The besieged hospital group purchasing industry has heightened its alert status as the California state Legislature appears poised to act on a bill-apparently the first of its kind-that would strictly regulate the business practices of group purchasing organizations.
Coming on the heels of a yearlong investigation by the U.S. Senate Judiciary Committee's antitrust subcommittee that strongly encouraged a revamping of business practices, GPOs are taking no chances. Worried that it could set a dangerous precedent, the industry is lobbying to nip the nascent law in the bud.
GPOs believe this would be the first such law in any state that forbids some basic contracting practices such as exclusive agreements with a single vendor-policies the GPOs say they rely on heavily to drive cost savings for their hospital members. But small-device manufacturers, which apparently have spurred the California bill as they spurred the congressional panel's review, despise the same policies, saying they block their innovative products from entering the marketplace.
"The precedent set by one large state doing it would exactly appear to be the (device manufacturers') strategy," said Edward Goodman, vice president of public policy for hospital alliance VHA. "We're looking at increased healthcare costs and a layer of unnecessary regulation favoring a special interest group-these device manufacturers who would accrue a benefit for their stockholders at the expense of the patients and hospitals of California."
Goodman said that the bill "was certainly pushed" by small device manufacturers, including Masimo Corp., an Irvine, Calif.-based pulse oximeter manufacturer that has led the device manufacturers' crusade against GPOs since a subcommittee hearing last year in Washington. Noting the sensitivity of the subject, Masimo officials requested a list of written questions, but then did not respond to the e-mail by deadline.
The bill, SB 749, was introduced on Feb. 21 by Democratic state Sen. Martha Escutia and has passed the Judiciary Committee, which she chairs, and could go swiftly to the state Senate floor within the next week or 10 days, Goodman said. After that it would have to go through the state Assembly before being signed into law by the governor. Goodman, who said he believes the law will likely pass the Senate, could not predict when or what would happen after that.
A fact sheet supplied by Escutia's staff explained the impetus for the bill, charging that though "cost control rests firmly in GPOs' purchasing power," the lower prices are "not being passed on to consumers due to GPOs' questionable ethical and business practices that affect not only cost but care." The bill seeks to protect California hospitals and consumers "and slow down runaway healthcare costs by codifying ethical standards established by the trade industry," according to the backgrounder.
GPOs are nervous on two counts. The substance of the legislation itself-including a 3% cap on the administrative fees that GPOs charge vendors, which gives the GPOs much of their revenue-"compounds (hospital) cost problems instead of addressing it," Goodman said. More widely, just the idea of a state law sends chills up the spine.
"No matter the contents, when you regulate a national industry you can end up with a patchwork of different laws, making it very hard to run a national business that is designed to drive cost savings and other value for healthcare organizations," Goodman said.
VHA estimates the bill would drain $30 million from the more than 140 California hospitals that purchase supplies through its group purchasing company, Novation. California hospitals collectively would lose more than $100 million. "This would accrue to the vendors who worked so hard to get the legislation passed," Goodman said.
Daniel Adams, president and chief executive officer of 312-bed Presbyterian Intercommunity Hospital, Whittier, in Escutia's home district, said his hospital stands to lose as much as $500,000 a year if the bill passes. The hospital purchases about $10 million annually through Novation and another $5 million through other GPOs, he said. Last year, the hospital earned a thin $1.2 million on $180 million in net revenue.
The hospital industry "has massive problems and to start ticking away at good business practices for the benefit of a single manufacturer-I don't see that," Adams said.
Novation's leading national competitor, Premier, also is working with the Health Industry Group Purchasing Association to lodge its concerns with California lawmakers, said Pat Poston, Premier's senior vice president of communications. "The bill would increase the expense of providing healthcare and ultimately raise costs borne by Medi-Cal, CalPERS, and California employers that pay for healthcare benefits," Poston said.
Premier has approximately 80 hospital members in California.