Until recently, hospital group purchasing organizations flew under the radar of nearly everyone, including patients, the front-line workers and, arguably, member hospitals' own boards of directors. But that all changed in the past few years as disenfranchised manufacturers of small medical devices became increasingly vocal about GPO business practices, enlisting the support of the Senate Judiciary's antitrust subcommittee in their claims that the GPOs were designed to marginalize their innovative products.
As a result, over the past three years all of the large, national GPOs have moved to offer greater transparency of their business operations and institute what they describe as rigorous codes of conduct. In addition, nine of the nation's leading GPOs have formed the Healthcare Group Purchasing Industry Initiative, designed to ward off the threat of legislation that would regulate the industry (March 21, p. 12).
However, that scrutiny has failed to transform another aspect of GPO operations: governance. How GPOs create their boards, select board members and use their governing bodies to oversee business operations and practices are still somewhat less than transparent processes despite growing public pressure-in a post-Enron and post-Allegheny Health, Education and Research Foundation era-to make governing boards more accountable.
Indeed, Kirk Hanson, interim coordinator of the HGPII, says GPO governance will not be an issue in the initiative's first questionnaire of GPO business practices, which should be publicly available on Nov. 1. Still, that doesn't mean that governance structure is not an important issue for GPOs. In an industry where no two GPOs look alike, governance structure can offer clues about the underpinnings of the organization.
"I'm not sure there is an ideal model. What I think is important is good governance procedures, regardless of ownership structure. That means substantial transparency, concern for conflicts of interests and a focus on the ultimate purpose of GPOs, which is a combination of cost control and quality healthcare," Hanson says. "GPO governance faces the same issues that all corporate governance faces. Some dimensions are more complex because hospitals at times are both owners and customers, but generally the issues are the same in all sectors of the economy."
No two the same
The governance structures of the large national GPOs are as varied as the organizations themselves. Hospital members that are also shareholders own and govern some, such as Premier and Consorta. Others, such as Alpharetta, Ga.-based MedAssets, which describes itself as a "cash-flow improvement company" of which group purchasing is just one piece, are owned and governed by investors.
Then there is Amerinet, chartered as a cooperative when three former GPOs joined together as owners: Vector, Amerinet Central and the group-purchasing arm of Intermountain Healthcare, an integrated healthcare network based in Salt Lake City. Net income is divided up equally among the three "patrons," says Bud Bowen, Amerinet's chief executive officer. Unlike publicly traded corporate boards, Amerinet's six board members, who represent the three owners, are not compensated.
"You'll probably find no two (GPO boards) alike," Bowen says. "The group purchasing industry is very diverse and there's a wide variety of corporate structures. In recent years, there's even GPOs interested in becoming publicly traded. ...With the diversity of the structures, there is no right or wrong way to structure each one. It's dependent on the goals of the GPOs and the goals of the owners."
Governance at Broadlane and MedAssets, which are privately held, is strikingly different from the structure at GPOs that are part of hospital alliances and cooperatives. The primary difference is that investor representatives figure prominently on their boards. Both companies are widely rumored to be considering initial public stock offerings, in which case the degree of transparency would necessarily change under Securities and Exchange Commission regulations.
The composition of the board at San Francisco-based Broadlane, which was spun off five years ago from Tenet Healthcare Corp., has changed as the company has evolved, says David McAdam, Broadlane's vice president of marketing. The company now describes itself as "the group procurement services company for healthcare." The 10-member board includes "significant" investors; customers such as Tenet and the Kaiser Foundation Health Plan, which also own equity; and independent members "who bring strong financial and/or healthcare expertise," McAdam says. Broadlane's independent directors are Alison Davis, general partner and managing director of Belvedere Capital Partners, a private equity firm that invests in financial services; Arthur Spiegel, who has diverse experience in healthcare; and Barry Schochet, who was an executive with Tenet when appointed to the board in 2000 but has since left the company.
"There is no three-ring binder that tells the board what kind of members come on the board," McAdam says. "It's historically been a collaborative process between the board and senior management of the company to determine the appropriate areas for expansion of board membership and specific potential appointees."
MedAssets' 11-member board nearly exclusively comprises people representing the company's investors, including private equity groups Parthenon Capital, Galen Partners and Benton Hill Investment Co., according to the MedAssets Web site. Benton Hill's chairman and CEO is Earl Norman, founder and former owner of HSCA, a GPO that was based outside St. Louis until MedAssets acquired it. In May, Grotech Capital Group, a private equity investment firm, invested $21.7 million in the GPO, and Harris Hyman, a Grotech general partner, joined the board (May 2, p. 16).
MedAssets officials acknowledged that Grotech purchased "a limited amount" of MedAssets stock from former owners of companies acquired by MedAssets, including Norman. Norman continues to own a significant amount of MedAssets stock and sits on MedAssets' board, MedAssets officials say.
Gary Johnson, MedAssets' vice president of marketing and marketing services, says in contrast that having hospital customers on the board of directors of a GPO, as many competitors do, "would seem to be a conflict."
Yet, when MedAssets boasted in July 2004 that it had persuaded three-hospital Atlantic Health System to leave hospital alliance VHA and its GPO, Novation, and bring its $160 million annual supply budget to its own group purchasing fold, MedAssets didn't publicly disclose a connection between its board and Atlantic's.
MedAssets' news release did not mention that John Wilkerson, a MedAssets board member and general partner of Galen Partners, also was on the board of directors of Florham Park, N.J.-based Atlantic. Wilkerson has served as chairman of Atlantic's board since May.
MedAssets and Atlantic officials both say Wilkerson's position with both companies was never hidden and indicate it was immaterial to the decision to change GPOs.
"As was the case with several changes we made in our GPO decisions in recent years, Atlantic Health's move to MedAssets was vetted through a clear corporate compliance policy regarding conflict of interest," says Joan Lebow, an Atlantic spokeswoman. "We were fully aware of the connection Mr. Wilkerson has to MedAssets and to Atlantic, reviewed this issue in the light of our rigorous compliance policy, and then determined that MedAssets was an appropriate GPO choice for Atlantic Health."
Similarly, MedAssets' Johnson says Wilkerson's relationships were "fully disclosed to all parties ... Everything was transparent and open. We don't have any skeletons."
Like Amerinet, Schaumburg, Ill.-based Consorta, which primarily serves faith-based healthcare organizations, is set up as a cooperative and is focused almost exclusively on group purchasing. Each of Consorta's 13 not-for-profit shareholders, which pay a one-time $355,000 fee for their share, appoints one of its senior executives to the board. The board members, who are reimbursed only for traveling and out-of-pocket expenses, also represent Consorta customers.
That might be construed as a conflict of interest for a publicly traded company, "But I think it's important to note that it's 100% owned by customers," says John Strong, Consorta's president and CEO. "The executive team and board have a very arm's-length businesslike arrangement where we are held to very high standards of ethics, performance and integrity because it's their company. We may be held to a higher standard than (investor-owned GPOs are held) by venture capitalists."
In the big leagues
Hospital CEOs who serve on the boards of member-owned GPOs like Consorta answer to their own boards, and that might give them a weakened view of boards. Historically, in a legal sense, the governance of not-for-profits was considered a "Little League activity," says Lawton Burns, a professor and director of the University of Pennsylvania's Wharton Center for Health Management and Economics. In Pennsylvania, hospital boards are formed with the intention "to promote volunteerism," he says. Hospital board trustees serve without compensation and are not typically held liable for any civil damages just as a Little League coach would be immune.
But "what we learned with AHERF is that it isn't Little League activity," Burns says. "I think it may be a systemic weakness in nonprofit governance when in fact (hospitals) have grown to be very big companies. There may be something about nonprofit governance that we have to be careful about. No one has studied the governance of those things very well."
Representing one of VHA's 128 shareholders, Gerald Miller, president and CEO of Crozer-Keystone Health System, Springfield, Pa., has served on the VHA board for three years-without compensation. "I happen to believe in VHA as an organization," he says. Comparing his own relationship with the Crozer-Keystone board to the VHA board's relationship with the alliance's executive team, Miller says he's learned from both ends and scoffs at the idea that hospital boards are weak. "We have some very independent Quakers around here," Miller says. "I think boards in general are becoming more independent. Sarbanes-Oxley ... led to better stewardship on the part of VHA and hospital boards, so I think it was good."
VHA's 17-member board comprises 14 representatives from shareholder hospitals, two outside directors and Curt Nonomaque, VHA's president and CEO. Only the outside directors are compensated: $5,000 per quarter and $4,000 for each meeting attended. That generally totals as much as $50,000 per year, says Lynn Gentry, a VHA spokesman. The two outside directors are Jerry Myers, a partner in the healthcare investment firm CroBern Management Partnership, Lake Bluff, Ill., and Vincent Kerr, executive vice president of network and clinical strategies for Uniprise, New York, a subsidiary of UnitedHealth Group. Myers can offer his expertise in Sarbanes-Oxley compliance, which VHA is following even though as a privately held, for-profit cooperative, it isn't required to, Nonomaque says. Since most of the board members are VHA customers as well as shareholders, there is the potential for conflicts of interest as there always are, Nonomaque says.
"I think the important piece here is your conflict policy-how you live it. We take our conflict-of-interest policy seriously here," he says. Board policy prohibits members from holding stock in companies that VHA or Novation have an investment in, and any equity holdings with vendors must be fully disclosed.
Board members are nominated by a five-member committee, three of whom are non-VHA board members, "so it's not a self-perpetuating board," Nonomaque says. Board members serve a maximum of two three-year terms.
Nonomaque says his relationship with the board is positive and interactive. "What I really like is it's an active board, but certainly not a rubber stamp. We structure it so that the bulk of the board meetings is them talking, not management," he says. "We tee up major strategic, operational or tactical issues."
Nonomaque says the VHA board has been more active in recent years but it's more a reflection of boards across the country than of any pressure put on VHA by the Senate antitrust subcommittee. Miller on the other hand says he thinks GPOs are reacting to both the Senate's monitoring of the industry and the Sarbanes-Oxley corporate accountability law, which "has changed the nature of openness and debate at lots of organizations."
Nonomaque also serves on the board of Novation, the joint GPO of VHA and University HealthSystem Consortium. Board members at Novation are nominated by each of the alliances. Novation's 14-member board comprises six members representing VHA, three representing UHC, two executives each from VHA and UHC, and Novation's president and CEO, Mark McKenna.
As with VHA, group purchasing is just one aspect-albeit a major one-of the services offered by hospital alliance Premier, but its governance structure differs slightly. Premier's board of 14 includes two outside directors and 12 inside directors, including Premier's President and CEO Richard Norling and senior executives at shareholder hospitals. The outside directors are William Mayer, founder of Park Avenue Equity Partners, and Susan Wang, retired executive vice president for business development and corporate secretary of Solectron Corp., an electronics manufacturer and provider of supply chain services. As with most of the other GPOs reviewed for this story, vendor representatives are not on the Premier board, although there is no codified policy prohibiting that. The only exceptions are Consorta, whose board by definition is made up entirely of its hospital shareholders, and Amerinet, which in 1995 instituted a formal policy prohibiting board members from having any interest in any Amerinet vendors.
A committee that includes nonboard members nominates Premier board members who are subsequently voted on by the entire Premier membership of 203 hospitals, says Gina Clark, Premier's senior vice president of strategic marketing, communications and alliance relations. All board members are compensated using a market-based plan set by an outside firm, Clark says, but compensation for hospital CEOs on the board goes directly to their organizations. Clark did not respond to a request for the specific amount of compensation.
Clark says Premier's board and senior management have "a very close working relationship." Despite that, the board is very independent, she says. "This is a board made up of extremely bright, successful men and women who run health systems across the country. They are not afraid of anyone. They speak their minds but are not afraid of good counsel. I think they act as an independent board making the right decisions."
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