No Bundle of Joy

Product bundling is in the spotlight again following the settlement of a class-action lawsuit.

Product bundling by big manufacturers got a black eye with the recent $337.5 million settlement of a class-action lawsuit brought by hospitals against Hill-Rom. So what else is new?

With the payout, announced in June, Batesville, Ind.-based Hillenbrand Industries and its Hill-Rom Inc. and Hill-Rom Company subsidiaries, ended antitrust class-action litigation initially brought against it by Spartanburg Regional Healthcare System in June 2003. The provider charged that Hill-Rom unfairly used its dominant position in the hospital-bed market to entice hospitals to buy its specialty beds and to stifle competition on that side of the business. In the process, the IDN charged, Hill-Rom offered illusory discounts that ended up costing them money.

To the end, Hillenbrand denied any wrongdoing. “As we have said before, we believe the claims in this case are without merit, but we also believe it is in our company’s and customers’ best interests to put this matter behind us,” said Hillenbrand Industries and Hill-Rom President and Chief Executive Officer Peter Soderberg.

Attempt to monopolize
In the suit, filed in the United States District Court for the District of South Carolina, Spartanburg Regional Healthcare System alleged that beginning in 1990, Hill-Rom engaged in anti-competitive actions by offering discounts on its standard beds and in-room products to customers who also agreed to rent Hill-Rom or SSI specialty beds. The hospital system alleged that Hill-Rom attempted to monopolize the market for specialty beds by using its market power in standard beds and in-room products.

The IDN charged that as a result of the bundling, Hill-Rom’s customers ended up paying higher prices for the company’s products than they would have paid in the absence of the bundling agreements. Spartanburg Regional alleged that had Hill-Rom not engaged in this conduct, its competitors would have gained greater market share, ultimately resulting in lower overall market prices and higher-quality products.

Hill-Rom alleged that its discounts were a legitimate means of competing and that they benefited customers. That said, the company says it discontinued bundling its standard and specialty beds in 2002. Terms of the settlement call for it to refrain from bundling until at least 2009.

Although Spartanburg purchased Hill-Rom products through Premier contracts, Premier was not involved in the lawsuit or settlement.

Spartanburg Regional President and CEO Ingo Angermeier reportedly was emboldened to file the class action suit by a September 2002 federal court decision ordering Hill-Rom to pay $173 million to Kinetic Concepts of San Antonio, Texas. In that case, which KCI originally filed in 1995, KCI charged Hill-Rom with using product bundling for anticompetitive purposes.

The ‘B’ word
Ever since GPOs fell under the scrutiny of the consumer press and the U.S. Congress five years ago, bundling has assumed a higher profile than ever. Small manufacturers have charged that their bigger counterparts use the practice to lock them out of the market, and that GPOs encourage it in order to gain large administrative fees.

In its July 2003 report, “Group Purchasing Organizations: Use of Contracting Processes and Strategies to Award Contracts for Medical-Surgical Products,” the U.S. General Accounting Office (GAO) reported on the frequency of bundling agreements in group purchasing contracts. The GAO report — which was prepared for the U.S. Senate Subcommittee on Antitrust, Competition Policy and Consumer Rights Committee — stopped short of passing judgment on the practice, but it did devote part of its report to a description of the nature and frequency of bundling relationships.

To be sure, recent Congressional scrutiny has not been kind to bundlers. In recent years, many GPOs have either grown quick to deny that they sign contracts that contain bundling provisions, or they have become anxious to defend their right to do so in certain circumstances. Even corporate contracts — in which large companies incentivize customers to buy a broad range of their products — have fallen on hard times.

“We make it a point never to bundle unrelated products,” said Rosalind McLeod, general counsel for Novation, Irving, Texas, at the 2006 VHA Leadership Conference in St. Louis. “There’s been so much scrutiny of GPOs over the last five or six years, and the bundling issue plays into healthcare law and antitrust issues. We do allow for bundling in related product categories, but when we do, we look at it very carefully.”

Responding to an inquiry from JHC following the Spartanburg/Hill-Rom settlement, Premier spokesman Hunter Kome said, “I would characterize this lawsuit as part of a larger trend of greater scrutiny toward supplier-driven bundling and greater awareness on the part of hospitals of the potential downsides of the practice.”

Premier has “publicly encouraged greater attention to the issue of supplier-driven bundling, so the increased scrutiny of the practice is positive from our perspective. We are encouraged by any reduction in supplier-driven bundling in situations where the bundling does not deliver value to hospitals.

“Our Code of Conduct does not allow sole-source contracts for physician preference products, only multisource,” Kome continued. “So Premier prevents bundling altogether when physician preference is involved.”

Not a seismic event
Some observers point out that the lawsuit didn’t put bundling on trial so much as Hill-Rom’s alleged attempt to stifle competition and to cause prices to rise above market levels.

“Bundling happens all the time,” says Lawton Burns, professor at the Wharton School of the University of Pennsylvania and author of the 2002 book The Health Care Value Chain. “The issue is in so-called ‘tying’ agreements,” in which the vendor ties together pricing of products in which it has a monopoly to those in which it does not.

Federal health policy consultant Robert Betz agrees. “If you and your family go into Sears Roebuck to buy linens for your house, when you buy sheets, do you also buy pillowcases? That’s bundling, if you want to take it to an absurd degree. You can take any other industry … and you’ll see bundling practices that are tried and true and economically feasible for both parties [that is, buyers and sellers.].” He also expressed some surprise that the case progressed as far as it did, particularly since most of the products involved are not clinically sensitive. “If you buy a million dollars worth of beds as part of a contract, you expect a couple of percentage points off [other products] you buy in the portfolio.”

In the end, because the case never went to trial, it will have little effect on healthcare industry trading practices, says Betz. “This is a settlement; it does not add to the body of case law.” What’s more, he says, “This ruling has to be put into the context of the greater scrutiny that has occurred in the marketplace and the courts over the years. Changes were already underway prior to the settlement.”

And the settlement amount is not all that big, considering settlements in other industries, including the pharmaceutical industry. “Of course, money is relative,” says Betz.

“People have said that this settlement will change everything,” he adds. “I have seen other events that I would characterize as being seminal. I don’t think this is one of them.”