[Senate Hearing 108-329]
[From the U.S. Government Publishing Office]
S. Hrg. 108-329
HOSPITAL GROUP PURCHASING: HAS THE MARKET BECOME MORE OPEN TO
COMPETITION?
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HEARING
before the
SUBCOMMITTEE ON ANTITRUST,
COMPETITION POLICY AND CONSUMER RIGHTS
of the
COMMITTEE ON THE JUDICIARY
UNITED STATES SENATE
ONE HUNDRED EIGHTH CONGRESS
FIRST SESSION
__________
JULY 16, 2003
__________
Serial No. J-108-25
__________
Printed for the use of the Committee on the Judiciary
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WASHINGTON : 2003
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COMMITTEE ON THE JUDICIARY
ORRIN G. HATCH, Utah, Chairman
CHARLES E. GRASSLEY, Iowa PATRICK J. LEAHY, Vermont
ARLEN SPECTER, Pennsylvania EDWARD M. KENNEDY, Massachusetts
JON KYL, Arizona JOSEPH R. BIDEN, Jr., Delaware
MIKE DeWINE, Ohio HERBERT KOHL, Wisconsin
JEFF SESSIONS, Alabama DIANNE FEINSTEIN, California
LINDSEY O. GRAHAM, South Carolina RUSSELL D. FEINGOLD, Wisconsin
LARRY E. CRAIG, Idaho CHARLES E. SCHUMER, New York
SAXBY CHAMBLISS, Georgia RICHARD J. DURBIN, Illinois
JOHN CORNYN, Texas JOHN EDWARDS, North Carolina
Bruce Artim, Chief Counsel and Staff Director
Bruce A. Cohen, Democratic Chief Counsel and Staff Director
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Subcommittee on Antitrust, Competition Policy and Consumer Rights
MIKE DeWINE, Ohio, Chairman
ORRIN G. HATCH, Utah HERBERT KOHL, Wisconsin
ARLEN SPECTER, Pennsylvania PATRICK J. LEAHY, Vermont
LINDSEY O. GRAHAM, South Carolina RUSSELL D. FEINGOLD, Wisconsin
SAXBY CHAMBLISS, Georgia JOHN EDWARDS, North Carolina
Peter Levitas, Majority Chief Counsel and Staff Director
Jeffrey Miller, Democratic Chief Counsel
C O N T E N T S
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STATEMENTS OF COMMITTEE MEMBERS
Page
DeWine, Hon. Mike, a U.S. Senator from the State of Ohio......... 1
Hatch, Hon. Orrin G., a U.S. Senator from the State of Utah,
prepared statement............................................. 161
Kohl, Hon. Herbert, a U.S. Senator from the State of Wisconsin... 3
Leahy, Hon. Patrick J., a U.S. Senator from the State of Vermont,
prepared statement............................................. 207
WITNESSES
Brown, Thomas V., Executive Vice President, BIOTRONIK, Inc., Lake
Oswego, Oregon................................................. 10
Everard, Lynn James, Healthcare Supply Chain Strategist, Coconut
Creek, Florida................................................. 13
Heiman, Gary, President and Chief Executive Officer, Standard
Textile Company, Cincinnati, Ohio.............................. 11
Hilal, Said, President and Chief Executive Officer, Applied
Medical Resources Corporation, Rancho Santa Margarita,
California..................................................... 9
McKenna, Mark, President, Novation, LLC, Irving, Texas........... 8
Norling, Richard A., Chairman and Chief Executive Officer,
Premier, Inc., San Diego California............................ 6
Weatherman, Elizabeth H., Managing Director, Warburg Pincus, LLC,
New York, New York............................................. 15
QUESTIONS AND ANSWERS
Responses of Mark McKenna to questions submitted by Senator
DeWine......................................................... 29
Responses of Mark McKenna to questions submitted by Senator Kohl. 49
Responses of Mark McKenna to questions submitted by Senator
Chambliss...................................................... 74
SUBMISSIONS FOR THE RECORD
Bracco Diagnostics Inc., Robert L. Aromando, Jr., Vice President
of Marketing, Princeton, New Jersey, statement................. 81
Brown, Thomas V., Executive Vice President, BIOTRONIK, Inc., Lake
Oswego, Oregon, prepared statement............................. 93
Children's Health Corporation of America, Don Black, President
and Chief Executive Officer, Overland Park, Kansas, statement.. 112
Community Hospital Network, William E. Corley, President,
Indianapolis, Indiana, letter.................................. 115
Egliman, David S., M.D., MPH, Clinical Associate Professor, Brown
University, statement.......................................... 116
Everard, Lynn James, Healthcare Supply Chain Strategist, Coconut
Creek, Florida, statement...................................... 127
General Accounting Office, Marjorie Kanof, Director, Health Care,
Clinical and Military Health Care, Washington, D.C., statement. 135
Harding, William W., President and Chief Executive Officer, Union
Hospital, Dover, Ohio, letter.................................. 160
Health Industry Group Purchasing Association, Robert Betz,
Arlington, Virginia, statement and attachment.................. 163
Heiman, Gary, President and Chief Executive Officer, Standard
Textile Company, Cincinnati, Ohio, prepared statement.......... 187
Hilal, Said, President and Chief Executive Officer, Applied
Medical Resources Corporation, Rancho Santa Margarita,
California, prepared statement................................. 189
LSL Industries, Inc., Ash Luthra, President, Chicago, Illinios,
statement...................................................... 209
Masimo Corporation, statement.................................... 211
McKenna, Mark, President, Novation, LLC, Irving, Texas, statement
and attachment................................................. 213
Medical Device Manufacturers Association, Mark B. Leahey, Esq.,
Executive Director, statement.................................. 229
Memorial Hermann Healthcare System, Dan Wolterman, President and
Chief Executive Office, Houston, Texas, letter................. 243
Norling, Richard A., Chairman and Chief Executive Officer,
Premier, Inc., San Diego, California, statement................ 245
Oliver, William C., President, Forrest General Hospital,
Hattiesburg, Mississippi, letter............................... 256
OSF Healthcare System, James M. Moore, Chief Executive Officer,
Peoria, Illinois, letter....................................... 258
Premier Health Partners, Thomas G. Breitenbach, President and
Chief Executive Office, Dayton, Ohio, letter................... 260
Retractable Technologies, Inc., Thomas J. Shaw, President and
Chief Executive Officer, statement............................. 261
Saint Luke's Health System, G. Richard Hastings, President and
Chief Executive Office, Kansas City, Missouri, letter.......... 271
Shelby County Myrtue Memorial Hospital, Stephen L. Goeser, Chief
Executive Officer, Harlan, Iowa, letter........................ 272
University of Utah Hospitals & Clinics, Richard A. Fullmer,
Executive Director, Salt Lake City, Utah, letter............... 275
Weatherman, Elizabeth H., Managing Director, Warburg Pincus, LLC,
New York, New York, prepared statement......................... 276
Wenick, Joel, FACHE, President Chief Exeuctive Officer, Phoebe
Putney Health System, Albany, Georgia, letter.................. 282
HOSPITAL GROUP PURCHASING: HAS THE MARKET BECOME MORE OPEN TO
COMPETITION?
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WEDNESDAY, JULY 16, 2003
United States Senate,
Subcommittee on Antitrust, Competition Policy, and Consumer
Rights, of the Committee on the Judiciary,
Washington, DC.
The Committee met, pursuant to notice, at 11:09 a.m., in
Room SD-226, Dirksen Senate Office Building, Hon. Mike DeWine,
Chairman of the Subcommittee, presiding.
Present: Senators DeWine and Kohl.
OPENING STATEMENT OF HON. MIKE DEWINE, A U.S. SENATOR FROM THE
STATE OF OHIO
Chairman DeWine. Good morning. I don't know if it is a good
sign or a bad sign when the witnesses are here before the
Chairman. Thank you for being prompt.
Welcome to the Antitrust Subcommittee hearing on hospital
group purchasing organizations. This hearing is, of course,
part of the Subcommittee's ongoing efforts to help inject
competition into the market of hospital group purchasing
organizations, also known as GPOs, in order to increase the
quality of health care that we receive and decrease the prices
we pay for it. Senator Kohl and I have focused on this very
important issue for a long time.
At our first hearing on GPOs in April of last year, we
heard testimony about GPO practices that, quite frankly,
disturbed me. For example, there was evidence that some GPO
executives, indeed, some GPOs themselves, owned financial
interest in their suppliers. This type of cross-ownership
raises, at the very least, the appearance of impropriety and
was cause for great concern.
Beyond these issues of business ethics, the Subcommittee
heard testimony regarding the competitive impact of some GPO
businesses and contracting practices. There were questions
raised about whether the structure of GPOs and the basic
business practices of most GPOs might be impeding the flow of
new and innovative medical devices and technologies to the
market, and more importantly, preventing these new technologies
from getting to the patients and health care workers who need
them. These concerns were aimed especially at Premier and
Novation, the nation's two leading GPOs.
In the wake of what we heard at that hearing, Senator Kohl
and I called for the GPO industry to adopt voluntary codes of
conduct to address the concerns raised by our investigation. To
their credit, most of the GPOs, including Premier and Novation,
and the industry as a whole, answered our call. After a great
deal of work with the Subcommittee, the GPOs adopted codes of
conduct reflecting a series of commitments regarding their
ethical standards and their business practices.
As promised, we are here today, 15 months later, to examine
the progress. Our questions are relatively simple. Are GPO
ethical standards stronger today? Are GPO business practices
better than they were a year ago? Are new, innovative medical
devices more available to hospitals than they were a year ago?
Simply put, are the codes of conduct working?
Our answers are a little more complex. The answers
themselves are more complex. Based on a year of investigation,
interviews with a broad range of industry participants, an
interim GAO study, and examination of GPO business documents, I
would say the answer is we have made some progress.
We have made a lot of progress with regard to ethical
standards. For example, both Premier and Novation now prohibit
all their employees from owning shares of their suppliers,
which removes even the appearance of impropriety. I think that
both Premier and Novation and the industry as a whole should be
applauded for these changes.
It is fair to say, however, that the ethical guidelines
are, as we might say, the low-hanging fruit. The biggest
concerns of the Subcommittee are in regard to GPO business
practices, where the progress is a little less clear and a
little more difficult to measure. We will hear today some
testimony, for example, from medical device manufacturers who
believe they still face significant competitive barriers based
largely on bundling, sole-source contracting, high commitment
levels, and other GPO business practices. On the other hand, I
think that many device manufacturers would agree that the
marketplace they face today is at least somewhat more open to
their efforts.
And, of course, we must not lose sight of the fact that
while many of these business practices may have the effect of
excluding some competitors from the market, they also may allow
GPOs to keep prices down, which is, of course, an important
goal sought by GPOs and their member hospitals. In fact, I have
heard from a number of hospitals in my home State of Ohio and
they are very satisfied with their GPOs.
Now, as I noted earlier, the answers we seek are complex
and this hearing will necessarily be only one of a number of
steps we take to lock in the positive changes made by GPOs and
work with them on potential future changes, as needed. The
General Accounting Office has released its interim report on
GPO practices, and at the request of the Subcommittee will
continue to examine the impact of GPO business practices on
prices for medical devices.
The Federal Trade Commission and the Antitrust Division are
currently in the midst of a wide-ranging review of antitrust
health care policy and are also at the request of the
Subcommittee examining the specific question of competition
within the GPO industry.
And, of course, the Subcommittee will continue to work with
all of the market participants, including the device
manufacturers, the hospitals, and the GPOs themselves, to
provide oversight and help increase competition wherever
possible. We will spend some time today hearing from our
witnesses with regard to any further specific suggestions that
they may have.
Before I turn to Senator Kohl, I would like to make a
couple of additional points. We have seen some changes in this
marketplace. We know that GPO business ethics have improved and
we know that some of the smaller manufacturers who were
virtually excluded from the process are starting to see some
changes. We must recognize, though, that the types of changes
implemented in the codes of conduct by the GPOs may take more
time to generate significant impact in the market. Many of
these changes in business practices have only recently been
implemented and will, we hope, have a greater impact in the
near future than they have had thus far.
In addition, it is important to recognize that we cannot
measure success only by examining how many different medical
device manufacturers are awarded a GPO contract. Not every
small device manufacturer deserves a contract on every device,
and some of the most controversial business practices may save
money for hospitals, at least in some circumstances.
In this industry, as in most, one-size-fits-all solutions
are not practical nor are they desirable. Instead, we must work
to foster a dynamic marketplace in which many device
manufacturers have a wide range of options to sell, and GPOs
have a wide range of options to buy. Only then will patients be
assured that competition is working to give them the best
possible medical care at the best possible price.
Let me now turn to the Ranking Member of the Subcommittee,
Senator Kohl, who has certainly done a great deal of research
and done a great deal of work on this particular issue. Senator
Kohl?
STATEMENT OF HON. HERB KOHL, A U.S. SENATOR FROM THE STATE OF
WISCONSIN
Senator Kohl. Thank you, Mr. Chairman, and thanks for the
bipartisan effort you have made in pursuing this important
issue.
It has been more than a year since we first heard troubling
allegations that patients and physicians were being denied
needed medical devices because of anti-competitive and
unethical actions of large hospital buying groups, known as
GPOs. After a year of investigation and oversight, we are
pleased that our efforts have begun to make the marketplace
more open for innovative competitors. We are concerned,
however, that not enough is happening and that it is not
happening quickly enough.
The primary allegation made against the GPO's business
practices was that, in many cases, GPOs prevented hospitals
from buying the best and safest products for their patients.
For example, the inability of hospitals to purchase safety
needles resulted in unnecessary injuries to health care
workers, who in some cases developed HIV and hepatitis. Heart
surgeons reported incidents where they were not permitted to
use the pacemaker that they judged medically necessary because
their hospital did not have a GPO contract with that supplier.
The situation was dangerous to patients and compromised
public health, so we launched an investigation into the
hospital purchasing industry. We discovered that the GPOs'
contracting practices, in many cases, froze out competition and
entrenched the dominant positions of the large suppliers, often
to the detriment of patient care.
We held a hearing last year on our findings. We secured the
agreement of Premier and Novation, the nation's two largest
GPOs, responsible for over $28 billion of purchasing at two-
thirds of our Nation's hospitals, to implement substantial
changes in their business practices. To their credit, Premier,
Novation, and four other large GPOs promised to change the way
they did business. They all agreed to important and voluntary
codes of business conduct.
Today, we ask two questions. What progress has been made in
the marketplace since Premier and Novation made their
agreements nearly a year ago? And what remains to be
accomplished?
We identified five major areas in need of reform in the GPO
industry. The first was ending conflicts of interest, such as
investments by GPOs or their executives in medical suppliers
with which they did business.
The second was sole-source contracts, in which one supplier
has an exclusive deal for a product with the GPO.
The third area was high commitment levels, in which a
hospital must purchase a very high amount, as high as 95
percent, from the GPO-approved vendor in order to get the best
prices.
The fourth was bundling practices, giving substantial extra
discounts to hospitals that buy a bundle of different products
in one contract.
And the fifth was high administrative fees, GPOs collecting
payments in excess of 3 percent of the value of the product
sold from suppliers. The GPO codes of conduct addressed each of
these issues.
The evidence we have received from medical device
manufacturers, hospitals, GAO, and the GPOs themselves tells us
that while some progress has been made with respect to each of
these issues, in many cases, much more needs to be done.
While significant progress was made with respect to
conflicts of interest, reform is much less certain in the area
of contracting practices. In general, it appears that Premier
has made more substantial reforms than Novation, but Premier's
reforms are not without their shortcomings.
With respect to sole-sourcing, Premier has promised to ban
this practice with respect to physician preference items, but
has not done so entirely. Novation did not make the same
pledge, and one-third of current contracts for clinical
preference items are still sole-sourced.
With respect to commitment levels, Premier has banned GPO-
imposed commitment levels, but left the door open to commitment
levels initiated by vendors. Novation expressly permits
commitment levels above 75 percent with consent of their
clinical councils.
With respect to administrative fees, Premier took the
laudable step of capping administrative fees at 3 percent in
all contracts. Novation has only agreed to a 3 percent fee cap
for what it designates as clinical preference products, and
their revenues from high administrative fees continue to rise.
Finally, with respect to bundling, both GPOs still engage
in this practice. The GAO report said bundling contracts at one
of the two largest GPOs still account for more than 40 percent
of its revenue. Novation will not terminate its bundling
program until 2004 at the earliest, although it could do so
sooner if it wished.
This clearly is only a start on the road to true reform.
While we applaud the positive changes that have been
implemented, the industry needs to do more and needs to do it
now. The past year has taught us that promises to change and
actual change, despite the best of intentions, are not the
same. We need to be assured that the commitments we have seen
so far and the ones that we will ask to be made today become
permanent and will last once the spotlight of a Senate hearing
room fades away.
Today, we will send a letter to the Secretary of Health and
Human Services to seek ways to make these good reforms
permanent, including requesting the appointment of an officer
to oversee the hospital group purchasing industry. We need to
ensure that GPOs fulfill their mission to act on behalf of
hospitals to obtain the best products at the best prices for
their patients. We also plan to ask the Department of Health
and Human Services to strengthen and revise its regulations
governing the Medicare safe harbor that permits GPO to accept
administrative fees from suppliers. And finally, we will
reiterate our request that the FTC reexamine and revise the
joint FTC/Justice Department Health Care Guidelines.
Mr. Norling and Mr. McKenna, as leaders of the two largest
GPOs providing supplies for nearly two-thirds of our Nation's
hospitals, you particularly bear a special burden. Your
companies' decisions on which products to put on contract
affects the health and safety of millions of patients and
health care workers every day. We depend on your good faith,
your judgment, and your integrity to ensure that hospitals have
access to the best medical products at the best prices. So it
is essential that you continue to follow through on your
industry's efforts to reform.
Our investigation so far has determined that your reforms
have made a good start in making the market more open, but the
job clearly is not finished. We commend you for the reforms
that you have made, but we will continue to oversee this
industry to see that group purchasing never denies a patient, a
physician, or a health care worker a needed medical device.
Thank you, Mr. Chairman.
Chairman DeWine. Senator Kohl, thank you very much.
We have a vote scheduled around 12 o'clock. That is Senate
language for nothing exact. That means that unless you all want
to spend the day with us, we probably ought to try to get done
before that vote.
So we are going to have--we have your written testimony. We
appreciate that. That will be made a part of the record. We
would ask you to summarize your testimony. Tell us in three
minutes what you think is the most important part of your
testimony. We already have your testimony, so we appreciate
that. Give us the highlights. Just off the top of your head,
give us what you think is the most important thing that we
know. We have seven very qualified, very important witnesses
here. Give us three minutes.
We are going to go by the rules. When you see the yellow
light, that means you have got a minute left. When you see the
red light, you are done and then we are going to go to the next
witness. Then we are going to go to questions. Questions will
start with Senator Kohl, and then I will have some questions.
Unless the Senate changes its mind, we will have until 12
o'clock, so you can see that doesn't give us a whole lot of
time for questions.
Mr. Norling, you are first.
Mr. Norling. Thank you, Chairman DeWine.
Chairman DeWine. You didn't know which way I was going to
go, but that is where we are going.
Mr. Norling. I had a suspicion.
Chairman DeWine. Let me give the brief introduction.
Richard Norling is Chairman and Chief Executive Officer of
Premier. He has served as President and Chief Executive Officer
of Fairview Hospital and Health Care. He has testified before
this Subcommittee and we welcome him back.
Mark McKenna is President of Novation. He has served in a
variety of positions since joining Novation in 1987.
Mr. Said Hilal is the President and Chief Executive Officer
of Applied Medical Resources Corporation, the manufacturer of
surgical devices, including devices used for minimally invasive
surgery.
Mr. Thomas Brown is Executive Vice President of BIOTRONIK,
headquartered in Portland, Oregon. I am sure I messed that up,
and you can correct me, Mr. Brown, in a minute.
Mr. Gary Heiman is President and Chief Executive Officer of
Standard Textile, based on Cincinnati, Ohio. Additionally, he
is also on the Board of Trustees for the Jewish Hospital of
Cincinnati.
Mr. Lynn Everard is a health care business and supply chain
consultant. His publications include a white paper detailing
the future of the health care supply chain and the impact of
group purchasing organizations on the financial prospects of
the health care industry.
Ms. Elizabeth Weatherman has been a member of the health
care group of Warburg Pincus since 1988. Ms. Weatherman has
testified on this matter in the past and we welcome her back
again.
Mr. Norling?
STATEMENT OF RICHARD A. NORLING, CHAIRMAN AND CHIEF EXECUTIVE
OFFICER, PREMIER, INC., SAN DIEGO, CALIFORNIA
Mr. Norling. Thank you again, Chairman DeWine and Ranking
Member Kohl. As I stated at last year's hearing, if there is an
opportunity to improve, Premier is going to take that
opportunity. Last year, we made commitments, and I am pleased
to report to the Subcommittee today that those commitments were
kept, and are imbedded.
With the adoption and implementation of the Premier code of
conduct, I would like to share with you the highlights of what
we have done with respect to our business practices.
First of all, we contract for physician preference items on
a multi-source basis, with no GPO commitment levels or bundling
with unrelated products. We adopted a contracting approach in
the last year that we call strategic sourcing. Fundamentally,
this enables suppliers with products focused in very limited
product areas to compete effectively with suppliers who offer a
much broader product line.
We have also substantially revised and improved our
technology assessment and breakthrough process, which offers
access even in the face of existing contracts. We have worked
with outside firms, such as ECRI, a very well-known national
firm that conducts research with respect to medical device
products.
I am pleased to see on the panel today Tom Brown of
BIOTRONIK. BIOTRONIK is a relatively small producer of
pacemakers and defibrillators that Premier recognized as
embodying innovative technology. We were pleased to give the
company an award this May through our technology breakthrough
program.
I am also pleased to see Mr. Hilal from Applied Medical. We
have a pending contract proposal for its GelPort product, and
last December, we sent the company details about our technology
breakthrough process, and encouraged it to submit other
products as well. We have yet to receive such, but certainly
look forward to it.
We have implemented, as you indicated, our conflict of
interest of policy, but let me be specific about other items.
We do limit fees to 3 percent. We do not charge up-front fees
or marketing fees. We do not accept administrative fees. We do
not require vendor participation in other services. We do not
private label. We have begun a process of standardizing
administrative fees, which Professor Hanson, who we brought in
as a third-party ethicist, conveyed as important in limiting
the potential of the perception that fees could influence
product selection--very, very important. We contract for 3
years or less; the few exceptions being in the interest of our
owners. We seek out diversity. We have hired an ethics and
compliance officer.
When we introduced our code, both of you gentlemen had some
nice things to say about it. You characterized it as industry-
leading, and I would agree with you. The code is a very
important start and we, indeed, have implemented that code
fully.
But I want to commit to you and other members of the
Subcommittee in good faith that we are going to be productively
involved in continuing to improve the group purchasing
industry, as well as health care in America.
In conclusion, I want to emphasize that you can count on
our continued cooperation and support. Simultaneously, we
believe that the time is right to encourage others to do their
part in an ongoing effort to ensure the quality and
effectiveness of our Nation's healthcare system, and I believe
you made those comments.
The title of this hearing asked the question, ``Has the
market become more open to competition?'' From Premier's
perspective, the answer to that is an emphatic yes. Thank you.
Chairman DeWine. Thank you very much.
[The prepared statement of Mr. Norling appears as a
submission for the record.]
Chairman DeWine. Mr. McKenna?
STATEMENT OF MARK MCKENNA, PRESIDENT, NOVATION, LLC, IRVING,
TEXAS
Mr. McKenna. Thank you, Chairman DeWine and Ranking Member
Kohl. Like my colleague here, a year ago, we were sitting here
and weren't sure what to expect. This year, though, we feel
very prepared relative to reporting to you the results of what
we committed to deliver to the Subcommittee on behalf of our
member hospitals that look to us to save dollars on high-
quality clinical products and commodity products.
We committed to promote industry best practices. You made
it clear to us that you wanted us to ensure that small vendors
had an opportunity to participate in group purchasing programs
and that member hospitals had ready access to innovative
technology. We heard you.
On August 8, we committed to implement seven operating
principles. Today, less than a year later, I am pleased to
report that we have not only met but in many cases exceeded
those principles. We have also systematically trained all of
our employees on their responsibilities to follow through and
implement these principles as a part of their daily business
practice. Let me take a few minutes to highlight a few
examples, and I would like to begin with technology.
Novation has dedicated new resources to the identification
and evaluation of new and emerging technology. We have also
launched a web-based technology forum. We believe it is the
only one of its kind in the industry. The forum invites vendors
to post information about their new products, whether they are
on contract or not on contract, and through our technology
pipeline program, Novation is constantly searching the
marketplace for emerging medical technology. Once we find a new
product, we take the initiative to contact the vendor and work
towards a contract position.
The results have been gratifying. In just 7 months, vendors
have posted information on the technology forum in 50 product
categories, and as a result of that, we have made 20 contract
awards to companies with innovative or new technology, and this
has been done outside the regular bidding cycle. There
currently are an additional 20--excuse me, a dozen more
products that are under review, so a total of 32 events in just
8 months since we put the technology forum in place.
Our progress in other areas of the operating principles has
also been significant, and let me report out. First, we have
revised our Opportunity Spectrum Program around commitment to
reemphasize that participation is purely voluntary. We have
eliminated all penalties in the event that a member elects to
drop from the program, and finally, we have eliminated any
requirement that the members purchase a combination of capital
equipment and disposables.
Novation has awarded multi-source contracts in six separate
clinical preference product categories that were previously
offered under a sole-source contract. For example, when I was
here last year, we had one safety needle under contract,
Senator Kohl, as you pointed out. This year, we have four.
Novation has also enhanced its processes for addressing
vendor grievances. Today, we have a formalized process and
commit to get back to suppliers within a 90-day period with a
result. And, in fact, we have done so with one vendor,
resulting in a contract award.
In conclusion, I want to emphasize to you that while I am
proud of the progress that we have made in just over 11 months,
we at Novation recognize that we have a continuing obligation
to live up to the letter and to the spirit of these operating
principles. It is an ongoing process that requires resolve,
diligence, leadership, and commitment. For its part, Novation
will continue to dedicate ourselves to these operating
principles and to ensuring that hospital members have unimpeded
access to a broad array of high-quality products at the lowest
possible prices.
Chairman DeWine. Thank you very much.
[The prepared statement of Mr. McKenna appears as a
submission for the record.]
Chairman DeWine. Mr. Hilal?
STATEMENT OF SAID HILAL, PRESIDENT AND CHIEF EXECUTIVE OFFICER,
APPLIED MEDICAL RESOURCES CORPORATION, RANCHO SANTA MARGARITA,
CALIFORNIA
Mr. Hilal. We have only just begun. Chairman DeWine,
Senator Kohl, thank you so much. Applied really appreciates
this opportunity to be in front of you.
Fourteen years ago, we started out the company with the
concept of combining better clinical outcomes with better
financial outcomes. Those are not mutually exclusive. They can
be done together. We spend 22 percent of our revenue on R&D. We
have over 380 pending or issued patents. We have the highest
quality.
You would think with a commitment like that and an
accomplishment like that that we would have the doors open,
that we would be doing well. We are not.
We face markets as closed as a castle, with the GPOs as the
most treacherous of outer moats. We are on the other side of
the moat. Similar to how castles have concentric lines of
defense, the dominant players have used GPOs as the outer moat
and then moved on to more of the localized exclusionary
contracts, bundling, grants, and so on. It is not one circle.
It is not one issue. It is a market that is not open.
In markets unencumbered by GPOs, we have done extremely
well. In the clamp market, in the padded clamp market, for
example, we went from no market share in 1990 to 70 percent
market share today, the market leader. We obsolete our own
technology three times in that period. In the progressive
European markets, where GPOs are not a factor, we have five
times the market share in the trocar market as we do here.
Fourteen months ago, frankly, we were energized and filled
with hope, and in May of last year, we went out to the largest
40 customers and we offered them trocars at 60 percent
discounts from their GPO prices. Now, that would have taken a
$300 million market down to $120 million and the customer would
have had the best product. But in the process, I agree, GPOs'
income would have gone from $9 million to $3.6 million at the 3
percent. But the issue is the customer is still waiting. The
patient is still waiting. We can help.
Admittedly, we have received some contracts and we are
grateful for that, but we are not satisfied. We cannot be
limited to the fringe markets where our impact is just the
latest and the greatest. We can make a big difference in big
markets, in markets where the dominant players day in, day out
as the clock is ticking are making hundreds of millions of
dollars of additional income. And in this process, we are not
helping the patient. We are not helping the process through it.
One hundred days ago, and at about the same time the
Subcommittee released the agenda for the hearing, we saw some
increased activity. We saw and we hoped the market would be
changing. At that time, we asked Novation for an end to the
contract with J&J which actually bundles sutures, trocars, and
surgical products together. Novation initially turned us down,
and as of late, asked us to submit a bid.
In conclusion, Applied is again very grateful for the
Subcommittee and for everyone that is following its lead.
Fourteen months into the effort, we see no indication that the
needed change will take root and grow without your continued
intervention. I kindly urge--I respectfully urge you to
continue your efforts and that you see that the changes to safe
harbor and the prohibitions of sole-source contracts and
bundling of unrelated products and vendors and limit to the
term of the GPO contracts are done.
This great nation has always been a bastion of free people
and free markets and this market is not free and the field is
not a level playing field. I urge you to help out. Thank you
very much.
[The prepared statement of Mr. Hilal appears as a
submission for the record.]
Chairman DeWine. Mr. Brown?
STATEMENT OF THOMAS V. BROWN, EXECUTIVE VICE PRESIDENT,
BIOTRONIK, INC., LAKE OSWEGO, OREGON
Mr. Brown. Chairman DeWine, Ranking Member Kohl, members of
the Subcommittee, I, too, urge this Committee to continue your
oversight of this very important issue that affects the
innovation, quality, and cost effectiveness of medical care in
this country. I would like to thank you for your efforts to
date and stress the importance of legislation or comprehensive
regulation in order to fix this problem permanently.
I represent a small company. BIOTRONIK has 2.5 percent
market share in the United States. But effectively, I am
representing hundreds of companies throughout this great United
States that have small market share. Over the past 10 years,
these companies have found themselves generally locked out of
group purchasing organizations due to their size. As a small
company, they simply do not generate enough sales to cause GPOs
to take notice. We are not considered a player. As a result,
these companies have generally found themselves outside the
market, looking in, when it comes to GPO contract
opportunities. This situation, unfortunately, continues today.
Last year, your Committee initiated hearings and study on
this and we sincerely appreciate your efforts, and improvements
have been observed. I am not going to go into those
improvements because of the time constraints, but they have
been mentioned and I would like to acknowledge those
improvements.
These are all positive steps that have resulted from the
U.S. Senate Committee on the Judiciary's efforts, but as I
noted earlier, there remains much to be done to create equal
access for small and large companies alike. The establishment
of code of conduct is a good start, but one cannot assume or
believe that this action alone will change or radically impact
the central problem, which remains fair and equal access to
contracts regardless of company size.
The problem continues to be perpetuated by GPOs, and, in
fact, one of the reasons this problem exists is that GPOs have
a very special privilege. That privilege is the exemption from
the Medicare anti-kickback and fraud statute. So long as GPOs
are allowed to charge administrative fees and so long as GPOs
are allowed to return a large portion or any portion of that
fee to the member hospitals, we have a serious conflict of
interest that is automatically biased towards large companies
with large market share holdings because of the potential fee
dollars.
Within our GPO industry, for example, within my industry, a
GPO could do a multi-source contract, which is two companies,
and they could lock up 80 percent of the market just by a
multi-source contract. A dual-source is really what I am
referring to. A multi-source contract is the answer. It is the
way to allow everybody fair access.
The administrative fee continues to be the core issue
impacting small companies' access into GPO systems. GPOs should
be required to allow all companies to participate in contracts
that incorporate administrative fees. This will eliminate the
bias towards large market share holders, eliminate the pressure
from large companies on GPOs, and allow small companies to
participate on the basis of price, quality, technology, and
service. This should improve the competitive process, resulting
in cost savings, broader access to life-saving products by
physicians, and the creation of a level playing field for all
vendors.
Representing all of the small companies in this industry,
Senator Kohl, we sincerely appreciate your leadership and
interest in this problem. Chairman DeWine, your support has
been invaluable and we look forward to your leadership in
resolving this issue. Thank you.
Chairman DeWine. Thank you very much.
[The prepared statement of Mr. Brown appears as a
submission for the record.]
Chairman DeWine. Mr. Heiman?
STATEMENT OF GARY HEIMAN, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, STANDARD TEXTILE COMPANY, CINCINNATI, OHIO
Mr. Heiman. Chairman DeWine, Ranking Member Kohl, and
distinguished members of the Subcommittee, thank you very much
for inviting me here today to provide my perspective as a
vendor of hospital supplies who has extensive experience with
the hospital supply chain. I am the President and CEO of
Standard Textile Company in Cincinnati, Ohio, a closely-held,
family-owned company that was founded by my grandfather in
1940. Today in the United States, we employ about 1,200 people,
including 350 employees in Ohio and 600 workers in Georgia,
amongst eight other locations within this country.
Standard Textile produces reusable products for health care
facilities ranging from surgical packs and gowns to
incontinence products and bed sheets. We also supply some of
the other fabrics that you see around hospitals, such as window
treatments, cubicle curtains, and upholstery fabric.
We began working with hospital group purchasing
organizations about 20 years ago, competing against much larger
companies, for example, Baxter International, Johnson and
Johnson, and Kimberly-Clark. Today, we have contracts with
virtually all of the GPOs, including AmeriNet, Broadlane,
Consorta, Kaiser, MedAssets, Novation, and Premier. About 75
percent of our revenue is generated through GPO contracts.
Using GPOs has helped us to reduce costs and increase the
efficiency and efficacy of our marketing, sales, and customer
service operations. Our bidding department used to be huge.
Today, it has only three people. We have been able to cut our
sales force by 15 to 20 percent. And while our prices have
dropped significantly under GPO contracts, we also have the
benefit and efficiencies of much greater volume. Today, we are
still a medium-sized company competing against Goliaths, but we
are seven times larger than we were 20 years ago.
I would like to give you just one example of how GPOs
helped us as a medium-sized manufacturer, and also helped
hospitals to adopt a technically innovative product that
greatly enhanced safety and efficacy.
In 1990, Standard Textile developed a patented, proprietary
fabric that we use to manufacture surgical packs and gowns and
sterile wraps, all Class II medical devices, for operating
rooms and other clinical procedures. This fabric has greater
barrier resistance to fluids and viral penetration and, as
such, enhances safety. it is also more cost effective and
environmentally friendly than disposable products because it
creates no medical waste on its own.
When we developed these products, VHA, which is one of
Novation's owners, already had a contract for disposable
products with a much larger publicly traded competitor,
Kimberly-Clark. It would have been easy, more convenient, and
certainly the path of least resistance for VHA to turn down a
small company like ours, but they didn't. Not only did they
clinically evaluate our products, they brought in, at their
expense, a third party, Deloitte and Touche, to analyze and
evaluate our financial model and determine that we could create
overall cost savings for hospitals.
Standard Textile doesn't always win the GPO contracts that
we bid on. At times, we have been defeated by other companies.
As a supplier, we, of course, never like to lose. But the GPO
committees that evaluate these contracts are representative of
the hospital industry, are qualified, and are fair. We may not
always agree or like their conclusions, but we do believe the
process is open, fair, and honest.
I can also say that whenever I have encountered a hospital
or clinician who wanted to use my product, regardless of
whether it was listed on their GPO contract, I have never had a
problem getting it into their hands. They always have the
freedom and the choice to buy directly from any supplier or
manufacturer.
In addition to being a supplier, I can also speak from a
hospital perspective about the benefits of GPOs. I am the Board
Chairman of the Jewish Hospital of Cincinnati, a medium-sized
tertiary care not-for-profit hospital with about 200 beds, and
growing, approximately 15,400 surgeries per year, and about
$248 million in annual revenues. In 1998, the hospital was
running an annual deficit of approximately $5 million. To help
reverse that situation, the hospital made many significant
operating changes, including greater utilization of GPOs to
assist in managing costs. This year, I am pleased to say that
the hospital will report--
Chairman DeWine. Mr. Heiman--
Mr. Heiman. --a net gain from operations of $12 to $13
million.
Chairman DeWine. We need to move on.
Mr. Heiman. I have got three more sentences, if that is
okay, Senator.
Chairman DeWine. We are about there.
Mr. Heiman. I have been following with great interest the
recent discussions about GPOs. I think it is commendable that
this Subcommittee has taken an active interest in the topic and
I believe many of the changes in the GPO industry since your
first hearing have been positive.
But speaking as both a hospital supplier and a hospital
board chairman, I think the existing GPO system brings enormous
value to the health care system and I hope it remains that way.
Again, thank you very much for inviting me to share my
views at this hearing and I welcome any of your questions.
Chairman DeWine. Thank you very much.
[The prepared statement of Mr. Heiman appears as a
submission for the record.]
Chairman DeWine. Mr. Everard?
STATEMENT OF LYNN JAMES EVERARD, HEALTHCARE SUPPLY CHAIN
STRATEGIST, COCONUT CREEK, FLORIDA
Mr. Everard. Mr. Chairman and Senator Kohl, if there was
ever any doubt in your minds about the importance of your
mission here, let me say that our Nation will not be able to do
its job of providing quality care and a safe working
environment unless or until the GPO problem is resolved. And
Senator Kohl and Senator DeWine, I would like to personally
thank you for your commitment and leadership on this issue.
You have already introduced me. I would like to let you
know that I am a supply chain strategist and health care
business educator, and for 22 years, I have worked in the
health care supply chain, studying its strengths, its
weaknesses, and its opportunities for improvement.
I am here today because of my deep concern for the safety
of patients and caregivers and the financial viability of our
Nation's hospitals, all of whom continue to be harmed because
competition in the health care supply chain is compromised due
to the business practices of some large manufacturers and
certain GPOs, fueled by the power granted to GPOs in the safe
harbor exemption.
I understand that almost a year ago, you were inclined to
continue the safe harbor pending the results of this experiment
with self-policing codes of conduct. I understand your desire
to take a measured approach, and I think that you were wise in
doing so. While I shared your optimism in that approach, a year
later, we have seen very little progress and this market
desperately needs to be open to competition. Robust competition
in the health care supply chain is not only important for small
manufacturers, but also for hospitals, as well. I believe that
the evidence is insufficient to warrant the continuation of the
special treatment in the safe harbor.
Mr. Chairman, you asked me to discuss the progress made in
the GPOs developing codes of conduct, and, in fact, GPOs have
developed codes of conduct, much to their credit.
Unfortunately, those codes of conduct may not have the results
that were intended because they are not externally verifiable.
The real question at this point for me is this. Are the
GPOs really doing their job of saving money for hospitals? In
its testimony before this Committee last year regarding the
cost savings by his group, Mr. Norling of Premier stated, ``We
estimate that we save our member hospitals over $1.5 billion
per year.'' Hospitals need real science proving the savings
produced by GPOs, not estimates. Last year's GAO study, the
only independent analysis of GPO savings, reported that GPOs
don't save money.
What is the real truth? That is not an idle question. By
granting the safe harbor, the Congress gave GPOs a great deal
of power and a significant ability to create revenue for
themselves.
The GPO landscape is extremely complex and complicated.
Sometimes it is difficult to know where the GPO ends and the
side businesses begin. I believe that Congress must fully
understand the flow of money in the health care supply chain
and the GPO's role in the flow of that money in order to
pronounce that the safe harbor is a benefit to patients and
taxpayers. I do not believe that this body can in good
conscience implement a code of conduct until all of the
questions about GPOs are answered.
GPOs seeking to end years of speculation on the part of
their foes should welcome the opportunity to fully disclose
their practices and sources and uses of revenue, and skeptics
who say, ``Trust, but verify,'' will have what they need, and
this entire industry can move beyond the GPO question and focus
all of its efforts on providing quality patient care and a safe
work environment.
Recently, two major GPOs announced plans to go public with
a stock offering. Does it seem right that while other hospitals
continue to struggle financially, Broadlane and MedAssets will
use the windfall granted to them by the Congress in the form of
the safe harbor to enrich themselves by selling stock in their
companies? Will this be the legacy of the safe harbor? I hope
not, Mr. Chairman.
In conclusion, this hearing has been about GPO behavior,
but the implications of that behavior affect our entire health
care system. Elsewhere in this Congress on this very day, other
members of the House and Senate are grappling with other health
care issues. The outcome of your decisions here today will
clearly affect the work that they are doing and the health care
system that hundreds of millions of Americans depend on to take
care of them. Thank you.
[The prepared statement of Mr. Everard appears as a
submission for the record.]
Chairman DeWine. Ms. Weatherman?
STATEMENT OF ELIZABETH H. WEATHERMAN, MANAGING DIRECTOR,
WARBURG PINCUS, LLC, NEW YORK, NEW YORK
Ms. Weatherman. Thank you, Senator DeWine and Senator Kohl.
I would like to thank you for inviting me back. I would like to
encourage you to refer to my written testimony for the details
supporting the views that the National Venture Capital
Association and myself, as a 15-year veteran investing in the
medical device arena, hold very strongly as our views.
But what I would like to do right now is very quickly
emphasize what I think are the true take-homes from my
testimony. First and foremost, it is really, really hard to
bring innovative new breakthrough technology to market in the
U.S. and around the world. There are major technological
challenges to developing the technology. There are intellectual
property barriers. There are regulatory barriers, the standards
to which we must adhere in terms of demonstrating the safety
and the efficacy of the devices that are being developed to
assure that they are going to work for the American patients
and that they are going to be safe. It is a veritable gauntlet,
and more new technologies fail to reach market than succeed.
So my second point, that to have an additional roadblock on
the part of GPOs, where they can essentially block a new
technology based on, I am sure their in some cases good
intentions, simply puts up an additional barrier, an additional
risk in the mind of venture capitalists who are already taking
huge risks, huge amount of capital that they are investing into
companies long before they know whether their technology is
ever going to generate revenues, much less a profit.
We thank you so much for the spotlight that you have put on
the practices that the GPOs have used over the years and we do
think that the code of conduct that you have asked them to
adopt is significant progress. However, a major flag for us is
the effort that Senator Eschutia attempted to make, the State
Senator in California, to adopt the code of conduct that the
GPOs themselves had adopted for themselves into legislation was
fought by many of the GPOs very hard. It makes us wonder, how
serious are these guys really about adopting a uniform code of
conduct and implementing it and executing it and really being
clear and that they are going to continue to be consistent with
it and really take it seriously. They may be trying to address
the letter of what you have asked them. We question the spirit
of some of them.
So in conclusion, we would like to ask you to do any and
all things you can to assure that the abuses that they have
committed over the years are corrected once and for all and
forever. Thank you.
Chairman DeWine. Thank you very much.
[The prepared statement of Ms. Weatherman appears as a
submission for the record.]
Chairman DeWine. Senator Kohl?
Senator Kohl. Mr. Norling and Mr. McKenna, we spent
considerable time and effort working with you last year to
draft new codes of conduct. We would like to spend some time
today going through each of these most important issues your
codes of conduct were supposed to address: Bundling, high
administrative fees, sole-sourcing, and high commitment levels.
In assessing this progress, one of our main concerns is the
conclusion that the GAO reached in its report released to our
Subcommittee today that, quote, ``Some GPOs' conduct codes
include exceptions and qualified language that can limit the
potential of the conduct codes to affect change.''
One GPO practice which many fear can damage competition is
known as bundling. This is the practice of entering into one
contract for multiple products, either from one vendor or from
multiple vendors. A hospital gets an added discount only if it
purchases from the bundle, but typically, it must purchase
virtually all of its requirements, often 95 percent, from every
product in that bundle. If a hospital does not meet this
requirement for just one product, then it loses the additional
discount for every product. This makes it very difficult, if
not impossible, for the small manufacturers of just one medical
product to compete with the bundle offered by the large
dominant suppliers.
Mr. McKenna, you pledged to terminate Novation's bundling
program, but only after it expires in the first quarter of
2005. We understand that you are now considering revising this
program sometime in 2004. Novation's vendor contracts have a
provision in which they can be terminated on 90 days' notice by
Novation. And so we ask, why not exercise this provision and
abrogate the bundling contracts today? Why should those
patients who benefit from the products outside the spectrum
bundle have to wait another year or two, Mr. McKenna?
Mr. McKenna. Senator Kohl, just as a basis, our program is
entirely voluntary. There is access pricing for all of our
members to utilize any product under contract with no
commitment whatsoever.
With that as a basis, as a hospital looks to maximize their
value, there are different price points they can purchase at at
different levels of commitment. But in no way does the
committed program that you reference link one product to
another. These contracts are put in place separately and the
hospitals on their own determine whether or not they want to
purchase at higher levels to gain greater value and benefits.
There is no precondition of any of these contracts to contain
base pricing. It is their decision alone.
We have eliminated any penalties from a member removing
themselves from these programs. That has been completed. We
have removed any anti-competitive language that was in the
program. We have removed any capital equipment requirements in
the program. We have lowered purchasing levels in two
particular categories, urology and pulse oximetry products,
which we have now also gone to a dual-source on.
And then, lastly, we have accelerated the work to put a
next-generation program in place, Senator, and these programs
bring significant value to our members. One of our primary
obligations is to the hospitals we serve. And so we are very
serious about doing this. We will do it ahead of schedule. But
these things do take time to do them properly.
Senator Kohl. Mr. Hilal, would you like to respond?
Mr. Hilal. With all due respect, it sounds like a parallel
universe because that is not what we see in the marketplace. We
had the case of walking up to an account and showing a group of
hospitals how we can save them $400,000 on purchases of about a
little under $1 million. The answer came back that should they
dare to do that, the cost on the other products would go up by
$600,000.
For us, it took a lot of work and a lot of arithmetic and a
lot of meetings in order to show the folly of that approach. In
our written testimony, you will see an analysis of how the
customer is actually not only intimidated by such numbers, but
confused by such numbers that actually come from the dominant
supplier more often than not.
So with the GPOs leading this whole bundling issue and its
impact on penalties and price changes, it becomes very
difficult for the customer to make a clear decision on where
they can save money and where they can't.
Senator Kohl. Again, Mr. McKenna, why don't you just
terminate your bundling program right now?
Mr. McKenna. Senator, our commitment program has been built
at the request of our members, our hospitals. It brings them
high levels of value with them making the sole decision as to
whether they access base-level pricing by nothing at all or
choose to participate in this program. As previously stated, we
have accelerated our efforts to change practices in our
committed programs. We have done that. We have communicated
that to the supplier community and to our hospitals and we are
on schedule to look at this program to make it more user-
friendly to all stakeholders in the supply chain way ahead of
schedule.
Senator Kohl. Why don't you do it right now?
Mr. McKenna. Once again, our primary objective is to make
sure that we serve the hospitals that we work at their behest
and we--
Senator Kohl. Why don't you offer them the maximum
discounts without the bundling?
Mr. McKenna. It has been our experience, and we recently
just had one, that in some cases, discounts will change, and we
want to make sure that as we go through our open competitive
bid process, that we give them equal or greater value and it is
our commitment to do that.
Senator Kohl. Can you give us a pledge that you will work
with even greater intensity to eliminate this practice by the
end of 2003?
Mr. McKenna. What I can commit to, Senator, is by the end
of 2003, we will have initiated a pilot to get this new program
out and running within our hospitals with the anticipation that
in early 2004, we could then launch it to the broader hospital
network.
Senator Kohl. Okay. Mr. Norling, Premier has pledged not to
engage in bundling of products across different vendors.
However, the GAO's testimony indicates, 5 months later, one of
the two large GPOs derived a whopping 40 percent of its
purchase volume from medical-surgical products from contracts
in which a single vendor bundled products together. Does your
code of conduct permit this? This is the very type of bundling
practice which Applied Medical has faced. Mr. Norling, will you
agree to revise your code of conduct to ensure that this type
of bundling is ended, as well?
Mr. Norling. Thank you, Senator Kohl, and I would reiterate
that we have already agreed not to bundle across multiple
vendors. Let us be clear with respect to the single-vendor
situation. I think I can illustrate this best, in terms of the
challenges involved, with regard to Mr. Hilal's comments.
Later this month, we will be issuing a request for
proposals covering the endomechanical product area which
includes trocars. We are also going to issue a request for
proposals regarding sutures. These are areas that have been
bundled traditionally, particularly under the influence of a
particular large manufacturer. Applied Medical and all
manufacturers in this product area will receive a request for a
proposal. We will be breaking these products out into eight
separate categories with no bundling.
So specific to the example that has been presented here,
and specific to the point I made earlier about what we called
strategic sourcing--of trying to get product categories at a
level in which small companies can compete effectively with
large companies--that is exactly what we are doing.
But large companies have traditionally insisted as a quid
pro quo for giving the contract and giving the discounts on
this kind of practice. We are seeking to make some changes, the
commitments in the existing code. I don't think it needs a
modification to the existing code. It needs continued
implementation, which we are talking about.
But can we do this alone? No. I think there are some
manufacturer behaviors, in this case large manufacturer
behaviors, that need to occur. And very frankly, with respect
to all of our comments about the larger needs here--I ask where
is the manufacturers' code of conduct that applies to these
kinds of circumstances as well?
Senator if you would forgive me, just to correct the
record, I am told I made the statement that we don't accept
administrative fees in my haste to respond to Senator DeWine's
time period. I would like to clarify that what I was trying to
say was that we don't accept up-front or marketing fees. It may
have been Freudian, but we do indeed accept administrative
fees.
Senator Kohl. Mr. Hilal, before we move on, do you want to
respond to Mr. Norling?
Mr. Hilal. I am delighted. We are looking forward to this
openness, to the fact that Premier has chosen to unbundle that
package. We believe we can offer value to Premier. We look
forward to working with them on that area.
Senator Kohl. Does anybody else want to respond to this
whole question of bundling?
Mr. McKenna. I would like to offer one additional comment.
Senator Kohl. Yes, Mr. McKenna?
Mr. McKenna. We have also looked at--in our definition of a
bundle, and time for debate, but it is linking one product to
another to get a price discount. What Mr. Norling has described
in this product category, we have also put on notice the
supplier in question and are working towards unbundling those
products so that we can open up this. But as Mr. Norling has
stated, this has not been something that has been easy for the
industry. Once again, our primary objective is to do no harm to
those that we serve, so with that in mind, we are on a mission,
as is our colleague here, to do similar activities.
Mr. Hilal. Senator Kohl, if I may, if I may add just the
comment that I truly believe that GPOs that comply with the
spirit of what you are aiming at accomplishing also need the
support from the dominant suppliers, because in some
situations, they have no choice. Facing large organizations
that are bundling, I believe that this has to be stopped at the
source, also. So I believe there is a sincere attempt here that
is moving in the right direction.
Senator Kohl. Before we go back to Senator DeWine, I would
like to get your comment, particularly Mr. McKenna, on
administrative fees. Premier made an impressive commitment in
this area, promising never to accept administrative fees higher
than 3 percent from suppliers and standardized fees with
respect to each product category.
Mr. McKenna, Novation's pledge on this issue was much more
limited and only applied to clinical preference products. Mr.
McKenna, I am sure you believe that anything Premier can do,
you can do better.
[Laughter.]
Senator Kohl. So will you pledge to us today to follow
Premier's lead on administrative fees? Will you do that, Mr.
McKenna?
Mr. McKenna. Senator Kohl, we believe that--and I think it
was made in one of the statements either you or Senator DeWine
made, that multiple business models are good. They are good for
competition. So our business model may be different than Mr.
Norling's. I think our primary objective, however, is to
deliver the highest possible quality products at the lowest
possible prices.
I also noted in reviewing the panel's testimony that our
administrative fee percent, which has been declining over the
past few years, was the exact same percent as noted in Mr.
Norling's testimony, 2.1 percent.
And if I may, we agreed to lower fees and reduce all fees
on clinical preference products to less than 3 percent. For all
those categories we have analyzed, we have done that. We agreed
to standardize our fees on our private label, and we have done
that. And we agreed not to enter into any new contracts for
clinical preference products that provide fees above 3 percent,
and we have done that.
So with that in mind, we think the system is fair and open.
We are committed to fully implementing the principles that we
have agreed to with the Subcommittee and we will continue to do
so.
Senator Kohl. Senator DeWine?
Chairman DeWine. Mr. McKenna, Mr. Norling, Mr. Hilal
describes a kind of different world than the world you
described. You tout your innovative technology programs as
giving more access to small innovative companies, such as his.
He describes a kind of medieval world where there is this
castle and there is this moat, and he didn't describe it as
such, but I see in this moat some alligators and crocodiles and
he just can't get even close to the castle without getting
eaten alive. So it is an entirely different world that I am
hearing and Senator Kohl is hearing and the audience is
hearing. How do you explain that to us? Why does the world look
so different to Mr. Hilal than it does to you all? You are in
the castle. The picture he paints is you are in the castle. You
guys are, I guess, the knights in the castle and he is trying
to get in. Why is the world so different?
Mr. Norling. Actually, Senator, if I may, I thought he was
portraying us as the moat, frankly.
[Laughter.]
Mr. Norling. I am not--
Chairman DeWine. I don't know. I think you have got the
drawbridge up, I think.
Mr. Norling. All right, fair enough.
[Laughter.]
Chairman DeWine. You have got the drawbridge up. I think he
would like the drawbridge down.
Mr. Norling. I would respectfully submit that the
drawbridge is certainly on the way down, if not totally down.
[Laughter.]
Chairman DeWine. Okay. Well, he wants it all the way down.
Now, we have all had enough fun, but why is the world
different, in all seriousness? Why are we seeing these
different stories here and where are we going?
Mr. Norling. Senator, let me go to a fundamental point
here. It has always been the case that if a hospital wants to
purchase a physician preference item off contract, it can, and
I can tell you, with the implementation of our code of conduct,
there are no consequences from Premier if it does so. So I
think that is a significant step associated with the code of
conduct.
But beyond that, in 1997--
Chairman DeWine. If they want to, technically, they can do
it.
Mr. Norling. If the hospitals want to buy, they can. There
is nothing that Premier does, as of this point, that restricts
them from doing so. I think that is a fundamental point.
Chairman DeWine. Okay.
Mr. Norling. I think the other point is--what is Premier
doing to encourage access? And I would tell you that it was in
1997 that we put our technology breakthrough clause in place
which said, even if there is an existing contract, perhaps a
sole-source with one of these big players, someone with
innovative technology could access Premier resources, have that
technology assessed, and be given the absolute opportunity for
a contract.
Now, that is one example, I think, of a very, very
aggressive process by Premier to welcome this sort of thing. I
am not suggesting we have done absolutely everything they could
possibly have done, and I will suggest that we will continue to
work hard on this. These not-for-profit hospitals out there are
under great pressure. If there is a new technology that either
is going to help with cost or quality for patients, it is our
obligation to make it accessible, and we are working very hard
at doing that.
Chairman DeWine. But why do you think he is seeing the
problem? If you were in his position, why do you see the
problem?
Mr. Norling. Number one, I am speaking for Premier, and so
I will let Mr. McKenna make his points, and frankly, there are
a lot of others who could very well be here speaking to the
moats they--
Chairman DeWine. You are not helping me understand it. Mr.
McKenna?
Mr. McKenna. Let me try to be brief but focused on
responding. First of all, I think we have got some bridges
built and they are down. I am not sure that we have made them
visible to all the companies that need to have access. I think
that is a tribute, however, and comment to the work that we are
doing and the principles that the Subcommittee asked us to
implement.
Once again, our program is voluntary. If a clinician wants
something and a hospital wants to buy it, they go buy it. It
happens every single day.
But more importantly, I think, in particular Mr. Said's
company, timing is always an issue. But since we have
implemented the principles, we have awarded through our amended
agreements process one product contract on one item, and then
we have several others in motion. We have started to build a
relationship with the company, we have met several times, and I
sense it is a speed issue. Our commitment would be to
accelerate to a degree possible building this relationship and
putting products on contract that our clinicians find
advantageous to them and we are committed to do so.
If you look at the access points now as far as building
bridges across the moat, there is a technology forum that
allows any supplier, whether they are on contract or not, to
post their products, and we have trained all of our folks on
that that touch contracting.
Mr. Norling. Senator, can I give you a specific response
with regard to Applied Medical--
Chairman DeWine. Sure.
Mr. Norling. --because I think Mr. Hilal--
Chairman DeWine. And then we want to hear from the guy
trying to get in the castle.
Mr. Norling. Absolutely. On December 12 of 2002, we
discussed all of Applied Medical's other products other than
the one we already had on contract. We told the company about
our tech breakthrough program and how to submit reviews for
those products. The same day, another Mr. Hilal, their senior
vice president, e-mailed a Premier staff member thanking her
and indicating an intent to submit Applied's products. We sent
the company the whole process of how to do that.
So this isn't an effort--this isn't us holding back. This
is us being straightforward and saying, here is how you access
Premier, even though we have a contract in place. I have got
Federal Express receipts, very frankly, displaying this
process. So I am not trying to create a controversy here other
than to say, this an example, with one of the members
testifying here, where we have gone out of our way to say, here
is how you can access this market via our tech breakthrough
process.
Mr. Hilal. Senator, if I may answer--
Chairman DeWine. Yes.
Mr. Hilal. Actually, we had that offer, and later on,
Premier individuals advised us specifically to not pursue that
route for two reasons. One is because it is very lengthy. We
are good at development. We are fast at development. But if
delays take two and 3 years at a time, our advantage is gone.
Eventually--
Chairman DeWine. Two or 3 years?
Mr. Hilal. Two or 3 years of getting into an account or
getting a technology to take hold. We have to implement--
Chairman DeWine. What takes two or 3 years?
Mr. Hilal. It takes two to 3 years usually to launch a new
product and get the clinical results and get the clinical
papers and the efficacy established, and then from that
standpoint, the applications to get into these kinds of
exceptional clinical. So from that standpoint, Premier advised
us, Premier individuals advised us to hold off on that because
they felt that the GelPort was already established. It had
enough clinical papers behind it and they wanted to get it on a
contract immediately, and that happened that way. So we did not
have to take the longer route.
Now, interestingly enough, as we got the GelPort in, one
thing that we added to it was trocars, additional devices used
with the procedure that happened to be on other sole-source
contract. Now, we added them gratis. We added them with no
additional cost to that device. I submit to you, Senator, that
today, Mr. Chairman, that today, we see more hospitals,
especially university hospitals, literally throwing away $300
worth of value for fear of violating their contracts and their
compliance, and then they turn around to Johnson & Johnson and
buy these same equivalent products from them.
And so the market is really not that open except to the
niche products. Our issue is not whether or not we can go into
niche markets, where our technology is superior, and sometimes
the only technology. We would like to participate in the larger
markets where we can bring not only innovation, but value and
savings. We can make a difference if we are only allowed in.
Right now, if I may push the analogy one more step, we are
allowed into the hamlets. We are not allowed into the castle.
Mr. Brown. Chairman DeWine--
Chairman DeWine. Mr. Brown?
Mr. Brown. If I may, sir. Thank you. To answer your
question more directly about why is there a moat, the moat is
really a direct result of the billions of dollars worth of
administrative fees that are at stake within the GPO systems as
a whole. Self-regulation is akin to putting the fox in charge
of the henhouse. We really need your help in allowing equal and
fair access to all companies because of this administrative fee
issue. That is the moat. We can't get over it.
Mr. Heiman. Senator DeWine?
Chairman DeWine. Well, how would you do that?
Mr. Brown. Well, I think there are a number of ways. I will
give you an example. There is one GPO by the name of Health
Trust that has taken--made the decision to create multi-source
contracts, not dual-source. From the eyes of a small vendor, a
dual-source contract is no better for the example I used
earlier. But if you use a multi-source contract and allow all
of the players to play, if you are going to charge a fee, if
there is a better way, if the GPOs believe that they can get
better pricing without allowing all vendors to play, then let
them do that without charging the fee. But if you are going to
charge the fee, everyone should have equal access.
Chairman DeWine. Mr. Heiman?
Mr. Heiman. Senator DeWine, I have a somewhat different
perspective. When I became President of our company, we were
approximately a $70 million company and we were competing
against giants like Baxter, Johnson & Johnson, and Kimberly-
Clark, and I believe that the smallest of these three was
Baxter International, with sales of about $5 billion. I don't
think any of these groups have ever been known for their kind
and compassionate marketing and sales tactics.
But at the end of the day, this really seems to me to be a
story of everyday America. Some people won, some people didn't
win, and those that didn't win just aren't happy about it. And
what I have always told my people is that if you didn't win,
don't come to me and start complaining and griping. Start
figuring out how you need to win.
So we started out as a small company. We worked hard. We
built better mousetraps and we earned the opportunity. We
listened to our customers. We improved and we gained access
over time and achieved POs. I think in doing that, we have
created a win-win relationship that really is good for
everybody in the industry. So that has been my perspective as a
small supplier, small manufacturer who has been able to grow in
this industry.
Mr. Hilal. Mr. Chairman, if I may just add one comment.
Chairman DeWine. Sure.
Mr. Hilal. I truly believe that the person that has to win
is the patient. Eventually, we are all in this very special
business in order to help patients get better medicine, more
available medicine, more affordable medicine. It is not enough
for one of us to have a good year, to make $1 million, to buy a
bigger home. There is an obligation that comes with this
industry. We are in it for a special reason. We are caretakers,
whether we are making a product or operating on a patient, and
my feeling is that we tend to forget that sometimes in a
competitive situation. But the fact is, we still have to look
for those results that give the best product at the best price.
Chairman DeWine. Senator Kohl?
Senator Kohl. Ms. Weatherman, you testified before our
Subcommittee when we first looked at the GPO issue a year ago.
So today, what is your assessment of impact of the GPO's new
codes of conduct and the ability of new and innovative medical
device manufacturers to gain access to the marketplace?
Ms. Weatherman. I think if you look at venture capital
investing over this time period over the last 12 months, it has
declined in the medical device arena. In 2001 and 2002, the
investment rate per quarter was roughly half-a-billion per
quarter, and so far this year, the average has been closer to
half of that.
It is a multi-factorial equation as to why the investment
has dropped, but my point is, having an additional sort of
whimsical barrier that the judgment that key people within GPOs
can make in the decision making process to allow a new
technology to get on contract, to not get on contract, is
another barrier and another factor that increases the risk for
VCs to want to invest in technology before it has gotten to
market. So it is a factor. How powerful a factor versus other
factors, it is hard to measure. But my overall point is, it is
a factor that is not conducive, in our experience and the
experience of the companies we have invested in, to furthering
innovation.
Senator Kohl. What more, in your opinion, do we need to do
to encourage people in your industry to believe that this
sector is open to new, innovative competitors?
Ms. Weatherman. It seems to me either the exemption to the
antitrust should be rescinded for GPOs or that the code of
conduct is actually put into law or a form where we can very
clearly see that it is going to be adhered to across the entire
universe of GPOs, not sort of depending on the interpretation
of different significant players, which I think, as you have
heard the testimony, there is a difference in interpretation
between the two leaders.
I think an even playing field would be far better. Having
the intermediary aspect of deciding what is innovative
technology and what is not would be extremely positive, for
that not to be the purview of the GPOs or, for that matter, the
large manufacturers. Let the customers decide which products
they want to purchase and have the full basket available to
them.
Senator Kohl. Mr. Everard, do you want to make a comment?
Mr. Everard. Sure. I would agree with that completely. I
think one of the elements that we are missing is that the GPO
product councils do not have--the individuals on those product
councils, where there may be 25 individuals, none of those
individuals has a fiduciary responsibility to all 1,500 or
2,000 hospitals or whatever it is. And for them to make those
decisions, in my mind, seems to, in some ways, usurp the
authority of the clinical caregivers in those individual
hospitals. So if we could take that out, it would be very
helpful.
The other thing that I would like to say at this point is
that as we discuss GPOs and the safe harbor, we have really got
only two choices. That is, we either eliminate the safe harbor
and return this industry to a level playing field where
everybody gets the same opportunity to compete for business,
one small or medium-size account at a time, where we don't
completely change the landscape of competition, or if we want
to keep the safe harbor, then we are going to have to implement
some very, very significant oversight and there are going to
have to be rules for participation and penalties for breaking
those rules. That is the only way that we will be able to keep
all of this fair and above board, and that is the only way that
patients, caregivers, and taxpayers are going to feel
comfortable with the system that has been created.
Senator Kohl. Mr. Brown?
Mr. Brown. Yes, sir. I would like to say--to address this
issue of product councils. I think if you look at this on one
hand, it looks like a fair way to assess which company should
be allowed to participate in the GPO contract. But in
actuality, what the product councils generally reflect is the
standard market share that is existing today out in the
marketplace. And so as a result of that, the little guy is
still generally excluded from fair access. So, somehow, that
has to be addressed, as well.
I would like to address a comment made by Mr. Norling and
that is the new technology assessment program does help small
companies, and my company is a good example of that. And while
we are very encouraged by this and that we have been selected
by Premier to participate in their program, I would also, on
the other side of the ledger, like to say that this only
reflects a small percentage of our product line. It only
reflects those products that the GPO has considered extremely
new and innovative. While I have a complete large sector of
products to be able to market to GPOs, I am still locked out
from that viewpoint.
Mr. Norling. Senator, if I may respond to that--the product
council process, I think, is an interesting one because you
can't bring representatives of 1,500 hospitals together to do
that. And if you are asking each hospital to effectively put
that sort of process in place, we contract for 300,000
different products. So I think of the mass of attempting to
deal with that.
How is this effectively and fairly done is the question
that is raised here, and I don't want to get into a debate
here, but that is why we have chosen to go outside to, in our
case, ECRI to do the technology assessment of products. They
offer clear standards in terms of what they do and how they do
it.
So our product councils are given clinical results from our
databases in terms of where they exist, and where we have good
insights. They are given reviews from a number of outside
consulting firms, including ECRI. That, in turn, is brought to
these councils.
Now, frankly, these folks are a great representation of the
1,500 hospitals and clinicians trying to make a difference for
patient care. I am not saying that they perfectly represent
every interest, and very frankly, that is why the idea that
choice does exist is a very important element. But at some
point, you need a resource to effectively screen this
incredibly high volume, bring objective data to the process,
and then a representative group to make a decision.
Now, if that decision were enforced by Premier arbitrarily
on hospitals, on clinicians, I think it would be a good point.
But that is indeed not the case, and I think I have submitted
that.
You have to have a mechanism to do the best job you can to
get fair representation of the patient and the clinicians into
the process. I am very open to ideas of what might be better,
but I assure you, having individual hospitals putting processes
in place to assess 300,000 line items is not the answer.
Senator Kohl. Mr. McKenna, Novation recently informed the
Subcommittee that several plainly anti-competitive contract
terms had now been removed from all of its contracts. These
contract terms forbid Novation hospitals from even evaluating
competitive products or forbid a Novation hospital from
purchasing any products that competed with products sold in the
bundled Opportunity Spectrum Program. While we are glad that
Novation has finally seen fit to eliminate these contract
terms, we were astounded that such plainly anti-competitive
provisions were found in Novation's contracts in the first
place.
Mr. McKenna, should the fact that these contract terms were
contained in Novation contracts for many years cause us concern
that Novation might well revert to these and other similar
anti-competitive practices should the spotlight of our
oversight ever be lessened?
Mr. McKenna. No, Senator Kohl, to the contrary. Broadly,
and then specifically, let me address your concern.
We have gone through and taken each of the operating
principles. We have put a management-level person responsible
for each principle and we have gone through and trained every
employee that has anything to do with contracting. So we have
made a commitment, which is a long-term commitment, to make
systemic changes to our organization culture to, on a daily
basis, make this a part of everyone's work.
In regard to the former language that has now been removed,
at the time we put those contracts in place, the driver really
came from the for-profit side and we were attempting to make
sure we stayed level with them relative to value. And so we
packaged our stand-alone contracts that were--they were put in
place one at a time and then we offered additional value if the
customer on their own elected to participate in those
contracts.
So just a perspective as to how we got to where we are. But
I think a testament to the principles that we have all agreed
to, we have now taken the steps to eliminate those issues and
have communicated that to both the supplier community and
certainly to our membership.
Senator Kohl. Mr. Norling, will you commit to review
Premier's contracts for language that could be considered or
construed as anti-competitive and report back to this Committee
that you have indeed done that review?
Mr. Norling. I will absolutely commit to that. I am not
aware of any language that can be construed as anti-
competitive, but we will make a systematic review of our
contract terms and conditions.
I will indicate, Senator, that typically that is a
negotiating point company-by-company, offering-by-offering. So
the terms and conditions, apply to not one contract, but a
whole series of them. But I will look at our standard and I
will make sure that, with regard to our practices, that
guidelines are in place to assure there are no anti-competitive
elements to it.
Senator Kohl. Any other comments from the panel? Yes, sir,
Mr. Hilal?
Mr. Hilal. Senator, if I may, more important than us
recognizing that the drawbridge is down, it is important that
hospitals themselves know, because what lingers behind any of
these practices is an impression that stays around for years, a
misperception of what hospitals can and cannot do,
unfortunately fueled by the large or dominant suppliers.
It behooves us when we change these things to strongly urge
the GPOs to communicate to their members that things have
changed. Unless and until they do that, things do not change in
the field. Thank you.
Senator Kohl. Mr. Chairman?
Chairman DeWine. Mr. Everard, if the GPOs fail to win
savings the way you say they do, why don't the hospitals just
leave the GPOs?
Mr. Everard. That is a very good question.
Chairman DeWine. They understand the business, don't they?
Mr. Everard. That is one of the problems that we have. The
arguments of the GPOs is that if they went away, immediately,
hospitals would face higher prices. I believe that that
argument is--the logic of that argument is really based more
upon education than economics. What I mean by that is that the
current pricing structures of GPOs become known the day that
they hit the street. They become almost common knowledge. It
would be very difficult and a very brazen move on the part of
any major manufacturer to raise prices unilaterally, knowing
that the prices are already out there, without having a good
reason to do it.
In general, hospitals have not devoted much effort to
managing their supply chains. They have chosen in many cases to
outsource that decision making process to GPOs. As a result,
they are now, years later, left defenseless. Within those
hospitals, there simply is not a supply chain expert who would
be able to properly assess the value of the GPO.
The other part of this is that in most GPO relationships,
hospitals receive a substantial rebate check at the end of the
year. The rebate is ostensibly money that is left over from GPO
operations expenses that is now returned back to the
shareholder hospitals. The CEOs of hospitals count on those
checks. Some of them are quite large, $1 million. They are
wondering what they would do without that $1 million if that
relationship and the rebate check went away. So they are almost
held hostage by the need to get the rebate.
What many of them don't understand is that a number of
hospitals, smaller hospitals, small IDNs, have gotten together
and gone out and achieved price savings on their own that take
their pricing and make it 13 percent or more below the prices
that are being paid by hospitals who are members of the GPO. So
there are models out there that have worked. Hospitals are able
to move away. But the hospitals generally don't understand that
that option is available to them and they are taught to fear
going out on their own. Any time a hospital goes out and fails
because it didn't do it the right way, the GPOs publicize that
to all the other hospitals to make sure that everybody is
afraid of making that move.
So one of the issues that we face in this industry is that
the hospitals simply don't have the knowledge or understanding
of real supply chain, and let me give you an example. Mr.
Norling referred to a term called ``strategic sourcing.'' The
way that GPOs use strategic sourcing is completely different
than the way that it is used in manufacturer outside of health
care.
One of the things I find fascinating is the dichotomy
between the way that large manufacturers, and small ones, for
that matter, in health care go about buying their products from
their raw materials suppliers and then the way that they turn
around and sell them to hospitals. It is a completely different
method and completely different model and I would like to know
why that is and I would like to encourage hospitals to adopt
that model for themselves.
Chairman DeWine. I want to thank the panel very much. We
have actually, as you can see, survived without a roll call,
which they keep telling us is going to occur at any moment. We
have survived. I thank you very much for your testimony.
The biggest thing I take away from this hearing is that
people in different parts of the industry see a different
world. That was brought out very well by the testimony. GPOs
feel as though they are very open to new products. Mr. Heiman,
as a supplier, certainly supports that view in very eloquent
testimony today. But two other suppliers supported by Mr.
Everard and Ms. Weatherman say that the process is too
uncertain, it is too burdensome. Simply put, they are locked
out. They are outside the castle.
You know, this is a big industry. We can't expect complete
agreement and uniformity within an industry, but these
differences are, I must say, very stark. It suggests to me that
this Subcommittee has more work to do. We must continue our
oversight, and so I intend to continue this oversight. We will
continue to look at this industry. We will continue to have
oversight, and we will, I expect, have a hearing in the future
again.
I would think it is fair to say that our work in this area
is not complete, but we appreciate you all coming in. You have
given some very valuable testimony and the hearing is
adjourned. Thank you very much.
[Whereupon, at 12:35 p.m., the Subcommittee was adjourned.]
[Questions and answers and submissions for the record
follow.]
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