View from Washington: “Simpler Times” and the Government’s Report on GPOs

The late summer release of two reports – one by the General Accountability Office (GAO) and the other by the staff of the Senate Finance Committee – looked at antitrust and ethical issues related to group purchasing organizations (GPOs). Both reports reignited policy issues which many in the industry would prefer to just go away.

The GAO report focused on the effects that the establishment of codes of conduct by GPOs has had on their business practices. Ever since 2002, Congress has raised questions about alleged anti-competitive business practices by some GPOs, such as excessive administrative fees, sole source contracting, and bundling of discounts.

GAO’s report was conducted at the request of the Senate Finance Committee and specifically, Chuck Grassley (R-IA), the Ranking Minority Member. For the study, the GAO interviewed six GPOs which represented almost 90 percent of total GPO purchasing volume in 2007, as well as representatives from six GPO hospitals and five medical product vendors which do business with GPOs.

The findings
Findings from the GAO report noted that average vendor-paid contract administrative fees in 2008 ranged from 1.22 to 2.25 percent. The six GPOs interviewed collected $1.7 billion in administrative fees, of which $1.1 billion was distributed back to customers and their shareholders. But is this $1.1 billion actually hard dollars or does this figure include the practice by some GPOs of returning the value of administrative fees in services?

Since 2002, all six of the examined GPOs had established and/or updated their codes of conduct. One inclusion by most GPOs addresses a key complaint by the Medical Device Manufacturers Association (MDMA) – adding policies which require the monitoring of new and innovative technology products. Another code of conduct provision which was added by the GPOs addresses earlier criticism about self dealing. One version stipulates that GPO employees with an ownership interest in a vendor cannot participate in discussions involving that vendor. Another version requires GPO employees to divest any/all stock held in supplier companies.

The trade group for the GPOs, the Health Industry Group Purchasing Association (HIGPA), in 2002-3 established a code of conduct and reporting system for the industry in response to a series of national news articles and hearings before a Senate Judiciary Subcommittee. This effort made great strides in the establishment of codes of conduct for GPOs nationally. HIGPA also split off supplier involvement as they worked to establish a health care supply chain institute. Subsequently, some of the GPOs formed a voluntary organization called the Healthcare Group Purchasing Industry Initiative (HGPII), the purpose of which is to promote and monitor best ethical and business practices among GPOs.

In its report, GAO noted all the GPOs reported these efforts have had a meritorious affect on numerous business practices. However, the GAO went on to note that the effects of these new business practices were not as evident to some of the vendors and customers they interviewed.

In a related statement, Senator Grassley articulates that the issue remains whether GPOs save money for hospitals and other providers which purchase medical products. “Whether Group Purchasing Organizations are able to help save money on medical supply costs, or not, impacts federal health care spending.” Further, Grassley’s statement says “There’s no data with which to independently verify the effect, one way or another, and that’s a shortcoming of the current system.”

In a separate report prepared by the Senate Finance Committee staff, which summarizes information submitted directly by GPOs on their business, it is stated “There seems to be general agreement that GPOs serve an important function. At issue is not the existence of GPOs but rather the incentive system under which they operate and whether or not they, in fact, achieve savings for the health care system.” Potentially troubling for the future of this issue is the reports focusing on the utilization of administrative fees to expand operations into other areas beyond healthcare which “… appear(s) to exceed the original intent of the safe harbor provisions.” The safe harbor specifically allows the collection of vendor paid administrative fees without violating antitrust and anti-kickback laws.

The choice left with hospitals
MDMA appears to have won the attention of a powerful member of the Senate Finance Committee and key staff. Contrary to the GPOs’ desire that this eight-year problem would remain dormant, it appears likely the issue will revive Congressional scrutiny.

Clearly hospitals nationwide support the contract aggregation power and price discounts GPOs can provide. Reportedly 98 percent of all hospitals contract with at least one GPO. Much less clear is if GPOs will ultimately win the current policy/public relations battle about: (1) keeping the safe harbor as is; (2) avoiding legislative/regulatory interventions; and, (3) maintaining their current role as middle-man in the health care supply chain – directly supported by administrative fees. It is a pretty sure bet additional Congressional inquiry/oversight is heading in the direction of GPOs in the months/years ahead. The issues raised by MDMA and other manufacturer/suppliers are not going away anytime soon.

Some believe the day is coming when Congress will give hospitals a choice. They will be asked if they want to retain the current GPO funding structure with the addition of enhanced GPO reporting to Medicare. Or, a likely alternative will be to ask hospitals if they want the administrative fees returned directly to them so they can employ GPOs for their contracting services. Under this scenario hospitals would become the responsible party for providing the transparency of value – verified through Medicare reporting – which the GAO says the current system is lacking. This scenario would foster a return of the healthcare supply chain to the pre-1980s days of dues-supported GPOs as a prominent industry model.

Many today in various parts of the political spectrum are calling for a return to “simpler times.” Maybe requiring administrative fees be paid directly to hospitals, is how the detractors of some GPOs define “simpler times.”

Robert Betz Ph.D. About Robert Betz Ph.D.

Robert Betz, Ph.D., is president of Robert Betz Associates, Inc. (RBA), a well-established federal health policy consulting firm located in the Washington, D.C. area. Additionally, Dr. Betz is an adjunct professor teaching at The George Washington University where he specializes in political science and health policy. For more information about RBA, visit www.robertbetz.com.

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