estimated that 72% of all hospital purchases flowed through GPO contracts. At Premier, pharmaceuticals accounted for $4 billion of the $18 billion that was purchased under Premier contracts in fiscal 2001, said Bert Patterson, Premier's vice president of contract administration. Premier, San Diego, an alliance of 1,600 not-for-profit hospitals, brokers prices on 9,700 drugs under about 170 pharmacy contracts, Patterson said.
Pharmaceuticals account for $7.9 billion of $19 billion in annual purchases under Novation's contracts, and for the past three years, the roughly 125 pharmacy contracts have represented about 35% of Novation's business, said David Gaugh, senior director of pharmacy contracting and marketing. The nation's largest GPO in terms of purchases under contract, Irving, Texas-based Novation, has 9,500 pharmaceutical line items under contracts from 130 companies.
"There is some grumbling when someone doesn't win a bid, but everyone to the last man standing agrees it's a fair process," Gaugh said. "An aspirin is an aspirin, but with a pulse oximeter, you can't say that without having peoples' opinions weigh in on it."
Even the device manufacturers are stymied as to why the pharmaceutical industry is taking no apparent interest in the debate over hospital group purchasing. "I just don't know. It's not something I really tracked," said Larry Holden, president of the Medical Device Manufacturers Association, Washington. "I have not heard a reason for their not being there, or they are just not engaged."
The purchasing groups think they know why, and the reason only attests to their fair business practices, they said. Contracting decisions on the pharmaceutical side tend to be more black and white, a science rather than art thanks to the precise chemical formulas that differentiate drugs. In a certain sense, the level playing field on the pharmaceutical side demonstrates how group purchasing works in the best of all worlds, according to the groups.
To be sure, it's not nirvana. Big-name pharmaceutical companies with innovative drugs can call the shots when it comes to contracting since they are the only game in town. Sometimes, it's a seller's market for years, until a drug comes off patent. But once generics get their chance to jump in, all bets are off and it can become a winner-take-all game. Manufacturers of chemically equivalent drugs that lose out on contracting bids would be hard-pressed to grouse that the contracting process was unfair-unless it really was. Since drugs also tend to be high physician-preference type items, both the GPOs and the pharmaceutical companies are more likely to wage their battles in doctors' offices.
"No one can make the case that their product is the best for everybody," Patterson said.
As in other types of GPO contracts, the lowest bid on the pharmaceutical side is not necessarily the hands-down winner. Other considerations such as a company's track record and its ability to supply the product also can factor into the decision. But GPO decisionmakers don't find themselves grappling with nuances in products as often as the medical surgical side does, Patterson said. For example, the Senate Judiciary antitrust subcommittee found itself mulling the subtle differences in pulse oximeters as one manufacturer, Masimo Corp., Irvine, Calif., testified that its "state-of-the-art" pulse oximetry equipment, which measures blood oxygen levels, was locked out of doing business with Novation and Premier. The two GPOs insisted that Masimo lost its bid fairly and squarely to Tyco-Nellcor because Masimo's version wasn't deemed to be the breakthrough product Masimo said it was.
The gray area on the pharmaceutical side concerns so-called therapeutic equivalents: classes of drugs that differ by chemical formula but aim to treat the same thing. GPOs dodge the potentially controversial area in different ways. Through its "Rational Choice" program, Premier evaluates drugs by class and then offers a voluntary formulary that member hospitals can access to squeeze bigger discounts from their drug purchases. Novation and AmeriNet, St. Louis, the nation's largest GPO in members, tend to contract with all the companies offering various versions, leaving the ultimate decisions to the doctors. But once a drug goes off patent and becomes more a commodity-like aspirin-all three GPOs said they prefer to award sole-source agreements to leverage the maximum possible discounts for their hospital members.
"The advantage we have in pharmacy is we know the chemical equivalents and the therapeutic equivalents, and we have the bidding process and put all of our contracts out to bid every two to three years and open up the entire market," said Allen Dunehew, vice president of pharmacy at AmeriNet. "We have a lot of science behind the pharmacy side that they don't have in other areas that makes it somewhat of a challenge."
Although there are some big brand-name drug manufacturers that won't do business with GPOs, Dunehew said he couldn't think of one generic manufacturer that shunned them.
Jan Bell, national account manager for managed care at G&W Laboratories, South Plainfield, N.J., whose niche product line includes suppositories, over-the-counter creams and ointments and laxatives, agreed. Working with GPOs keeps things relatively simple for the small, family-owned generic drug manufacturer, she said.
"Basically, it's an open marketplace. You bid. If you win, you get the business and if you don't, you have to figure out what you have to do to be more competitive and get the business the next go round," Bell said. "If you don't get a contract, it's your own fault or maybe you don't want the business."