Senate Judiciary Committee Revisits GPO Issue

In mid-March, the Senate Judiciary Committee’s subcommittee on antitrust, competition policy, and consumer rights held the fourth in a series of hearings to investigate the practices of healthcare group purchasing organizations (GPOs). The proceedings represent an effort to determine if GPOs are engaging in anticompetitive practices and whether congressional action is needed to ensure a competitive climate in hospital purchasing.

Senator Kohl: Disappointed in GPO turnout.

Senator Herb Kohl (D–WI), a ranking member of the subcommittee, expressed disappointment that no GPOs accepted the subcommittee’s invitation to testify at the hearing. However, a representative from the Healthcare Group Purchasing Industry Initiative (HGPII; Washington, DC) did testify. HGPII was established last year by the nation’s leading healthcare GPOs as a formal program designed to promote and monitor best business practices in purchasing for hospitals and other healthcare providers.

Bednar: Support for GPO self-regulation.

“The initiative nurtures an ethical culture of compliance within every GPO; promotes self-governance, discovery, and correction of conduct that falls below the standards; and enforces a requirement that each member share their best practices in dealing with ethics and business conduct issues,” Richard Bednar, senior counsel at Crowell & Moring LLP and coordinator of HGPII, told the subcommittee. “The initiative is off and running on a sure path to success.”

Bednar urged the subcommittee to support the “organizational culture of compliance” promoted by the group rather than impose external restraints. “Behavior follows expectations, and the GPO initiative’s expectations are high,” Bednar said.

Mina Ubbing, president and CEO of Fairfield Medical Center (Lancaster, Ohio), said, “The initiative sets a standard of industry practices by which all GPOs are judged. They do not control the purchasing marketplace, but rather help to make it a more robust, competitive, cost-effective, and informed decision-making environment.” She urged the subcommittee to support the continuation of the initiative rather than any proposed legislation, which she said “would impose costly new restrictions on GPOs and the healthcare systems that depend on them.”

The subcommittee also heard from a number of individuals who cited specific examples of alleged GPO abuses and unfair business practices.

Blumenthal: Revealing suspect practices.

Connecticut Attorney General Richard Blumenthal said that an investigation in his state “uncovered suspect interrelationships and questionable practices involving hospital, GPO, and major medical supply executives whose practices often benefit themselves rather than patients, insurers, and government programs that pay hospital bills.” Citing his “longstanding concern that GPOs create a myriad of conflicts and anticompetitive behavior that must be regulated, if not prohibited,” Blumenthal described voluntary self-regulation efforts offered by GPOs as “simply too little, too late.”

“We find ourselves back in this hearing room for a fourth time in as many years,” Mark Leahey, executive director of the Medical Device Manufacturers Association (MDMA; Washington, DC), noted to the subcommittee. “And as a result, patients, caregivers, and taxpayers still suffer from the anticompetitive and exclusionary practices of GPOs.”

MDMA’s Leahey: Calling for competition.

Leahey cited reports from the Office of Inspector General of the Department of Health and Human Services (HHS; Washington, DC) that found that six GPOs collected $2.3 billion in fees while their “operating expenses were a whopping $725 million.” Leahey said that as long as GPOs receive fees from vendors based on the volume of products and the value of the transaction, there is no incentive to lower costs. Leahey challenged the notion that GPOs are focused on getting the best products at the best price. “Given the current structure, why would they? The more a hospital pays, the more money the GPO makes,” he said.

S. Prakash Sethi, PhD, a professor of management and president of the International Center for Corporate Accountability at the Zicklin School of Business at Baruch College, the City University of New York, said HGPII was predicated on “a business model based on perverse financial incentives . . . that undermine the imperatives of competitive markets.” He called for the repeal of the safe harbor provisions of the Social Security Act, which would ultimately prohibit GPOs from receiving fees from vendors. Sethi said a voluntary code of business ethics for GPOs would have value, but only after market-based competition was restored to the system.

Sethi’s opposition to GPO fees has long been advocated by MDMA’s Leahey, who told the subcommittee, “If you repeal the GPO safe harbor that Congress created 20 years ago under entirely different circumstances, you will restore competition back in the healthcare system by realigning the incentives of GPOs with their member hospitals and not the dominant suppliers.”

In response to the possibility of new legislation, the chief executives of the nine leading GPOs submitted a letter to the subcommittee to respond to three draft bills that are gaining traction in the Senate.

Although all three proposed bills are detailed, the following represents the primary provisions of each.

• The Medical Device Competition Act would limit GPO administrative fees received from vendors to 3% of the transaction value.

• The Hospital Group Purchasing Organization Reform Act would eliminate GPOs’ safe harbor from antikickback statutes if they failed to comply with an industry code of ethics as monitored by a new HHS compliance office.

• The Ensuring Competition in Hospital Purchasing Act would eliminate the GPO safe harbor completely.

In their eight-page letter to the subcommittee, the CEOs said legislation was unnecessary because “the self-governance effort has made substantial progress.” They detailed their opposition to each bill and said that any proposed legislation to regulate GPOs would ultimately drive up the cost of healthcare.

HIGPA’s LoBiondo: Support for GPOs.

Albert LoBiondo, chair of the Health Industry Group Purchasing Association (HIGPA; Chicago), submitted a letter to the subcommittee supporting the CEOs’ written statement. LoBiondo largely echoed the written testimony of the CEOs, stating, “Hospitals rely on GPOs to help control costs while improving patient care. With health costs skyrocketing out of control, we must not restrict their ability to work with GPOs.”

Robert Betz, PhD, president of Robert Betz Associates Inc. (Arlington, VA) and former president of HIGPA, said, “The latest hearing will likely be a turning point for the healthcare purchasing supply chain industry.”

Within the next several months, the subcommittee is expected to decide whether GPO self-regulation is sufficient or if specific legislation is needed. Based on the observations and comments of the subcommittee members, it appears that some form of legislation may now be closer than ever before.

© 2006 Canon Communications LLC

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