[Senate Hearing 107-899]
[From the U.S. Government Publishing Office]
S. Hrg. 107-899
HOSPITAL GROUP PURCHASING: LOWERING COSTS AT THE EXPENSE OF PATIENT
HEALTH AND MEDICAL INNOVATIONS?
=======================================================================
HEARING
before the
SUBCOMMITTEE ON ANTITRUST,
BUSINESS RIGHTS, AND COMPETITION
of the
COMMITTEE ON THE JUDICIARY
UNITED STATES SENATE
ONE HUNDRED SEVENTH CONGRESS
SECOND SESSION
__________
APRIL 30, 2002
__________
Serial No. J-107-76
__________
Printed for the use of the Committee on the Judiciary
U. S. GOVERNMENT PRINTING OFFICE
85-986 WASHINGTON : 2003
____________________________________________________________________________
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; (202) 512-1800
Fax: (202) 512-2250 Mail: Stop SSOP, Washington, DC 20402-0001
COMMITTEE ON THE JUDICIARY
PATRICK J. LEAHY, Vermont, Chairman
EDWARD M. KENNEDY, Massachusetts ORRIN G. HATCH, Utah
JOSEPH R. BIDEN, Jr., Delaware STROM THURMOND, South Carolina
HERBERT KOHL, Wisconsin CHARLES E. GRASSLEY, Iowa
DIANNE FEINSTEIN, California ARLEN SPECTER, Pennsylvania
RUSSELL D. FEINGOLD, Wisconsin JON KYL, Arizona
CHARLES E. SCHUMER, New York MIKE DeWINE, Ohio
RICHARD J. DURBIN, Illinois JEFF SESSIONS, Alabama
MARIA CANTWELL, Washington SAM BROWNBACK, Kansas
JOHN EDWARDS, North Carolina MITCH McCONNELL, Kentucky
Bruce A. Cohen, Majority Chief Counsel and Staff Director
Sharon Prost, Minority Chief Counsel
Makan Delrahim, Minority Staff Director
------
Subcommittee on Antitrust, Business Rights, and Competition
HERBERT KOHL, Wisconsin, Chairman
PATRICK J. LEAHY, Vermont MIKE DeWINE, Ohio
RUSSELL D. FEINGOLD, Wisconsin ORRIN G. HATCH, Utah
CHARLES E. SCHUMER, New York ARLEN SPECTER, Pennsylvania
MARIA CANTWELL, Washington STROM THURMOND, South Carolina
JOHN EDWARDS, North Carolina SAM BROWNBACK, Kansas
Victoria Bassetti, Majority Chief Counsel
Peter Levitas, Minority Chief Counsel
C O N T E N T S
----------
STATEMENTS OF COMMITTEE MEMBERS
Page
DeWine, Hon. Mike, a U.S. Senator from the State of Ohio......... 4
Hatch, Hon. Orrin G., a U.S. Senator from the State of Utah...... 68
Kohl, Hon. Herb, a U.S. Senator from the State of Wisconsin...... 1
Leahy, Hon. Patrick J., a U.S. Senator from the State of Vermont. 8
Schumer, Hon. Charles E., a U.S. Senator from the State of New
York........................................................... 20
Thurmond, Hon. Strom, a U.S. Senator from the State of South
Carolina....................................................... 69
WITNESSES
Barrett, Trisha, BSN, Assistant Director, Materiel Services,
Value Analysis Facilitator, University of California, San
Francisco Medical Center, San Francisco, California............ 21
Detlor, Lynn R., Principal, GPO Concepts, Inc., San Diego,
California..................................................... 40
Goldstein, Mitchell, M.D., Neonatologist, Citrus Valley Medical
Center, West Covina, California................................ 27
Kiana, Joe E., President and Chief Executive Officer, Masimo
Corporation, Irvine, California................................ 24
McKenna, Mark, President, Novation, LLC, Irving, Texas........... 11
Norling, Richard A., Chief Executive Officer, Premier, Inc., San
Diego, California.............................................. 9
Weatherman, Elizabeth A., Vice Chair, Medical Group, National
Venture Capital Association and Managing Director, Warburg
Pincus, LLC, New York, New York................................ 42
QUESTIONS AND ANSWERS
Responses of Mark McKenna to questions submitted by:
Senator DeWine............................................... 76
Senator Hatch................................................ 87
Senator Leahy................................................ 71
Responses of Richard A. Norling to questions submitted by:
Senator Hatch................................................ 87
Senator Leahy................................................ 71
Responses of Joe E. Kiana to questions submitted by Senator Leahy 75
SUBMISSIONS FOR THE RECORD
Brown, Thomas V., Executive Vice President, Biotronik, Inc....... 95
Cohen, Gary, President, BD Medical Systems, Becton Dickinson and
Company........................................................ 90
ECRI, Jeffrey C. Lerner, President and Chief Executive Office,
Plymouth, PA................................................... 110
Emory University School of Medicine, Augusto Sola, MD, Professor
of Pediatrics and Obstetrics and Gynecology, Director, Division
of Neonatal-Perinatal Medicine, Atlanta, Georgia, letter....... 184
Engibous, Doris, President, Nellco Tyco Healthcare, Pleasenton,
CA, letter..................................................... 163
Hazen, Paul, President and CEO, National Cooperative Business
Association.................................................... 157
Hipps, Julia Naumhein, RN BS..................................... 135
Holden, Larry, President, Medical Device Manufacturers
Association.................................................... 144
Muris, Hon. Timothy, Chairman, Federal Trade Commission and Hon.
Charles James, Assistant Attorney General, Letter.............. 142
Pevco Systems International, Inc., Frederick M. Valerino, Jr.,
President...................................................... 169
Saint Vincent, Catholic Medical Centers, Daved J. Campbell,
President, Chief Executive Officer............................. 183
Scanlon, William J., GAO, Director, Health Care Issues........... 112
Shaw, Thomas J., President & CEO, National Cooperative Business
Association.................................................... 172
HOSPITAL GROUP PURCHASING: LOWERING COSTS AT THE EXPENSE OF PATIENT
HEALTH AND MEDICAL INNOVATIONS?
----------
TUESDAY, APRIL 30, 2002
United States Senate,
Subcommittee on Antitrust, Business Rights,
and Competition,
Committee on the Judiciary,
Washington, D.C.
The committee met, pursuant to notice, at 2:54 p.m., in
room SD-226, Dirksen Senate Office Building, Hon. Herb Kohl,
chairman of the subcommittee, presiding.
Present: Senators Kohl, Leahy, Schumer, and DeWine.
OPENING STATEMENT OF HON. HERB KOHL, A U.S. SENATOR FROM THE
STATE OF WISCONSIN
Chairman Kohl. This hearing will come to order. I held it
for Senator DeWine, who is unavoidably detained for just a few
minutes and he requested that we proceed.
Today, this subcommittee turns its attention to an issue
affecting the health and safety of every American who has ever
or will ever need treatment at a hospital, in other words,
every one of us. This issue is how hospitals form buying groups
to purchase nearly everything used by hospitals, everything
from pacemakers to thermometers, from surgical devices and CAT
scanners to needles and band-aids, and how these groups affect
the cost and quality of patient health and medical innovation
throughout our country.
These guying groups, known as group purchasing
organizations, or GPOs, are at the nerve center of our health
care system. Because they determine what products are in our
hospitals, they directly affect patient health and safety.
Because they control more than $34 billion in health care
purchases, they impact the cost we all pay for our health
system. Because they represent more than 75 percent of the
nation's hospital beds, they are a powerful gatekeeper who can
cut off competition and squeeze out innovation.
Gaining a GPO contract is essential for any medical
equipment supplier. GPOs determine which medical devices will
be used to treat us when we are sick or injured, which
manufacturers will survive and prosper, and, in fact, which
ones will fail. It does not do any good to invent the next
great pacemaker or safety needle if you cannot get it to
patients because a GPO stands in your way.
With that kind of power comes responsibility. But too
often, it seems that GPOs have failed to serve as honest
brokers seeking to serve the best interests of hospitals and
patients. We are going to detail three major concerns.
First, conflicts of interest raise the specter of critical
health care decisions being influenced by financial ties to
suppliers. We have heard startling allegations of scandal and
conflicts of interest that have infected the GPOs. Premier's
chief executive received millions of dollars worth of stock
options from a company with a contract supplying pharmaceutical
services to Premier hospitals. His response, that he recused
himself from contracting decisions with respect to the company
at issue and that his financial interests were disclosed and
approved by Premier's board, is good, but not good enough. He
should have severed all ties to the company when he joined
Premier.
On another occasion, Premier steered business to a
pharmaceutical supply company and thereby helped turn its $100
investment into a stake worth $46 million last year. Novation
today demands that medical suppliers it contracts with sell
their products on a for-profit e-commerce site in which
Novation has a substantial interest and in which many of
Novation's senior executives hold personal stakes.
These practices, in our judgment, are appalling and should
not be tolerated. We cannot accept a situation where a decision
on which medical device will be used to treat a critically ill
patient could conceivably or even theoretically turn on the
stock holdings of a GPO executive.
Second, contracting practices may reduce competition and
innovation in health care and narrow the ability of physicians
to choose the best treatment for their patients. In one case we
know of, a hospital denied a physician permission to use a
vital pacemaker for a patient on the operating table, but not
yet anesthetized, and all because there was no GPO contract for
that particular pacemaker. The pacemaker that was on contract
that the hospital required him to use was in the midst of an
FDA investigation into its effectiveness and safety. Hospitals
have failed to buy safety syringes which prevent accidental
needle sticks because doing so would mean buying off the GPO
contract. As a result, nurses have suffered easily preventable
injuries and have developed HIV and hepatitis.
GPO contracting policies have created a system that keeps
many good products out of circulation while enabling large
manufacturers to entrench their market position. Practices such
as sole sourcing, high commitment levels, which require a
hospital to purchase as much as 90 percent of a product from
one company in order to get the maximum discount, and bundling,
which gives hospitals extra discounts and bonuses for buying a
group of products, can seriously damage the ability of doctors
to choose the best products for their patients and for
competitive manufacturers to survive and innovate.
Third, the General Accounting Office today revealed that
these buying groups, whose goal, after all, is to save money,
do not always get the best deal. We all support the basic
purpose of GPOs, to hold down health care costs with volume
purchasing. But the GAO study raises serious doubts as to
whether GPOs are doing a good enough job in achieving this
goal. In many cases, hospitals can get a better deal if they go
outside the GPO. It seems like sometimes GPOs may produce the
worst of both worlds, little savings and fewer choices.
We, therefore, call on the entire GPO industry to work with
us to create a code of conduct that will address these ethical
problems and contracting issues. The industry should clean up
its own act, and we believe they want to, but without quick and
effective self-regulation, we would have to consider
Congressional action.
In addition, Senator DeWine and I are today writing to the
Justice Department and the Federal Trade Commission to request
that they reexamine their guidelines that protect GPOs from
Federal antitrust scrutiny in most cases.
Our goal should be to ensure that the GPO system truly
achieves cost savings in the cost of medical equipment and that
these savings do not come at the expense of patient health and
medical innovation. We thank our witnesses for coming here to
testify and we look forward to hearing their views.
[The prepared statement of Senator Kohl follows:]
Statement of Hon. Herb Kohl, a U.S. Senator from the State of Wisconsin
Today our subcommittee turns its attention to an issue affecting
the health and safety of every American who has ever, or ever will,
need treatment at a hospital--in other words, all of us. This issue is
how hospitals form buying groups to purchase nearly everything used by
hospitals--everything from pacemakers to thermometers, from surgical
devices and CAT scanners to needles and Band-Aids--and how those groups
affect the cost and quality of patient health and medical innovation.
These buying groups--known as group purchasing organizations or
GPOs--are at the nerve center of our health care system. Because they
determine what products are in our hospitals, they directly affect
patient health and safety. Because they control more than $34 billion
in health care purchases, they impact the cost we all pay for our
health system. Because they represent more than 75 percent of the
nation's hospital beds, they are a powerful gatekeeper who can cutoff
competition and squeeze out innovation. Gaining a GPO contract is
essential for any medical equipment supplier. GPOs determine which
medical devices will be used to treat us when we are sick or injured,
which manufacturers will survive and prosper--and which ones will fail.
It doesn't do any good to invent the next great pacemaker or safety
needle if you can't get it to patients because the GPO stands in your
way.
With that kind of power comes responsibility. But too often it
seems GPOs have failed to serve as honest brokers seeking to serve the
best interests of hospitals and patients.
We have three main concerns.
First: conflicts of interests raise the specter of critical health
decisions being influenced by financial ties to suppliers. We have
heard startling allegations of scandal and conflicts of interests that
have infected the GPOs. Premier's chief executive received millions of
dollars worth of stock options from a company with a contract supplying
pharmaceutical services to Premier hospitals. His response--that he
recused himself from contracting decisions with respect to the company
at issue and that his financial interests were disclosed, and approved
by, Premier's Board--is good, but not good enough. He should have
severed all ties to the company when he joined Premier. On another
occasion, Premier steered business to a pharmaceutical supply company
and thereby helped turn its initial $100 investment into a stake worth
$46 million dollars last year. Novation today demands that medical
suppliers it contracts with sell their products on a for-profit e-
commerce site in which Novation has a substantial interest and in which
many of Novation's senior executives hold personal stakes.
These practices are appalling and cannot be tolerated. We cannot
accept a situation where a decision on which medical device will be
used to treat a critically ill patient could conceivably or even
theoretically turn on the stock holdings of a GPO executive.
Second: contracting practices may reduce competition and innovation
in health care and narrow the ability of physicians to chose the best
treatment for their patients. In one case we know of, a hospital denied
a physician permission to use a vital pacemaker for a patient on the
operating table but not yet anaesthetized--all because there was no GPO
contract for that pacemaker. The pacemaker that was on contract--that
the hospital required him to use--was in the midst of an FDA
investigation into its effectiveness and safety. Hospitals have failed
to buy safety syringes which prevent accidental needle sticks because
doing so would mean buying off the GPO contract. As a result, nurses
have suffered easily preventable injuries and have developed HIV and
Hepatitis.
GPO contracting policies have created a system that keeps many good
products out of circulation while enabling large manufacturers to
entrench their market position. Practices such as sole sourcing, high
commitment--levels--requiring a hospital to purchase as much as 90
percent of a product from one company in order to get the maximum
discount--and bundling--giving hospitals extra discounts and bonuses
for buying a group of products--can seriously damage the ability of
doctors to choose the best products for their patients and for
competitive manufacturers to survive and innovate.
Third: the General Accounting Office today revealed that these
buying groups--whose goal is to save money--don't always get the best
deal. We all support the basic purpose of GPOs--to hold down health
care costs with volume purchasing. But the GAO study raises serious
doubts as to whether GPOs are doing a satisfactory job achieving this
goal. In many case, hospitals can get a better deal if they go outside
the GPO. It seems like sometimes GPOs may produce the worst of both
worlds--little savings and fewer choices.
We therefore call on the entire GPO industry to work with us to
create a code of conduct that will address these ethical problems and
contracting issues. The industry should clean up its own house, and we
believe they want to. But without quick and effective self-regulation,
we would have to consider congressional action. In addition, Senator
DeWine and I are today writing to the Justice Department and Federal
Trade Commission to request that they re-examine their Guidelines that
protect GPOs from Federal antitrust scrutiny in most cases.
Our goal should be to ensure that the GPO system truly achieves
cost savings in the cost of medical equipment, and that these savings
do not come at the expense of patient health or medical innovation. We
thank our witnesses for testifying today and look forward to hearing
their views.
Chairman Kohl. I call now on my colleague and the ranking
member of this subcommittee, Senator Michael DeWine.
STATEMENT OF HON. MIKE DEWINE, A U.S. SENATOR FROM THE STATE OF
OHIO
Senator DeWine. Mr. Chairman, thank you very much. Let me
begin by saying that I am also quite disturbed by some of what
we have learned in our investigation of group purchasing
organizations.
There is certainly some anecdotal evidence and some
indication that GPOs in some cases have strayed from their
original purpose of allowing hospitals to work together to
limit costs. We clearly have some specific incidents that we
need to explore today, and I know we will, and we need to
decide how to prevent them in the future.
In addition, we need to examine the enormous changes in the
medical supply marketplace and the changes that have occurred
in GPOs. As medical costs have skyrocketed, many hospitals
struggle on a daily basis. They struggle to reduce costs while
attempting to maintain high quality health care
GPOs have become an increasingly important part of this
effort to reduce costs. However, I think it is fair to say that
due to consolidation and other changes in the GPO system, GPOs
today look very different than the system that was originally
planned and contemplated.
Some reports indicate that hospitals channel as much as 70
to 80 percent of their non-labor expenditures through GPOs.
Within that 70 to 80 percent of purchasing, two large GPOs,
Premier and Novation, handle purchasing for over 60 percent of
the nation's hospitals. This level of concentration gives these
two firms a very important role in the medical device market,
and their buying arrangements have a tremendous impact on the
market.
This importance is magnified by the fact that Premier and
Novation will often have only one or two suppliers on contract
for a given product or product category. For the one or two
suppliers who are able to make a deal with them, they are
virtually assured a very big market for their products. The
others, however, will face real problems in gaining access to a
large or significant segment of the market.
As long as these contracting and purchasing decisions are
based on a reasonable mix of quality and cost factors, these
outcomes are not necessarily troubling, and we have been told
that, often, health practitioners do play a significant role in
determining which products are placed on GPO contracts, a role
which helps to assure that product quality and patient care are
part of the decision.
However, there are some indications that other factors have
sometimes been considered, factors that have more to do with
the financial health of the GPO than the health of the patient.
For example, information provided to this subcommittee
demonstrates that executives of some GPOs have a financial
interest in companies that have been granted GPO contracts.
Obviously, it is completely unacceptable for private financial
interests to play any role in contracting decisions.
More broadly, I am concerned about the extensive range of
businesses and programs run by GPOs and the manner in which
they are funded. Approximately 15 years ago, Congress gave the
GPOs an exemption from the anti-kickback laws in order to allow
them to collect administrative fees from suppliers. But the
result of that decision is a system in which some believe the
GPOs have conflicting interest and mixed incentives. It is not
always clear whether GPOs are serving the hospitals who own
them or the suppliers who have in some ways become their
clients. We need to explore this issue today.
Furthermore, Mr. Chairman, we need to examine the
competitive implications of the GPO system. It is critical that
we maintain a competitive environment in which new and improved
medical devices are able to gain a foothold in the marketplace.
However, many have complained that the GPO structure is acting
as an impediment to innovation by allowing incumbent suppliers
to lock in large portions of the buying market for their
products.
That assessment seems to have some support among those in
the investment community. In fact, we will hear testimony today
that investors are increasingly unwilling to fund start-ups,
the kind of companies that often provide technological
improvements, because the odds are stacked too heavily in favor
of incumbents on GPO contracts. This is a very troubling
possibility.
On balance, it does seem likely that GPOs have delivered
savings to hospitals. Many of the hospitals in my home State of
Ohio have reported that to me, although, as the recent GAO
study indicates, GPOs do not necessarily always save money for
hospitals. As I have noted, legitimate questions have been
raised about what impact the current structure of the GPO
market is having on innovation and health care. We cannot
overlook the long-term costs that we will pay, both in dollars
and in quality of care, if we allow our purchasing structure to
impede innovation in medical devices.
So, Mr. Chairman, I look forward to hearing from our
witnesses. I will closely evaluate everything that we hear
today. Certainly, we must remain focused, focused on making
health care affordable to all Americans. It is equally
important to ensure that the system operates in a way that will
provide the best possible health care for patients.
As an initial step, as Senator Kohl has already indicated,
the chairman and I both agree that a code of conduct addressing
a number of specific practices will help address our concerns.
In the meantime, Senator Kohl and I have sent a letter to the
Justice Department Antitrust Division and the Federal Trade
Commission asking them to examine the competitive effects of
the GPO system.
If, after careful evaluation, we determine that further
changes are, in fact, necessary, we will work closely with all
interested parties as we seek a system that will provide our
hospitals with the best products at competitive prices. Thank
you, Mr. Chairman
Chairman Kohl. Thank you, Senator DeWine.
[The prepared statement of Senator DeWine follows:]
Statement of Hon. Mike DeWine, a U.S. Senator from the State of Ohio
Let me begin by saying that I am also quite disturbed by some of
what we have learned in our investigation of group purchasing
organizations. There is certainly some anecdotal evidence, and some
indication that GPOs in some cases have strayed from their original
purpose of allowing hospitals to work together to limit costs. We
clearly have some specific incidents that we need to explore today, and
we need to decide how to prevent them in the future.
In addition, we need to examine the enormous changes in the medical
supply marketplace, and the changes that have occurred in GPOs. As
medical costs have skyrocketed, many hospitals struggle on a daily
basis to reduce costs while attempting to maintain high-quality health
care.
GPOs have become an increasingly important part of this effort to
reduce costs. However, I think it is fair to say that due to
consolidation and other changes in the GPO system, GPOs today look very
different than the system that was originally contemplated.
Some reports indicate that hospitals channel as much as 70 to 80
percent of their nonlabor expenditures through GPOs. Within that 70 to
80 percent of purchasing, two large GPOs, Premier and Novation, handle
purchasing for over 60 percent of the nation's hospitals.
This level of concentration gives these two firms a very important
role in the medical device market, and their buying arrangements have a
tremendous impact on the market.
This importance is magnified by the fact that Premier and Novation
will often have only one or two suppliers on contract for a given
product or product category. For the one or two suppliers who are able
to make a deal with them, they are virtually assured a very big market
for their products; the others will face real problems in gaining
access to a large segment of the potential market.
As long as these contracting and purchasing decisions are based on
a reasonable mix of quality and cost factors, these outcomes are not
necessarily troubling. We have been told that often health
practitioners do play a significant role in determining which products
are placed on GPO contracts, a role which helps to assure that product
quality and patient care are part of the decision.
However, there are some indications that other factors have
sometimes been considered, factors that have more to do with the
financial health of the GPO than the health of the patient. For
example, information provided to the Subcommittee demonstrates that
executives of some GPOs have a financial interest in companies that
have been granted GPO contracts. Obviously, it is completely
unacceptable for private financial interests to play any role in
contracting decisions.
More broadly, I am concerned about the extensive range of
businesses and programs run by GPOs, and the manner in which they are
funded. Approximately 15 years ago, Congress gave the GPOs an exemption
from the anti-kickback laws in order to allow them to collect
administrative fees from suppliers. But the result of that decision is
a system in which some believe the GPOs have conflicting interests and
mixed incentives. It is not always clear whether GPOs are serving the
hospitals who own them or the suppliers, who in some ways, have become
their clients. We need to explore this issue today.
Furthermore, we need to examine the competitive implications of the
GPO system. It is critical that we maintain a competitive environment
in which new and improved medical devices are able to gain a foothold
in the marketplace. However, many have complained that the GPO
structure is acting as an impediment to innovation, by allowing
incumbent suppliers to lock in large portions of the buying market for
their products.
That assessment seems to have some support among those in the
investment community. In fact, we will hear testimony today that
investors are increasingly unwilling to fund startups, the kind of
companies that often provide technological improvements, because the
odds are stacked too heavily in favor of incumbents on GPO contracts.
This is a very troubling possibility.
On balance, it does seem likely that GPOs have delivered savings to
hospitals. Many of the hospitals in my home State of Ohio have reported
as much to me, although, as the recent GAO study indicates, GPOs do not
necessarily always save money for hospitals. As I have noted,
legitimate questions have been raised about what impact the current
structure of the GPO market is having on innovation and health care.
We cannot overlook the long-term cost that we will pay, both in
dollars and in quality of care, if we allow our purchasing structure to
impede innovation in medical devices.
I look forward to hearing from our witnesses, and I will closely
evaluate everything we hear today. Certainly we must remain focused on
making health care affordable to Americans. It is equally important to
ensure that the system operates in a way that will provide the best
possible health care for patients. As an initial step, I agree with
Senator Kohl that a code of conduct, addressing a number of specific
practices, will help address our concerns. In the meantime, Senator
Kohl and I have sent a letter to the Justice Department Antitrust
Division, and the Federal Trade Commission, asking there to examine the
competitive effects of the GPO system. If, after careful evaluation, we
determine that further changes are necessary, we will work closely with
all interested parties as we seek a system that will provide our
hospitals with the best products at competitive prices.
Chairman Kohl. Now, to our witnesses. I will introduce the
seven and then we will start with their testimony.
Mr. Richard Norling is Chairman and CEO of Premier,
Incorporated. He joined Premier in 1997, first as Chief
Operating Officer. Before that, Mr. Norling was President and
CEO of Fairview Hospital and Health Care System, headquartered
in Minneapolis-St. Paul, Minnesota.
We have with us Mr. Mark McKenna, President of Novation. He
served on the management team that structured the joint venture
between VHA and UHC, resulting in the creation of Novation.
Prior to joining VHA in 1987, Mr. McKenna was Director of
Marketing for IMED Corporation of San Diego.
Ms. Trisha Barrett is a registered nurse and Assistant
Director of Materiel Services and Value Analysis Facilitator at
the University of California Medical Center in San Francisco.
Ms. Barrett serves on the Novation Nursing and Clinical
Practice Council.
Mr. Joe Kiani is the co-founder and CEO of Masimo
Corporation, a privately-held medical technology company. He is
also an inventor on more than 30 patents related to signal
processing sensors and patient monitoring.
Dr. Mitch Goldstein is a physician at the Citrus Valley
Medical Center and the University of California-Irvine Medical
Center. He specializes in neonatal medicine.
Ms. Elizabeth Weatherman is the Managing Director of
Warburg Pincus, where she has been a member of the health care
group since 1988. Ms. Weatherman also serves as the Vice Chair
of the National Venture Capital Association Medical Group.
Mr. Lynn Detlor is the Principal of GPO Concepts, Inc. He
served as President of Premier Purchasing Partners from 1986 to
1999. Mr. Detlor joined Premier through a merger with the
American Health Care Systems, where he served as President.
We welcome you all here today. We request that you hold
your statements to five minutes.
Before we commence, I would like to ask the chairman of our
committee, Senator Leahy, if he has an opening statement.
STATEMENT OF HON. PATRICK J. LEAHY, A U.S. SENATOR FROM THE
STATE OF VERMONT
Chairman Leahy. Mr. Chairman, just hearing your comment
about keeping it brief, I just want to compliment both you and
Senator DeWine. As I have said on many occasions, the two of
you, the subcommittee should be a model for the rest of the
Senate in the way you handle it.
One, we all agree that we worry about escalating health
care costs, whether you are a legislator or a provider or you
are a consumer or anything else. I am concerned on this one
issue: Do the GPO's contracts and other practices with large
established medical and pharmaceutical supply companies keep
newer and smaller companies from bringing innovative items in?
Do the fees paid by suppliers to the GPOs who act as go-
betweens for the hospitals exceed statutory limits? Do some
GPOs have officers and employees with inappropriate connections
to large medical suppliers? Should they be funded by the
suppliers at all, rather than by the member hospitals?
So these are the issues. I will, because of our other
hearing, I will leave most of these for the record, but I do
want to compliment you, Mr. Chairman and Senator DeWine, and
thank you for holding this hearing. If I could put my whole
statement and my questions in the record.
Chairman Kohl. It will be done and we thank you for your
appearing here, Senator Leahy.
[The prepared statement of Senator Leahy follows:]
Statement of Hon. Patrick Leahy, a U.S. Senator from the State of
Arizona
Escalating health care costs are a source of concern to all of us,
as legislators and as health care consumers. The struggle to keep
health care costs as low as possible, while ensuring that the quality
of care remains high, is the Herculean task confronting our nation's
health care providers and hospital administrators. In recent years, the
development of Group Purchasing Organizations, or GPOs, has been
heralded as an effective tool to meet this pressing need. The New York
Times reported today that the General Accounting Office has just
released a study concluding that hospitals do not necessarily benefit
from participating in GPOs.
GPOs allow hospitals to aggregate their buying power in making
purchases from suppliers of medical equipment, pharmaceuticals, and the
many ordinary products necessary for the daily functions of any
hospital. By purchasing in bulk, the hospitals ostensibly would save
money, and because the GPOs handle much of the administrative burden of
dealing with the suppliers, the hospitals would then be relieved of
those tasks.
However, recent media reports and industry commentaries suggest
there are issues we need to address in the context of GPO purchasing. I
see this hearing as an opportunity for the Judiciary Committee and for
the public to learn more about how GPOs operate, how they benefit
hospitals, and whether there are any changes that could improve their
operations.
Serious questions on several topics should be answered, including:
Do the fees paid by suppliers to the GPOs who act as the
go-betweens with the hospitals exceed the statutory limits?
Do some GPOs have officers and employees with
inappropriate connections to large medical suppliers?
Should the GPOs be funded by the suppliers at all, rather
than by their member hospitals?
Do the GPOs' contracts and other practices with large,
established medical and pharmaceutical supply companies keep newer and
smaller companies from bringing innovative and high-quality products
into our nation's hospitals?
In light of the new GAO report, do GPOs actually save
hospitals money?
I look forward to exploring these questions with the panel today,
and I thank Senators Kohl and DeWine for their laudable and bipartisan
efforts to ensure that these questions--and other important antitrust
issues--are considered in this forum. I commend the chairman and the
ranking member of this subcommittee for their productive working
relationship. This level of cooperation should be the rule and not the
exception in the Senate.
Another significant effort to improve the quality and lower health
care costs is the Drug Competition Act of 2001, S. 754, which was
reported out of this Committee unanimously last October. Drafted in the
wake of several Federal Trade Commission suits against large brand name
drug makers who paid off their generic rivals to keep their lower cost
drugs off the market, that bill would require that such deals be filed
with the antitrust enforcement agencies. The FTC and the Justice
Department would then have the tools they need--tools they have asked
us for--to combat these pernicious practices which keep prescription
drug costs unnecessarily high by blocking generic entry into the
marketplace. But that bill has been awaiting Senate action for 6
months, the victim of a partisan anonymous hold. Such politically
motivated efforts only hurt consumers, and I would hope that this body
could focus on the best interests of the American people, rather than
on short-term political gain.
I thank the witnesses for coming before us today and I look forward
to hearing their testimony.
Chairman Kohl. We start with your testimony first, Mr.
Norling.
STATEMENT OF RICHARD A. NORLING, CHIEF EXECUTIVE OFFICER,
PREMIER, INC., SAN DIEGO, CALIFORNIA
Mr. Norling. Thank you, Chairman Kohl, Senator DeWine, and
Senator Leahy. I am Richard Norling, Chairman and CEO of
Premier. As a former hospital CEO who spent 28 years in not-
for-profit health care, I know that hospitals are under
enormous pressure from Medicare, Medicaid, and other payers to
deliver high quality care at the best possible price for their
patients, and hospitals need all the help they can get. Premier
provides them with a very important tool, namely group
purchasing services. I would like to talk to the subcommittee
on specifically how that works.
Premier is an alliance of some 1,600 not-for-profit
hospitals and health care systems, from major medical centers
to small rural community hospitals. To put it simply, our
mission is to do everything we can to help our not-for-profit
hospital members provide the best patient care at the best
possible price. We are a performance improvement organization.
One important part of what we do is negotiate contracts
with suppliers for our hospitals, but we are not a middleman
for hospital purchasing. In addition to our contracting
program, we offer many other valuable services to our
hospitals. For example, Premier is the most significant health
care database available in America today to help hospitals
share information and implement best clinical practices. We
estimate that we save our member hospitals over $1.5 billion
per year through all our programs.
Premier is a driving force for innovation. Premier hospital
systems, like Aurora Health Care in Wisconsin, Cleveland Clinic
in Ohio, demand immediate access to the newest and most
effective technology. We work closely with our hospitals to
identify and evaluate promising new products and processes. We
have staff dedicated to tracking key medical developments to
identify the very best products. Our technology assessment
team's primary job is to evaluate promising new technologies
with an eye towards bringing those advances into our hospitals.
Our contracts give us flexibility to add breakthrough
technologies regardless of the existence of existing contracts.
If I can, a couple of examples with regard to our record on
innovation. We regularly examine the marketplace and move
rapidly to evaluate new technologies and make available under
group contracts those that are real breakthrough advances. In
January, shortly after the cutting-edge given imaging camera
pill was launched--I have an example of that right here--our
staff recognized the potential of this pill-sized device,
which, after being swallowed by the patient, provides the most
advanced images of the small intestine available. It is a very,
very exciting technology. Within 30 days of learning that, we
had a group contract with this company, the only group
purchasing organization at this time with a contract of this
revolutionary new product.
Second point, even when a contract is already in place, we
can add breakthrough products to our portfolio. In early 1999,
well before Congress passed the Needle Stick Safety Act, which
I might note we very strongly supported, Premier reached out to
the industry for new safety products in this arena. Through our
Technology Breakthroughs Program, we added three new syringes
and four blood-drawing devices with safety features to expand
our portfolio, all but one of these from small manufacturers.
Currently, we have 96 sharps safety products categories on
contract with 772 individual products available to our members.
These are manufactured by 15 different companies.
The facts are clear. Our contracting process is open to all
suppliers and we are always interested in and actively seek out
more advanced and safer products. If this were not the case,
there is no doubt our member hospitals would go elsewhere.
Let me emphasize how we engage those hospitals. All product
selections are made with substantial clinical input by
committees of people who work at our hospitals. Once they, the
committees, make their decisions, we negotiate the contracts.
But Premier does not purchase products, hospitals do. Our group
purchasing contracts do not require our hospitals to use a
contract for all of their needs in any product category. Our
members can and do buy items to meet their unique needs and
preferences while still getting a negotiated discount for
products under group contracts.
Like all GPOs, we receive administrative fees in return for
our services. Our fees average 2.1 percent, well within Federal
guidelines. We have no fees in excess of 3 percent involving
medical products or pharmaceuticals. We do not require up-front
payments, and since 1997, 67.4 percent of all administrative
fees we receive through group purchasing have been distributed
as cash payments or credited to Premier hospitals as
incremental equity in their retained earnings.
After Premier's creation in late 1995 through a three-way
merger, we inherited from our predecessor organizations some
practices that have figured in recent criticisms of our
organization. As Premier has matured and evolved, many of those
practices have been discontinued.
In conclusion, we are very proud of our accomplishments in
pursuing excellence in health care. We are committed to
operating openly, honestly, and transparently. We intend to
cooperate with the subcommittee and the health care community
to explore every avenue to make our work even more effective.
If there is an opportunity to improve, Senators, we will take
it, and may I say that I applaud you for your proposal on the
idea of an industry-wide set of ethical practices and you have
Premier's absolute full support in trying to seek that common
ground that I think is so important. Thank you.
Chairman Kohl. We thank you, Mr. Norling.
Now from Novation, we have Mr. McKenna.
STATEMENT OF MARK MCKENNA, PRESIDENT, NOVATION, LLC, IRVING,
TEXAS
Mr. McKenna. Good afternoon, Chairman Kohl, Ranking Member
DeWine, and Senator Leahy. It is my pleasure to be with you
today representing over 2,300 health care organizations. I am
also compelled to relay this message from our members. The
value, cost savings, and other benefits they receive through
Novation are necessary and crucial to their survival and to
their ability to provide quality patient care in their
communities.
Novation was formed in 1998 by combining the group
purchasing programs of VHA and the University Health System
Consortium, two national health care alliances with members in
all 50 States. From major academic medical centers to rural 50-
bed facilities, these hospitals share a common mission of
community service, a vision of continually improving the
quality of care, and an imperative to operate more efficiently.
These hospitals rely on us and the collective strength of their
membership.
Group purchasing saves hospitals hundreds of millions of
dollars annually. By our estimate, last year alone, we saved
our members over $1 billion by aggregating their buying power
and by consequently avoiding other costs. Many hospitals,
especially those serving rural communities, could not realize
these savings on their own. Here is just one result of how
these savings can directly improve community health and why our
members value what we do.
In Menomonee Falls, Wisconsin, Community Memorial Hospital
saved $1.5 million over the last 2 years through purchases made
by Novation contracts, and they report that these savings have
helped them fund a free clinic for indigent care patients in
their community.
The benefits enjoyed by Community Memorial reflect a sound
business model. It is a cooperative model, similar to others
outside the health care sector, such as agriculture and
electronics.
Now, I would like to take a moment to briefly comment on
Novation's business practices. I am proud of our organization
and what we accomplish every day on behalf of our members. We
are member-driven and rely heavily on member input in
determining the needs, identifying and evaluating products, and
by helping individuals share ideas and best practices.
Novation provides many ways for physicians and other
clinical professionals from our member organizations to guide
us in administering an objective and open bid process,
resulting in the selection of high-quality, low-cost products.
We use over 20 member advisory councils. Our councils include
more than 450 individuals from 300 health care organizations.
These represent both large and small hospitals. Our contract
decisions are supported by a matrix evaluation that considers
safety, quality, availability, support, customer service,
education, and, of course, cost.
Some suppliers may provide a single product. Others provide
more. But each product is chosen on its own merits through this
fair, objective, and inclusive process. In fact, all our bids
are posted on our public website so they are all available to
all suppliers. This methodology results in low best bid, which
in our definition means providing our members the highest
quality products at the lowest possible costs.
I should point out that many suppliers can and do take
advantage of opportunities to provide contracts through
Novation. In fact, approximately 25 percent of our suppliers
meet the Small Business Administration's definition of a small
business. One example, Triad Disposables, a small Upper Midwest
company that makes alcohol preps, which won a bid over much
larger competitors, proves this out.
Our contracts are also flexible, allowing us to continually
seek and offer new and alternative products and the latest
technology. For example, our members told us that Possis
Medical had an innovative device to more effectively treat
blood clots, and after receiving input from members on our
advisory councils, we promptly added it to our portfolio.
Finally, our members can freely choose whether or not to
purchase through Novation contracts, and we believe that this
voluntary approach has been key to our success and greatly
enhances the satisfaction of our members. They retain the
freedom to choose the products that best meet their specific
needs.
In the time allotted, I hope I have been able to give you a
sense of how group purchasing benefits hospitals and how
Novation adheres to a strong, fair, and ethical process in
contracting. As you know, hospitals across the country are
under severe budget constraints and desperately need ways in
which to reduce their costs and serve their communities. Thank
you for this opportunity to tell our story.
[The prepared statement of Mr. McKenna follows:]
Statement of Mark McKenna, President, Novation, LLC
Chairman Kohl, Ranking Member DeWine, and distinguished members of
the Subcommittee, thank you for this opportunity to tell our story and
share with you examples of the value we believe Novation delivers to
the nation's patients and hospitals. My name is Mark McKenna. I am the
president of Novation, the supply chain management company for VHA Inc.
and University HealthSystem Consortium (UHC), two alliances comprised
of community-owned not-for-profit hospitals and academic health systems
throughout the United States.
Our focus at Novation is to help the hospital members of VHA and
UHC realize efficiencies and cost savings in their purchasing
functions. As I'm sure you know, the environment of health care has
changed dramatically in the last 10 years--through the Balanced Budget
Act of 1997, staffing shortages, advances in technology, aging
populations and managed care. Our nation's hospitals are facing these
pressures and the rising costs of supplies, as well. At the same time,
reimbursements from HMOs and Medicare continue shrinking, while many
more patients are uninsured and are unable to pay at all. Hospitals are
caught in the middle. Novation, as an extension of its owner alliances,
works to lessen this financial pressure by helping those it serves
create a more cost-efficient supply chain, while keeping quality the
top priority.
For example, Community Memorial Hospital, a VHA member and not-for-
profit health care organization in Menomonee Falls, Wisconsin, employs
almost 1,300 people and provided care to more than 60,000 patients last
year, including many indigent patients. By choosing to purchase quality
products through Novation contracts they realized tangible costs
savings of well over $700,000 in 2001, in addition to significant cost-
avoidance. These savings went directly to their bottom-line and helped
them maintain their community outreach and indigent care services to
their community, such as their free clinic. This hospital's story is
only one of many around the country.
At its very core, group purchasing benefits hospitals as well as
the entire health care system. As it currently stands, group purchasing
brings the most value to hospitals and maintains a fair market for
suppliers. All of the hospitals Novation serves are under tight budget
constraints. Thousands of free standing large, medium and small
hospitals--especially smaller facilities in rural areas--would
experience increased costs and struggle to survive if the system was
changed.
Health care group purchasing was created by groups of hospitals
that came together to gain efficiencies. History traces the concept of
group purchasing in the health care industry to as far back as the late
1800's. However, it really didn't take hold until the late 1970's, when
health care costs, specifically supply costs, were escalating at an
alarming rate. Not-for-profit and academic hospitals, hurting
financially, sought a way to aggregate purchasing strength to lower
supply costs and to better compete with the for-profit hospital chains.
By pooling their efforts, they were able to achieve more together than
they could alone.
VHA and UHC are organized as cooperatives and as such, return 100
percent of their cooperative income to members in cash and equity. In
2001, VHA returned approximately 32 percent of its revenue to members
in cash payments. UHC distributed almost 40 percent of its revenue to
members in cash payments. Members indicate that the combination of VHA
and UHC's cash and equity returns, pricing, and value beyond price for
products and services are superior to other alternatives. These
cooperative payments and the clinical services that the alliances offer
help hospitals carry out their missions.
Fees also fund other services of the alliances and are utilized in
board-approved initiatives such as information technology resources,
research, benchmarking, educational programs, and other efforts to
improve health care--things that would be too costly for hospitals to
do on their own.
We continue this vision of slowing rising health care costs,
helping hospitals fulfill their mission of healing and saving lives.
Novation serves the purchasing needs of more than 2,300 health care
organizations--the members of VHA and UHC. Our company was formed in
January 1998 when these two alliances created a new joint venture firm
that would efficiently serve the purchasing needs of both alliances.
VHA, is a nationwide network of more than 2,200 leading community-owned
health care organizations and their physicians. It comprises 26 percent
of the nation's community hospitals. UHC, representing most of the
academic medical centers in the United States, is an alliance of 87
academic medical centers and 110 associate members. In total, VHA and
UHC represent health care organizations in all 50 states.
Cooperative group purchasing, as well as Novation's overall
approach, are commonly recognized business models. Novation's
relationships with suppliers are similar to business-to-business
relationships in other industries where agents broker services such as
real estate, financial services, travel and hospitality and other
buying agents in the electronics and food industries.
Cooperatives have served this country well. They enable their
members to reap the benefits of joint endeavors while still maintaining
their independence. They allow the members to own and control the
business and to operate it for their benefit. Our cooperative structure
is similar to other cooperatives in the farming, building, hardware and
restaurant industries. Supplier-paid fees are a means by which
cooperatives operate. This is the most effective way to fund our
operations, given the financial constraints that most hospitals operate
under.
Novation receives fees from suppliers just as other cooperatives
do. The amount of the fee offered is generally based upon the value
placed on Novation's services by the supplier and usually varies based
upon the product category. Fees are paid based on a percentage of
member purchases from the agreements accessed.
Our average overall fee is 2.1 percent. Of those fees that are
above 3 percent, the vast majority are for NOVAPLUS agreements--our
private label brand owned by VHA and UHC members. These slightly higher
fees involve trademark and licensing fees. Novation, VHA and UHC are
fully accountable for the fees they collect from suppliers and
manufacturers and disclose all fee information to the member hospitals.
The Federal Government has previously reviewed the issue of
administrative fees received by group purchasing organizations from
suppliers and determined that based on the benefit of these
organizations to the nation's health care system, the fees they
generate on behalf of their memberships should be permitted. On April
17, 1985, Richard P. Kusserow, HHS Inspector General said:
``We [HHS OIG] believe the current practice of reimbursement
by vendors to group purchasing agents should be permitted . . .
The use of volume purchasing through group purchasing agents
clearly reduces the cost of purchases by hospitals. Therefore,
we would encourage use of such arrangements regardless of the
reimbursement methodology.''
Novation works as an agent on behalf of VHA and UHC hospitals,
ultimately answering to them. Whereas publicly held manufacturers
ultimately answer to stockholders for their financial performance, we
answer to hospitals for financial performance as well as by how well we
help them fulfill their missions of healing. Member satisfaction is
extremely important to Novation. Half of our yearly incentive plan for
all employees is based on member satisfaction. As stewards of the
members' finances, the other half is based on achieving operating
income goals.
With significant involvement from, and on behalf of, VHA and UHC
members, Novation works with medical supply companies to offer
contracts for products of the highest quality at the most cost-
efficient price. When comparing Novation's product portfolio to member
and prospective member hospitals' supply purchasing Novation has saved
VHA and UHC member hospitals approximately $2.1 billion since its
inception in 1998.
Dennis Barry, President and CEO of Moses Cone Health System in
Greensboro, NC and chairman-elect for the board of the American
Hospital Association, probably sums it up best:
``[They] bring significant value to us as an organization:
better pricing for consumables and equipment than we could
arrange on our own; a range of other services . . . helpful to
our organization; the ability to network with other similar
sized organizations throughout the country on a whole range of
questions or issues.''
You will hear many benefits and aspects of group purchasing and
Novation mentioned today, but the primary one to remember can be summed
up in our mission statement: In partnership with VHA and UHC, Novation
will deliver industry-leading supply chain management solutions that
assist community-based, not-for-profit and academic hospitals in
improving financial, operational and clinical performance.
Novation, and group purchasing as a whole, brings tremendous value
to health care. In this regard, my testimony will focus on five topics:
The philosophy and ethics of Novation's overall business
practices
The value created by Novation's competitive ``low best
bid'' process
The fair, open and competitive nature of Novation's
bidding process for suppliers of all sizes
The flexibility of participation in our product and
program offerings
The clinical & operational benefits beyond group
purchasing of the VHA and UHC alliances
Now, I would like to tell you about the way Novation delivers value
to member hospitals:
Novation's Overall Business Philosophy
Our overall philosophy is to deliver the greatest possible value to
hospitals, keeping both quality and cost squarely in focus. This is
accomplished in large part through our open competitive bid process and
through extensive member input.
On a more practical level, our day-to-day purpose is to offer and
manage contracts with a variety of companies that provide VHA and UHC
hospitals with the ability to access high quality products in a cost-
efficient manner. Much of what we contract for is commodity-oriented
products.
Our contracting objective is to provide members with the highest
quality products at the lowest total delivered cost. Recognizing the
diversity of the hospitals we serve, all participation in our product
agreements is purely voluntary. We seek to provide additional value to
hospitals based upon their purchasing volume, commitment and ability to
drive purchasing efficiencies across their respective systems. To that
end, considerable attention has been given to the following elements:
Involvement of VHA and UHC member representatives in the
process
Development of a structured process with ``high
integrity'' to accommodate the competitive bid requirements of public
institutions
Reliance upon the business acumen and facilitation skills
of staff to guide the process
Because of our eight-step contract process--what we believe to be
the most extensive in the industry--hospitals can have confidence that
Novation ensures consistent, high-value agreements. This process is
used across all departments and program areas of the company to achieve
a consistent, high-value outcome.
Novation's contracting process includes the following steps:
1. Identifying VHA and UHC member contract needs
2. Conducting member and market research
3. Developing and analyzing bids with councils
4. Deciding awards
5. Resolving and clarifying contract issues
6. Finalizing the award
7. Launching the agreement
8. Retaining records
To determine contracting priorities, Novation relies on member
input and member purchasing behavior. Through the direction of member
councils, made up of clinical and procurement professionals, as well as
surveys and other research, we distribute Invitations to Bid for
specific product categories. These include specific questions related
to member-determined specifications.
Additionally, we post and maintain a bid calendar of products that
are up for bid on our public web site, inviting all suppliers, large
and small, to request an invitation to bid. While many manufacturers
offer multiple product lines, they must submit separate bids for each
product category based upon the bid calendar. Novation's supplier
agreements are generally 3-year agreements with two 1-year optional
extension years, exercised at the discretion of Novation and the
hospital members. Member councils also help determine if an agreement
is sole (one supplier) or multi-sourced (multiple suppliers.)
Generally, when there is little difference in the overall award
decision criteria matrix results, a multi-source award is recommended
to give members more choice.
``Low Best Bid'' Contracting Process
Novation is proud of its innovative ``low best bid'' approach to
contracting. In fact, it is one of the first things new Novation
employees learn as they are oriented into the company. Understanding
the low best bid process is the key to understanding Novation's overall
strategy. The concept centers around the view that hospitals derive the
most value from supply agreements when other qualitative (non-
financial) factors are considered rather than just the lowest price.
The product with the best value for hospital members is not necessarily
the product with the lowest price. The low best bid takes into account
both financial and non-financial criteria. All decision criteria are
established by member councils and through research and vary from
product category to product category. For example, non-financial
requirements might include: patient and care provider safety, customer
service, product quality, clinical knowledge of company
representatives, educational offerings and cost in use. Financial
criteria can include price, fees and other value measures such as free
goods for trial, which are deducted from the cost of the product. These
criteria are entered into a matrix--what we call a Decision Criteria
Award Matrix--standardizing the way decisions are made. To calculate
the low best bid, the financial scores are divided by the non-financial
scores for each bidder. This fair and equitable process, created with
significant member involvement, ensures a mix of both high quality and
cost effectiveness.
Our contracting process is thorough and exhaustive. The average
contract decision takes 9 months, and some take as long as 1\1/2\ years
from start to finish. In addition to member-based criteria and input,
the decisions take into account such things as: interviews, field
trials and published literature, as well as the opinions of multiple
member clinicians. Imagine the time, resources and cost associated with
these activities if more than 2,000 hospitals did them individually.
The entire contracting process is member-driven. As the contracting
arm for the members of VHA and UHC, Novation works with prestigious
hospitals around the country that employ some of the most well-
respected clinical professionals. Novation seeks member input in many
ways including through surveys, councils, task forces and focus groups.
In fact, Novation sponsors 23 standing member councils and several
other ad hoc task forces, representing more than 300 hospitals, that
help shape Novation's product portfolio.
Novation keeps its member-centered focus throughout its award
selection process. Physicians, nurses, pharmacists, directors of
operating rooms, other clinicians and materials managers from around
the country are included on councils. These member councils help decide
the bid criteria before the invitations to bid are even sent to
suppliers.
It's also important to note that Novation's highly objective and
fair contracting process makes the concept of ``inherent conflicts''
practically impossible. Fees are one small part of a host of quality,
non-financial and pricing criteria, which is also set by members.
Mathematically alone, fees alone never drive decisions. Quality plays
too important a role--as it should.
Working with Suppliers of all Sizes
Novation's public competitive bid process allows all eligible
suppliers to participate in a fair manner. Novation welcomes
competition from manufacturers as it allows us to gain better value for
the members we serve. The competitive bid process and our low best bid
approach, provide a level playing field for manufacturers large and
small. Our bid calendar is continuously posted on our public web site
to ensure the bid is open to all interested parties and those
interested in receiving a bid are encouraged to request one.
Of the approximately 500 suppliers contracted with Novation, 25
percent of them are small businesses, as defined by the Small Business
Administration. A shining example of Novation working with a small
company is our relationship with Triad Disposables, a small business
based in Wisconsin. Through the contracting process, they were awarded
the contract for alcohol wipes, a low-tech but vital supply for all
hospitals. During the contract process, they won over other larger
suppliers, including one of the largest in health care, simply because
they brought the most value to the members per the decision criteria
established by the members.
Innovative technology suppliers, in addition to small suppliers,
are found throughout our portfolio of supplier contracts. One
innovator, Possis Medical, is a leader in creating a significant new
medical market for the mechanical removal of blood clots with a
procedure known as ``rheolytic thrombectomy.'' Soon after the FDA
approved this new technology, Novation placed it on contract in
September 1999, following input from members. The members involved in
the decision consisted of interventional radiologists, radiology
technologists, interventional cardiologists and cardiovascular
administrators and nurses. Additional input was obtained through market
research studies to VHA and UHC members.
It is important to note the distinction between ``new'' (something
not available anywhere else) and ``different'' (something similar that
accomplishes the same outcome) technology. Novation is committed to
providing agreements containing the latest technology to members--the
competitive bid process and provisions in our contracts ensure it.
Novation strives to be sensitive to continually evolving health
care technology, to remain relevant to those we serve. Through our
contracting process, we ensure that we contract for the technology that
is most acceptable to VHA and UHC hospitals at the time of the bid
award. Should technology change during the term of the agreement and
the current supply partner not provide the latest technology, Novation
can add other suppliers or terminate the existing agreement and put out
a bid for a new agreement if the members find the technology change so
substantive to deem the current agreement's offerings outdated. All
agreements contain termination clauses that allow Novation to terminate
the agreement with the existing supplier with 90 days written notice
when necessary.
An example of a supplier with a new technology being added to the
portfolio is Megadyne, a small company that makes an innovative
product--reusable grounding pads--used to protect patients from
electrical shock. Novation already had disposable grounding pads on
contract with 3M and Valley Lab. Megadyne's reusable pads employed a
new technology that VHA and UHC members wanted added to the portfolio.
These reusable pads are and example of ``new'' technology.
An example of technology that is simply ``different'' is in the
field of pulse oximetry. The selection of Nellcor over Masimo is a good
example of how Novation's bid process works fairly. During the
contracting process, which took almost 18 months to complete, we used
enormous amounts of clinical input from members, including the active
involvement of five separate member councils made up of more than 40
hospital professionals as well as survey results involving more than
850 member hospitals. Regarding the non-financial criteria, our process
revealed that Masimo's technology is based on ``rhythmic and
repetitive'' patient motion while Nellcor's technology is based on
``random and chaotic'' patient motion. Masimo's product was deemed to
be a different technology, but not a new technology. Our clinicians
gave us input that random and chaotic patient motion is a more
realistic measure, especially when the patients are children and
babies. Overall, in the non-financial categories, Nellcor received
higher marks from clinicians than any other competitor in every single
category. In the end, the results were overwhelmingly in favor of
Nellcor, far above all other bid participants. Ultimately, the member
councils recommended the bid award go to Nellcor.
Besides meeting member standards, suppliers with new technologies
also face additional challenges. Some truly ``new'' technologies must
wait for FDA approval.
Others are available, but must wait long periods for reimbursement
approval, making them cost-prohibitive to many health care
institutions. Finally, many companies with ``new'' technologies are not
always interested in contracts with group purchasing organizations,
believing that with no competition they can command higher pricing for
their product on their own.
Possibly even more telling regarding clinical input in decisions,
is the support of many clinicians at VHA and UHC member hospitals
following bid awards. Because participation in our contracts is
voluntary, hospitals often conduct their own clinical trials on some
contracted products, even after the rigorous review the Novation
contracting process gives to the products. By conducting their own
clinical trials, members ensure they are choosing to access the
products that best meet their needs. This not only underscores the
clinical decision of our member councils, but also underscores the
inherent freedom of choice that member hospitals enjoy in the Novation
relationship.
In addition to relying on member input to keep us updated on health
care technology changes, Novation's contracting staff--with significant
input from Novation's field-based service delivery team--is responsible
for monitoring their respective product's markets for technological
advances. These staff members typically have a high degree of
experience, training and expertise related to their area of
responsibility--often having direct experience in these areas at
provider organizations. Should a Novation staff member learn of changes
in product technology, the staff member can review the impact of the
technology changes with one of Novation's member councils.
As a member-driven organization, it is always in the members' best
interest to make sure that our agreements meet the needs of the VHA and
UHC members--clinically, financially and operationally.
Flexibility of Member Participation
Hospital participation in Novation agreements is totally voluntary.
Novation strives to offer VHA and UHC hospitals the most competitive
value on the highest quality products based upon members' purchase
patterns and ability to deliver volume, commitment and purchasing
efficiencies.
However, we also recognize that each hospital's ability to commit
varies. In response, Novation offers a portfolio of agreements and
programs in which organizations can freely choose to participate in,
without disadvantaging those that cannot.
For example, Novation offers a committed purchasing program we call
OPPORTUNITY. Novation's approach to commitment is a self-selecting
philosophy in which members are free to choose whether they wish to
participate. We believe the voluntary nature of OPPORTUNITY has helped
make it the industry's leading and most successful committed purchasing
program. In addition to offering best pricing, the program helps
organizations focus their efforts on further improving efficiencies
through standardization and utilization. OPPORTUNITY delivers cash
rewards for commitment and the potential to increase VHA's and UHC's
cooperative returns. OPPORTUNITY rewards VHA and UHC hospitals that
voluntarily meet previously agreed-upon commitments in designated
product categories. There are no Novation programs that require 100
percent participation.
Our contracts offer product coverage of about 75 percent of the
total supplies the average hospital uses. So, there is 25 percent we
don't have on contract at all--these products could represent fast-
changing technology areas, local or regional products or large capital
expenditures. Of the 75 percent product coverage we offer, VHA and UHC
hospitals typically use our contracts for about 55 percent of their
purchases. So, overall, VHA and UHC hospitals use Novation's services
to purchase about 40 percent or less of their product needs, all of
which is accessed on a voluntary basis. Hospitals choose what works
best for them.
The significant involvement of the councils and hospitals as a
whole, play an important role in the aggregated purchasing strength of
the VHA and UHC facilities. We actually see ourselves as a champion for
the small rural or community hospital that would have a difficult time
providing these services on their own. Through our aggregated approach,
small rural and community hospitals enjoy the buying strength of large
health systems. More than 700 VHA and UHC member hospitals have fewer
than 100 licensed beds. According to the March 2000 Muse & Associates
study, The Role of Group Purchasing Organization in the U.S. Health
Care System, without Novation to contract on their behalf, these small
health institutions could be spending up to 15 percent more on hospital
supplies. Additionally, of our 23 member councils and task forces,
about 30 percent of the participants are representatives from small
hospitals with 100 beds or less.
To better illustrate this, if I may quote Susan Park, Purchasing
Agent of VHA member Sarah D. Culbertson Memorial Hospital in Rushville,
IL, she says,
``We have limited resources, as a 58-bed facility, and
Novation is always willing to work with us to meet our needs.
With Novation's help, we gain the benefits of a bigger hospital
that we couldn't get on our own. Through Novation, we are not
little, but mighty.''
Clinical & Operational Benefits of the VHA and UHC Alliances
It's important to note that health care organizations affiliate
with VHA and UHC and gain access to Novation's services for a number of
benefits beyond simply supply chain management. These include:
nationwide collaboration on clinical improvement initiatives; high-
quality educational opportunities; groundbreaking research on emerging
technologies; consulting services that improve operational
efficiencies; research on consumer trends; advocacy on public policy
issues; and innovative services provided by VHA and UHC that might not
otherwise be affordable for individual organizations or available from
other sources. Alliances represent the coming together of their member
organizations in areas other than purchasing. More can be done to
improve the country's health through collaboration and scales of
efficiency.
For example, VHA recently launched the nationwide program, Women's
HeartAdvantage, as part of a national initiative to change how women
are treated for heart disease and to educate women about their own
risks for heart disease. VHA is collaborating with hospitals across the
Nation to implement the first hospital-based program to address heart
disease, which is the greatest health threat to women. To address this
largely unrecognized health crisis, VHA conducted nationwide and
market-specific benchmarking research on the attitudes and awareness
among women about heart disease. Interval results from the Yale-New
Haven Hospital demonstration program revealed that after 10 months of
the Women's HeartAdvantage program, awareness significantly increased
from 26 percent to 39 percent. In fact, already we know it's helped
save at least one life. After experiencing chest pain, a patient
mentioned to her doctor that she had read about Yale-New Haven's
participation in Women's HeartAdvantage. The symptoms she read about
reminded her of her own discomfort. She was sent to the hospital, where
doctors performed an emergency balloon angioplasty, and she's doing
fine.
Likewise, UHC helps members identify standards of excellence among
academic health centers and community providers so that members can
achieve optimal quality and productivity.
UHC's improvement and effectiveness services focus on enhancing
practice management, improving members' clinical and operational
performance, and providing the support and resources for effective
clinical decisionmaking. UHC's benchmarking projects use data-driven
processes to identify models of efficiency and best practice, share up-
to-date information, and initiate effective, long-term clinical and
operational improvements. A recent benchmarking study focused on
ischemic strokes. Participating hospitals reported current patient care
protocols for treating stroke victims. UHC compiled and reviewed the
information and produced a report that identified best practices in
patient care. The University of Utah Hospitals and Clinics was one of
the stroke project participants. Using the findings from the UHC study,
the hospital's staff formed a clinical ``brain attack team'' of
physicians, nurses and pharmacists. The team reviewed the findings and
modeled their response and treatment patterns on better performers'
practices. Since implementing their new response protocols, they have
experienced improved outcomes with many of their stroke patients.
Attention to safety is also a vital initiative. Novation's
comprehensive safety initiative promotes and enhances patient, care
provider and environmental safety. Through this initiative, Novation
increases member awareness of its safety-related contracted products;
promotes and tracks supplier-sponsored safety initiatives; obtain
member input on safety projects through councils; and incorporates
safety specifications into the contract process. Our quality assurance/
regulatory affairs team ensures the delivery of safe and effective
products by conducting manufacturing inspections and audits of supply
partners, monitoring customer complaints and enforcing all regulatory
guidelines.
During 1999 and 2000, 25 VHA and UHC member organizations
participated in the Novation Education in Anesthesia Techniques
program. This program is an anesthesia clinical simulation training
program offered by Novation's anesthesia business unit. The initiative
was presented, reviewed and supported by the Novation Anesthesia
Advisory Council which consists of clinicians such as nurses and
pharmacists. This program allows organizations to receive a free,
cutting-edge and accredited training program for anesthesiologists,
nurses and pharmacists. Nine out of ten participants felt that their
clinical staff gained enhanced clinical knowledge from the program.
Multiple clinical participants wrote to us following the program. One
letter from a physician and professor at the University of Minnesota
said the program was ``tremendously successful educationally for
medical students, residents, fellows, anesthetists and staff.''
Additionally a fourth-year medical student that attended the
program wrote to us saying:
``I attended a training session on the identification and
treatment of a tension pneumothorax. The very next morning, one
of our patients developed a tension pneumothorax in the PACU.
After the incident, when the resident began asking questions
about how to treat this condition, I was able to answer
correctly.''
Additionally, VHA and UHC, operational efficiency solutions are
offered to hospitals through [email protected], Novation's Internet
information solution containing a members-only Web site and e-commerce
services for hospitals and suppliers. Hospitals can access contract and
program information, publications and other Novation supply chain
tools. In the late 1990s, VHA and UHC members strongly indicated a need
and a desire for electronic health care procurement. VHA and UHC's
strategic investment in Neoforma to build [email protected] ensures
that members have easier access to innovative technologies and reduces
members' development costs for these services.
The health care industry is large, fragmented and surprisingly
behind in the information arena. Easily accessible information
available to all parties in the supply chain is non-existent. In 1995,
the industry-wide study, ``Efficient Healthcare Consumer Response''
stated that by addressing current inefficiencies in the supply chain,
$11 billion of additional savings could be realized by America's
hospitals. Despite the industry's best efforts to try to address these
issues, very little was accomplished. The evolution of the Internet and
the 2001 study, ``The Value of e-Commerce in the Healthcare Supply
Chain'' identified specific steps we can take to achieve potentially 2-
10 percent savings and help hospitals accelerate the technology
timeline to reach supply chain efficiencies enjoyed by other
industries. Those steps are the guiding development principles behind
the [email protected]
[email protected] is an evolution of our core competency of
aggregating purchases to reduce supply costs. The Internet makes it
possible to streamline the process, create new efficiencies and connect
existing information systems to perform productive new activities.
[email protected] will enable members to purchase virtually all
their supplies through our e-commerce services. In fact, any supplier--
both those with and without Novation agreements--can post all of their
product information on [email protected] just those products on
contract--to allow greater visibility. These services will allow
members and suppliers to automate current manual purchasing processes.
It will reduce administrative costs by aggregating purchasing
information across all health care organization sites.
[email protected] is a logical extension of what we already do for
VHA and UHC members--deliver value.
As it grows and develops, [email protected] is proving to be
successful. In just over a year since its first member hospital went
online, [email protected] has seen dramatic increases in the
transaction volume and rapid hospital and supplier adoption. Currently,
more than 700 VHA and UHC hospitals and almost 240 supply and
distribution companies have signed on to participate in
[email protected] e-commerce services. This leading supply chain
solution facilitates the efficient exchange of information with
hospitals and their suppliers for the procurement of goods and
services, resulting in streamlined processes, reductions in
administrative costs and more efficient healthcare purchasing.
Conclusion
Safety, quality patient care and good stewardship of resources are
the top priorities of the hospitals and health care professionals we
serve. Their passion, commitment, and insight are transferred to us
through their involvement in everything we do as a company. We are
dedicated to helping hospitals around the country realize significant
efficiencies and cost-savings--the underlying reason for the existence
of group purchasing organizations. In today's health care environment
of tight budgets, these savings are invaluable in allowing hospitals
the breathing room to have resources for safe and quality patient care,
providing indigent care, hiring practitioners, providing community
outreach programs and offering the best services most effective to
better the health of our nation.
On behalf of Novation, VHA, UHC, their hospitals and their
patients, I deeply appreciate the opportunity to share with you of the
value and benefits we bring to public and community-owned hospitals
around the United States.
Chairman Kohl. Before we proceed further, I would like to
ask Senator Schumer, who is on a very tight schedule, to make
his always very brief and concise statement.
[Laughter.]
OPENING STATEMENT OF HON. CHARLES E. SCHUMER,
A U.S. SENATOR FROM THE STATE OF NEW YORK
Senator Schumer. Thank you, Mr. Chairman, and I want to
thank you for squeezing me in right now and, more importantly,
for your leadership, and I thank Ranking Member DeWine, as
well.
What I want to do is just ask that my statement be added
into the record, my whole statement, to make the point, of
course, that health care costs are out of control. We have to
find solutions to this. I think it is very important that all
of us keep in mind that GPOs, in concept, are not all a bad
thing. They perform a valuable service by permitting hospitals
to buy supplies more effectively, and when hospitals can
purchase quality equipment at cheaper prices, consumers save
money.
Now, health care bills are soaring. We know that. Savings
cannot come at the cost of the quality of care. So the balance
we need to strike at this hearing today is important. We have
to not throw out the baby with the bathwater, look at the
concept of GPOs and understand why they are needed, see if how
business has been conducted works--there have been some serious
allegations that it has not--and I look forward to, Mr.
Chairman, not only to your hearing, but knowing your thoughtful
diligence and persistence at these issues, to help you come up
with whatever solutions might make things a little better.
Chairman Kohl. Thank you, Senator Schumer.
Senator Schumer. Thank you. I apologize. This committee
always has a lot of things going and we have the bankruptcy
conference, as well, but I wanted to come in here, so thank
you. I appreciate it.
Chairman Kohl. Thank you for coming.
[The prepared statement of Senator Schumer follows:]
Statement of Hon. Charles E. Schumer, a U.S. Senator from the
State of New York
Mr. Chairman, thank you for squeezing me in to make a few brief
remarks. As you know because of all the work you've done on the bill,
we're trying to work out the final details in the bankruptcy
legislation that's in conference. But I did want to take a couple of
moments out of that process to say a few words here.
It's no secret that health care costs in this country are spiraling
way out of control. An ever increasing percentage of Americans' monthly
income is going to pay absurdly high health care bills. We need to find
solutions to this problem that will only get more serious as the baby
boomers move into their later years.
One area that I've been looking at is prescription drugs. Senator
McCain and I have a bill that would make generic drugs more broadly
available and reduce patients' reliance on high-priced drugs from the
big pharmaceutical companies. Passing that bill would be a start, but
only a start.
In the past few months there's been a lot of debate about the role
of group purchasing organizations in the health care system. As you
mentioned in your statement, the New York Times ran a front page
article raising some serious questions about the practices of certain
GPOs and I'm pleased to see that they're here today to give some
answers to those questions.
As we examine the problems, it's important for all of us to keep in
mind that GPOs, in and of themselves, are not a bad thing. They perform
a valuable service by permitting hospitals to buy supplies more
affordably. When hospitals can purchase quality equipment at cheaper
prices, consumers save money.
Not to put too fine a point on it, but lower operating costs lead
to lower-cost operations.
With health care bills soaring through the roof, every dollar
counts. But savings can't come at the cost of quality care. That's the
balance we need to strike and this hearing today is important because
it will examine both the problems with and the advantages of using
GPOs.
Government shouldn't jump in with fixes to problems that industry
can clean up on its own. That's why I'm so pleased to hear that the
GPOs have committed to creating their own code of conduct which, we
trust, will resolve the concerns that have been raised about the ways
GPOs operate.
Mr. Chairman, I know that you share my view on that issue and I
believe that holding this hearing, focusing attention on these issues,
and taking a constructive approach to solving the problems you're
highlighting here is just the kind of limited government intervention
that serves our constituents well.
I look forward to reading the testimony of everyone here and to
reviewing your answers to the questions posed. I apologize for not
being able to stay to participate, but duty on the bankruptcy bill
calls.
Chairman Kohl. Now, we proceed to Ms. Trisha Barrett.
STATEMENT OF TRISHA BARRETT, BSN, ASSISTANT DIRECTOR, MATERIEL
SERVICES, VALUE ANALYSIS FACILITATOR, UNIVERSITY OF CALIFORNIA,
SAN FRANCISCO MEDICAL CENTER, SAN FRANCISCO, CALIFORNIA
Ms. Barrett. Chairman Kohl and Senator DeWine, it is a
pleasure to be with you this afternoon to share my perception
of how our hospital benefits from its association with
Novation. My name is Trisha Barrett. I am the Value Analysis
Facilitator for the University of California-San Francisco
Medical Center, a member of UHC, where my responsibilities
include the clinical coordination for product selection and
standardization.
I have been a nurse for 25 years. Previous to joining UCSF,
I served in a similar capacity at a VHA facility. I have thus
served on the Novation Nursing Council as both a VHA and a UHC
member representative. I am proud to serve an organization like
UCSF Medical Center, where our mission focuses on caring,
healing, teaching, and discovering.
UCSF Medical Center is a 500-bed academic hospital.
Annually, we perform over 20,000 surgical procedures and
provide literally tens of thousands of days of care. To meet
this demand, we maintain a product and device inventory
anywhere from 20,000 to 30,000 items. Recently, we were named
one of the top ten hospitals by U.S. News and World Report.
Beyond the daily challenges of providing care and saving
lives, America's hospitals face nursing shortages, constraints
imposed by managed care, and important patient and health care
worker safety issues. Overshadowing these challenges is
financial pressure due to ever-rising costs of pharamceuticals,
supplies, devices, and equipment. While Medicare, Medicaid, and
private payer reimbursements go down, the cost of health care
continues to rise.
Novation helps our organization remain financially viable,
allowing us to place our energies where they belong, on patient
care. We spend about $120 million each year for supplies, 50
percent of that through Novation contracts. The remaining 50
percent is spent on products that are not on contract or on
products that may compete with Novation contracts, but our
clinicians choose to use them. That is one of the good things
about Novation. Use of their services and product contracts are
voluntary. However, we do use Novation agreements whenever we
can because they bring value to UCSF Medical Center.
The Medical Center benefits from my participation in
councils and task forces because it provides a forum where I am
able to provide clinical expertise and product experience in
the formation and analysis of Novation contracts. Clinicians
like me from across the country gather and collaborate to share
our experience, reach consensus, and advise Novation in
structuring and awarding contracts that we know will best meet
the needs of our patients and our staff.
For example, I am currently working with fellow clinicians
throughout the country to establish quality criteria for the
upcoming IV catheter bid. We clinicians share our experiences
and opinions to formulate catheter quality and supplier service
criteria. For instance, many hospitals have lost on-site nurse
educators, either to national nursing shortage or to financial
constraints. Therefore, educational support will be a high
priority for the supplier we choose, that the supplier will be
able to provide 24-hour-a-day, seven-day-a-week training during
conversion from old product to new. These discussions lead to
consensus and advice that make the final bid award a good one.
It is important to note that as clinicians who actually use
medical products to treat, heal, and save lives, we place a
high priority on product quality and performance in our
discussions and our decisions. I take my role as a health care
professional very seriously, so when I was invited to
participate on the Novation Nursing Council in 1999, I welcomed
the opportunity. Being a council member is something I do above
and beyond my day-to-day responsibilities at UCSF and often
involves being away from my family. However, having the
opportunity to assist Novation in contracting for the highest
quality, most clinically acceptable products available on
behalf of our patients makes it all worthwhile. More
importantly, I can trust in other Novation contracts because I
know there are hundreds of others like myself working on other
member councils.
I have the privilege of assisting some of the best doctors
and nurses in the country at UCSF. With that privilege comes
the moral and legal responsibility to invest the hospital's
funds wisely. When selecting products, I ask my fellow
clinicians to think of these funds as they would their own
family budget.
There has been a perception that member hospitals are a
passive third party when these awards are made. Nothing could
be further from the truth. At each individual facility, the
hospital must evaluate Novation's offering, committed or not,
on its clinical and financial merits.
In closing, I would suggest that the members of the
committee proceed very carefully in considering any new laws
that could potentially place additional financial pressure on
an already fragile health care system. Without companies like
Novation, I am concerned that hospitals, and ultimately
patients, would pay more for health care. In addition, we in
hospitals would be forced to dedicate significant additional
resources to contracting, diverting those precious resources
away from care at the bedside. Thank you.
Chairman Kohl. Thank you for your statement, Ms. Barrett.
[The prepared statement of Ms. Barrett follows:]
Statement of Trisha Barrett, Value Analysis Facilitator, University of
California, San Francisco Medical Center
Chairman Kohl, Senator DeWine, and distinguished members of the
Subcommittee, it is a pleasure to be with you this afternoon to share
my perspective of how our health care organization benefits from its
association with Novation.
My name is Trisha Barrett and I am the Value Analysis Facilitator
for the University of California, San Francisco Medical Center--a
member of University HealthSystem Consortium (UHC)--where my
responsibilities include the clinical coordination for product
selection and standardization. I have been a nurse for 25 years.
Previous to joining UCSF, I served in similar capacity for Alta Bates
Summit Medical Center in Berkeley and Oakland California, a member of
VHA. I have thus served on the Novation Nursing and Clinical Practice
Council as both a VHA and UHC member representative.
I am proud to serve in an organization like UCSF Medical Center
where our mission focuses on caring, healing, teaching and discovering.
UCSF Medical Center is a 500-bed academic hospital, located in northern
California that employs 5,500 health care professionals. Annually, we
perform 20,000 surgical procedures, and provide tens of thousands of
inpatient and outpatient days of care. To meet this demand, we maintain
a product and device inventory of anywhere from 20,000 to 30,000
different items. Recently, we were named one of the top ten hospitals
in the Nation by U.S. News and World Report.
Beyond the daily challenges of providing care and saving lives,
America's healthcare organizations face shortages of nurses,
constraints imposed by managed care, patient and healthcare worker
safety issues, the aging of the baby boomer generation and more.
Overshadowing these challenges is financial pressure due to the ever-
rising costs of pharmaceuticals, supplies, devices and equipment. While
Medicare, Medicaid and private payer reimbursements go down, the cost
of health care continues to rise. Novation helps our organization
remain financially viable, allowing us to place our energies where they
belong--on patient care. We spend about $120 million each year for
supplies--50 percent of that through Novation contracts. We at UCSF
choose to access just over 50 percent of the Novation contracts
available to UHC hospitals. The remaining 50 percent is spent on
products that are not on contract, or on products that may compete with
Novation's contracts that our clinicians choose to use instead. That's
one of the good things about Novation--use of their services and
product contracts are voluntary. However, we do use Novation agreements
whenever we can because they bring value to UCSF Medical Center.
The Medical Center benefits from my participation on councils and
task forces because it provides a forum where I am able to provide
clinical expertise and experience in the formation and analysis of
Novation contracts. Clinicians like me from hospitals across the
country gather and collaborate to share our experience, reach
consensus, and advise Novation in structuring and awarding contracts
that we know will best meet the needs of our patients and staff.
For example, I am currently working with fellow clinicians
throughout the country to establish quality criteria for the IV
catheters bid. Clinical council members share our experiences and
opinions during meetings and conference calls where we discuss IV
catheter quality criteria and supplier service criteria. We recently
discussed the need for the supplier to support hospitals with education
and training. Many hospitals have lost onsite nurse educators either to
the national nursing shortage or to financial constraints. Educational
support is a high priority for the supplier we choose--that they be
able to provide training 24 hours a day 7 days a week during conversion
from old product to new. These meetings and discussions lead to
consensus and advice that makes the final bid a good one and also makes
it satisfying to participate on the councils and task forces.
It is important to note that as clinicians--who actually use
medical products to treat, heal and save lives--we place a high
priority on product quality and performance in our discussions and
decisions. I take my role as a health care professional very seriously,
so when I was invited to become a part of Novation's Nursing and
Clinical Practice Council in 1999, I welcomed the opportunity. Being a
member of a council is something I do above and beyond my current
responsibilities at UCSF and involves being away from my family
periodically. However, having the opportunity to assist Novation in
contracting for the highest quality, most clinically acceptable
products available on behalf of patients makes it all worth it. More
importantly I can trust in other contracts because I know there are
hundreds of others like myself working on the other member councils.
I have the privilege of assisting some of the best doctors, nurses
and other healthcare professionals in the country. With that privilege
comes the moral and legal responsibility to invest the organization's
funds wisely. I ask fellow clinicians to think of these funds as they
would their own family budget. When possible, we use Novation
contracts. Beyond that, we concentrate our own hospital resources at
searching and bidding for those items our care providers need that are
not on contracts or offered by suppliers who choose not to participate
in Novation bids.
In closing, I would suggest that the members of the committee
proceed very carefully in considering any new laws that could
potentially place additional financial pressure on an already fragile
health care system. Without companies like Novation, I am concerned
that health care organizations, and ultimately patients, would pay more
for health care. In addition, we would be forced to dedicate
significant additional resources toward contracting, diverting precious
resources away from the delivery of care.
Thank you.
Chairman Kohl. Now, we are going to hear from Joe Kiani,
who is a co-founder and CEO of a privately-held medical
technology company. Thank you for being here.
STATEMENT OF JOE E. KIANI, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, MASIMO CORPORATION, IRVINE, CALIFORNIA
Mr. Kiani. Thank you, Chairman Kohl and Ranking Member
DeWine. Good afternoon. We are happy to be here to testify. We
thank you.
Masimo is a typical American start-up company. Our goal was
to make a contribution to humanity by improving care and
reducing cost of care. We also wanted to become financially
independent and reward investors who invested in our dream.
Masimo actually started very humbly in our garage. I took a
loan, a second loan on my home, and since then, $90 million has
been invested in Masimo by some of the leading health care
investors in this country.
Masimo has developed the next-generation pulse oximetry.
Pulse oximetry, in case you do not know--we have lived this for
14 years--is the non-invasive monitor to measure oxygen in the
blood, and it is important, because if your blood oxygen drops
below normal, within three minutes, you can get brain damage,
and within five minutes, you can die. On neonates, there is an
additional problem. If they get too much oxygen, they can get
eye damage.
Masimo is the innovator in the industry. The problems that
were thought to be inherent limitations with pulse oximetry, we
solved. These were problems of motion artifact, like you would
see with babies moving or agitated patients in the intensive
care unit or recovery room, and maybe just as importantly, very
sick patients have very low perfusion, which means very low
blood flow.
In fact, there have been over 50 clinical studies over the
last several years by independent researchers across the
country that have proved that Masimo SET is indeed superior and
it has improved care and reduced costs. But you gentlemen do
not need to decide that here. We understand your role as policy
makers is to not favor any company, but to foster a free
market. We are not asking for special treatment. We are just
asking for you to show oversight on this and help us compete in
a free market.
We believe there needs to be reform because there is a
system here that precludes innovative devices to get to the
hands of the clinicians who are the best to know what is best
for the patients, and this is happening at the expense of not
only manufacturers like ours, but expense of clinicians,
patients, and payers.
The fact that our primary competitor, who owns more than 90
percent of the pulse oximetry market, can pay group purchasing
organizations to exclude Masimo from the market is dead wrong.
It is not good for Masimo and it is not good for the society.
The title of the hearing is, ``Hospital Group Purchasing:
Lowering Costs at the Expense of Patient Health and Medical
Improvements?'' I presume this title assumes that GPOs are
saving money. I do not understand how they can save money when
they exclude competition in most instances.
My dad used to say to me, to keep your honest neighbors
honest, lock your front door. Well, with very good intentions,
Congress left the door open in 1986 and allowed kickbacks to be
paid by suppliers to group purchasing organizations. I guess in
a polite world, those are not called kickbacks, they are called
administration fees, marketing fees, other types of fees.
GPOs, and when I mean GPOs, I am talking about the most
powerful group purchasing organizations like Novation and
Premier, are using this policy to enrich themselves and a few
companies by selling them exclusivity and market share, to
these powerful companies. Their strategy is to maximize the
group purchasing organizations' and these companies' revenues
at the expense of vendors, hospitals, patients, and payers, and
as you very well know, government is one of those payers and
pays over 40 percent of health care expenditures.
Why have we concluded this? For 4 years, we have had direct
experience dealing with Premier and Novation, who we believe
actually control over 70 percent of U.S. hospitals' purchasing.
There has been a systematic pattern of exclusion of competition
by sole-source contracting, by bundling, by questionable
tactics, which include threatening manufacturers of Masimo-type
devices, the same manufacturers that actually are current, or
some of them are still current GPO contractees, with expulsion
if they show Masimo technology to their member hospitals. We
discovered the hard way that the breakthrough process, the
breakthrough technology process, or the technology assessment
process, is a sham. I have specific examples that I will be
happy to share with you here today and I welcome your questions
on that.
Is this all sour grapes? There is an exhibit I would like
to show you. I think it is important, if you will allow us,
Chairman Kohl, to show it.
Let us look at this exhibit. Masimo has 100 percent success
rate in the free markets. In the magenta, you see the sole-
source GPOs. In the yellow, you see the free markets. Last
year, we did not lose one deal, we did not lose one opportunity
at a hospital that was in a free market. AmeriNet is actually
one GPO who has allowed Masimo in contract, and we are grateful
of that. They are acting differently. They do believe members
should have choice and voice and they do believe in bringing
value. Then also, independent hospitals, zero. I did not expect
to see the statistics, Chairman Kohl, but we lost zero.
At the same time, we lost 48 contracts, 22 at Premier, 24
at Novation, and 22 at Consorta. These are all sole-source
contractees with Tyco-Nellcor, who is the 90 percent market
share competitor of ours. As you can see, in hospital-wide
conversions, what that means, these are hospitals that chose
that every one of their patients should have access to Masimo
SET, in the free markets, over 50 percent of those hospitals
chose to have every patient there be monitored with our
technology. As you can see, the sole-source environment, in
Novation, we did have some success, 10 percent, but those
happen to be the most famous institutions, like Massachusetts
General Hospital, where they are not easily bullied by such
tactics. Thank you.
We are not just an anecdote. I know some would like you to
believe that, but Masimo's story is just one of many, just one
example. Chairman Kohl, there are numerous other companies--I
can go from A to Z, companies like Applied Medical, Biotronics,
Retractable Technologies, St. Jude Medical, and Utah Medical--
that suffer the same problems that I am talking about today.
The current system for group purchasing organizations like
Premier and Novation sell markets and exclusivity to group
selling organizations, these big companies I big call them, has
a negative impact on health care. Many companies are exploiting
the system to exclude competition. Competition and innovation
is, therefore, stifled. Prices are artificially kept high.
Patient care is being harmed. Today, it is the best pulse
oximetry, the best pacemaker, the best safety needle, but
tomorrow, it could be the best cancer treating medication that
is kept out.
We need a solution. The solution should restore free
market. I have my own. I would be happy to share with you what
my recommendations for those solutions are. But we believe
competition is not only the key to innovation and improved
health care, but as one hospital purchasing manager has put on
his walls, he put, ``Competition is the mother of lower
prices.''
So I would be happy to answer your questions and I thank
you for this opportunity.
Chairman Kohl. Thank you for your testimony today, Mr.
Kiani.
Now, we move on to Dr. Mitchell Goldstein, a physician at
the Citrus Valley Medical Center at the University of
California, Irvine Medical Center. He specializes in neonatal
medicine.
Dr. Goldstein.
STATEMENT OF MITCHELL GOLDSTEIN, M.D., NEONATOL-
OGIST, CITRUS VALLEY MEDICAL CENTER, WEST COVINA, CALIFORNIA
Dr. Goldstein. Good afternoon. Thank you for inviting me to
testify today. I am Dr. Mitchell Goldstein. I am a practicing
neonatologist and clinical researcher in southern California.
I am here because I have become concerned that products
offering improved care and potentially decreased costs are
being kept from reaching patients due to purchasing
constraints. GPOs operate in the middle ground, selectively
contracting with manufacturers and supposedly providing
discounted pricing to hospitals.
Pulse oximeters' incessant beeping and alarming were more
of a distraction than a useful clinical tool when I started
practice. During one outbreak of retinopathy prematurity, a
disease caused by too much oxygen given to premature infants,
an associate of mine went through the neonatal intensive care
unit, shutting off every oximeter in the room. The devices were
the cause of inappropriate oxygen administration. This was the
beginning of my interest in improving this technology.
Since 1994, I have conducted several studies on pulse
oximetry. I found a 90 percent reduction in false alarms in
neonatal patients using Masimo technology. Looking at the
independent studies, Masimo SET has been shown to be
overwhelmingly superior to its competition.
Masimo SET has not been placed on the GPO's availability
list. Those of us physicians who have tried to lobby for
purchase of Masimo SET in GPO-dominated hospitals have dealt
with the incessant smoke and mirrors techniques. One former
associate of mine in an area children's hospital has indicated
in a national neonatal forum that his hospital's GPO contract
prevents them from acquiring more than a certain percentage of
Masimo pulse oximeters. His hospital has also requested that he
not speak publicly about these constraints.
Several years ago, I was involved in the care of a newborn
several weeks of age. The baby came to the emergency room in
extreme condition. The skin was blue. Resuscitation was begun.
The conventional monitors gave no indication of improvement.
The pulse oximeter could not measure the infant's oxygen
saturation. No amount of effort appeared to improve the
situation. The nurses and respiratory therapists questioned the
wisdom of continuing the resuscitation. I attached a novel new
oximeter that we had only because of our research. We finally
had a number to work with.
If not for the presence of the Masimo pulse oximeter, life-
sustaining efforts would have been discontinued. At this
hospital, the same pulse oximeters that did not work are still
in use. GPO-related incentives prevented the introduction of a
better product. Another oximeter's failure nearly cost several
small premature babies' lives. In one case, this device
reported a near-perfect saturation when the baby had no oxygen
in the blood at all.
While these occurrences have been reported to the
manufacturer and subsequently to the FDA, these oximeters are
still in clinical use in this particular hospital. Why? Because
despite the manufacturer's admission that the oximeter was not
designed to work in this type of situation, a GPO-mandated
contract stipulates that this hospital cannot engage in
contracting to purchase another manufacturer's pulse oximeters.
Bunnel Incorporated produces a state-of-the-art newborn
ventilator that prevents chronic lung disease by delivering
very fast but very small ventilator breaths. An innovative
device with improved ventilation and better monitoring has been
put on the shelf because of lack of funding. The reason?
Venture capitalists will not advance the funds necessary to
continue the development of the ventilator because the
manufacturer does not have an existing relationship with any of
the GPOs. Efforts to produce a ventilator for adults have met
with similar outcome. The GPOs have not only restricted market
access, but have discouraged and prevented research and
development of newer innovative technologies.
Another ventilator company, Infrasonics Corporation, with
an innovative line of ventilators with promising clinical
results, was unable to capture sufficient market share to
remain viable due to GPO contracting.
Utah Medical Products makes special newborn central line
catheters designed to reduce complications. In some hospitals,
these catheters are smuggled in or kept under lock and key
because they are prohibited under the GPO contract. Physicians
are discouraged from officially approaching the vendor for in-
hospital competitive trials.
Who is it, after all, that decides which equipment is
covered by the GPO contracts? What criteria are used? What
happens to the research and development process? If the proper
equipment is not made available, how does the individual
patient suffer?
In my field, the answer is clear. Take away the incentive
to develop newborn-appropriate devices, pulse oximeters,
ventilators, catheters, and other equipment, develop only for
the highly profitable product lines, cater to the lowest common
denominator, and patient care will be compromised, the point
that babies go blind from being exposed to inappropriate
amounts of oxygen, flail helplessly while convulsing on
ventilators designed principally for adults, and once again,
lose their lives to the ravages of premature lung disease.
As physicians, we weigh thoroughly our choices for care and
medical therapeutics. Where medical care has become subservient
to contracting demands, our ability to practice medicine is
curtailed. Innovation deferred, health care denied. Give us the
option, the freedom of choice to select the medical equipment
that will most adequately meet our patients' needs at the best
possible price. Thank you very much.
Chairman Kohl. We thank you very much, Dr. Goldstein.
[The prepared statement of Dr. Goldstein follows:]
Statement of Mitchell Goldstein, M.D., Neonatologist, Citrus Valley
Medical Center
Patient care is dependent on the availability of equipment designed
specifically to meet patient needs. The individual needs of patient
care are often subservient to the contracting demands of institutions.
Without doubt, the need to decrease cost is a powerful drive to
achieving better access to health care. A better balance sheet allows a
hospital to more efficiently meet its needs. Group Purchasing
Organizations operate in the middle ground selectively contracting with
manufacturers and supposedly providing discounted pricing to hospitals.
However if the equipment available doesn't provide for the individual
needs of the patient, at what price is cost savings achieved?
During my training and early practice as a Neonatologist, pulse
oximeters (devices designed to measure the amount of oxygen in the
blood) had been more than a casual annoyance. The incessant beeping and
alarming of the non-functional devices were more of a distraction than
a useful clinical tool. During one outbreak of retinopathy of
prematurity (blindness caused by too much oxygen given to premature
infants) an associate of mine went through the neonatal intensive care
unit, shutting off every oximeter in the room. These devices were the
cause of inappropriate oxygen administration. Several weeks later I was
discussing our frustration with a manufacturer of newborn hospital
equipment and expressed my concern that no one in the field was working
to enhance the State of the art. He gave me contact numbers for Masimo.
This was the beginning of my interest in their technology.
Since 1994, I have been involved in clinical studies with Masimo
Signal Extraction Technology (SET) pulse oximeters. My early studies
demonstrated the practicality of a ``Novel Pulse Oximeter Technology
Resistant to Noise Artifact and Low Perfusion'' and that this
technology was . . . ``Capable of Reliable Bradycardia (low heart rate)
Monitoring in the Neonate''. Subsequently, I was able to demonstrate a
90 percent reduction in false alarms in neonatal patients using Masimo
technology. I showed that ``Conventional Pulse Oximetry Can Give
Spurious Data in a Neonatal Population at Risk for Retinopathy of
Prematurity (ROP),'' demonstrated the feasibility of reliable pulse
oximetry operation during neonatal transport, and revealed that Masimo
SET reliably tracks neonatal heart rate variability. We investigated
and concluded that ``Selective Inattention to Pulse Oximetry Alarms is
Unsafe in Infants at Risk for Apnea of Prematurity''. In studying
Nellcor alarm management technology, SatSeconds, we showed that in an
effort to limit ``nuisance'' alarms, the Nellcor N-395 misses relevant
desaturations and jeopardized the detection of the infant at risk for
sudden infant death syndrome.
Other groups have looked critically at the emerging pulse oximeter
technologies. Dr. Barker has shown significantly fewer missed true
events and false alarms using Masimo SET technology in adults. He has
demonstrated that Masimo SET is on the top of the curve relative to
performance when compared to other oximeter technologies using a model
of motion and low perfusion. Dr. Torres's group has shown the failure
rate of the Nellcor 395 to be four times that of Masimo SET. Dr.
Brouillete has shown that Masimo SET is more accurate for monitoring
breathing obstruction during sleep in children and that the Nellcor 395
is not adequate for a sleep laboratory setting. Dr. Hay has shown
decreased false alarms, missed true events, and measurement failures by
Masimo SET relative to other technologies. Dr. Sola has demonstrated a
significant decrease in retinopathy of prematurity. Overall looking at
major independent studies, Masimo SET has been shown to be
overwhelmingly superior to its competition.
Despite this plethora of evidence, Masimo SET has not been placed
on the GPO's availability list. Those of us physicians who have tried
to lobby for purchase of Masimo SET in GPO dominated hospitals have
dealt with the incessant ``smoke and mirror'' techniques. One former
associate of mine at an area Childrens Hospital has indicated in a
national neonatal forum that his hospital's GPO contract prevents them
from acquiring more than a certain percentage of the ``superior''
Masimo SET oximeters. His hospital has also requested that he not speak
publicly about these constraints. Dr. Sola's experience, as reported in
the New York Times article, caused him to question the entire buying
process. ``In country with freedom of choice, this was the hardest
thing for me to understand,'' said Dr. Sola. ``If the baby was choosing
consciously, we know what the baby would choose.''
Several years ago, I was involved in the care of a newborn several
weeks of age. The baby presented to the emergency room in extreme
condition. The skin was poorly perfused and blue. The blood pressure
was not measurable. The baby was brought to the newborn intensive care
unit immediately. Artificial ventilation was provided, central lines
were placed, and fluids and cardiac medications were given. The
conventional monitors gave no indication of improvement. I had
approached the parents about the seriousness of the situation after
working on the baby for over a half hour. The nurses and respiratory
therapists questioned the wisdom of continuing the resuscitation. The
pulse oximeter could not measure the infant's oxygen saturation. The
baby still appeared blue and poorly perfused. No amount of effort
appeared to improve the situation. Out of desperation, I attached a
novel new oximeter (which only available to me on a research protocol)
designed to work through poor perfusion. Finally, we had a number to
work with. Despite the fact that the other oximeter was attached, for
the next several hours, until the blood pressure was in the normal
range, there was no saturation readout. If not for the presence of the
Masimo pulse oximeter, life-sustaining efforts would have been
discontinued. The baby, who was subsequently diagnosed with a complex
heart defect, would have died instead of receiving a life sustaining
heart transplantation. At this hospital, the same pulse oximeters that
failed to measure this baby's vital signs are still in use despite my
years of research demonstrating the superiority of Masimo's technology.
GPO related incentives prevented the introduction of a better product.
Is this an isolated case? No, there are numerous other clinical
examples of oximetry failure. Within the past several months at yet
another hospital, I have had the displeasure to witness another
device's failure nearly costing several small premature babies' lives.
In one case, this device reported a near perfect saturation, when the
baby had no oxygen in her blood. While these occurrences have been
reported to the manufacturer and subsequently to the FDA, these
oximeters are still in clinical use in this particular hospital. Why?
Because despite the manufacturer's admission that the oximeter was not
designed to work in this type of situation, a GPO mandated contract
stipulates that this hospital cannot engage in contracting to purchase
another manufacturer's pulse oximeters.
There are additional examples. In the area of assisted ventilation,
GPO mandated contracts have restricted innovation. Bunnel Incorporated
has for many years produced a State of the art newborn ventilator that
helps prevent chronic lung disease by delivering very fast but very
small ventilator breaths. An innovative device under development that
would have produced improved ventilation with better monitoring has
been put on the shelf for lack of funding. The reason? Venture
capitalists will not advance the funds necessary to continue the
development of the ventilator because the manufacturer does not have a
relationship with any of the GPO's. Efforts to produce a ventilator for
adults have met with similar outcome. Because of predatory tactics, the
GPO's have not only restricted market access to only a select few
companies but have discouraged and prevented research and development
of newer innovative technologies.
Infrasonics Corporation manufactured one of the more popular
neonatal and pediatric ventilators. The InfantStar and InfantStar 950
were in widespread use in neonatal units across the country. These
ventilators distinguished themselves in being the ``workhorses'' of
neonatal ventilation. With the rise of GPO related contracting,
Infrasonics had decreased ability to sell to its market. Despite the
fact that the 950+ was under development and provided many new and
innovative modes of neonatal and pediatric ventilation, further sales
and development of the product line were ultimately scuttled. These new
``market pressures'' decrease the number of options available to
provide patient care.
Utah Medical Products makes special newborn central line catheters
designed to ease insertion, reduce the risk of perforating blood
vessels, and prevent complications such as catheter breakage, clotting,
or adhesion to the wall of these blood vessels. In some hospitals,
these catheters are smuggled in or kept under lock and key so that they
can be available for ``only the sickest'' patients. Physicians are
discouraged from ``officially'' approaching the vendor for in hospital
competitive trials. Hospitals are falsely led to believe that they can
rely on a consistent pricing schedule offered through the GPO's to meet
physician expectations for choice and quality. Hospital costs can
increase secondary to related complications, and again patient care
suffers.
The argument that the GPO's offer for standardization of patient
equipment across a hospital or across a hospital network is persuasive.
Put the same equipment in numerous centers across the country,
standardize the equipment in the hospital so that you decrease the cost
of training nurses and respiratory therapists, achieve the efficiencies
of being able to order in large quantities, and increase the amount of
money supposedly available for research and to ``improve patient
care''. But, there is a significant downside. Who is it after all that
decides which equipment is carried by the GPO contract? What criteria
are used? What happens to the research and development process? If the
proper equipment is not made available, how does the individual patient
suffer? In the case of my field, the answer is clear. Take away the
incentive to develop newborn appropriate devices, pulse oximeters,
ventilators, catheters, and other equipment, develop only for the
highly profitable product lines, cater to the lowest common dominator;
and patient care will be compromised to the point that babies go blind
from being exposed to inappropriate amounts of oxygen, flail helplessly
while convulsing on ventilators designed principally for adults, and
once again lose their lives to the ravages of premature lung disease.
As physicians, we learn to weigh thoroughly our choices for care
and medical therapeutics. Where medical care has become subservient to
contracting demands, our ability to practice medicine is curtailed.
Give us the option, the freedom of choice, to select the medical
equipment that will most adequately meet our patient's needs at the
best possible price.
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
Chairman Kohl. Now, we turn to Mr. Lynn Detlor. He is the
principal of GPO Concepts, Inc.
STATEMENT OF LYNN R. DETLOR, PRINCIPAL, GPO CONCEPTS, INC., SAN
DIEGO, CALIFORNIA
Mr. Detlor. Senator Kohl, thank you, Senator DeWine. My
professional career in health care began in 1972. Group
purchasing in health care at that time was in its infancy.
Hospital medical supply costs averaged 6 to 7 percent of our
annual expense budget, as compared to today in a hospital,
where the expense for medical supplies could range anywhere
between 23 to 28 percent, depending on the acuity of care
delivered. The growth in new technology has helped to expand
the growth in the supply cost arena.
The political impact of Medicare legislation in the mid-
1970s on operating expenses had a direct impact on hospital
executives targeting areas to lower expenses. Salary impact as
a potential target caused adjustments in nurse staff-patient
ratios, and supply cost reductions through materials management
was the major targets. This drove the rapid growth of State and
local group purchasing organizations.
In 1974, I was hired by the Adventist Health System to
organize and establish a collective purchasing program for 17
hospitals in the Western United States. This shortly led to the
expansion of the program to all 84 Adventist institutions in
North America.
In 1986, I was hired by American Healthcare Systems to
organize and develop a national group purchasing organization,
which ultimately grew to 40 multi-hospital systems representing
approximately 1,400 institutions. This growth and expansion was
directly related to the continued pressure to lower operating
costs. Also in response to competition from for-profit health
systems in select markets throughout North America, American
Healthcare Systems operated with approximately 60 employees and
an annual operating budget of $10 to $12 million.
Income was derived from annual dues from its members. Over
time, dues were replaced by fees charged to a select group of
manufacturers, at that time which we called corporate partners.
Fees were not taken on all contracts. Instead, management time
was spent on helping the select manufacturers reduce their
costs of selling and passing it along to the hospitals. The
elimination of dues was seen as an additional cost-cutting
strategy. Other group purchasing organizations were already
solely fee-funded from the medical manufacturing industry.
Pricing of products was implied by medical manufacturers to
be linked to the largest compliant customers. This, in turn,
led to the consolidation of the marketplace. Local and State
group purchasing organizations began to consolidate with larger
national organizations in the quest for lower prices for their
members. Today, less than a dozen group purchasing
organizations represent the majority of the nation's hospitals.
Two, Novation and Premier, represent over 60 percent of the
nation's institutions.
In 1995, American Healthcare Systems and Premier, a group
purchasing organization out of Chicago, merged, and six months
later, Sun Health merged to form what today is the new Premier.
Novation was formed by the linking of the University Hospital
Consortium and the Voluntary Hospitals of America.
The outcome of mergers has led to large organizations with
operating budgets in excess of $300 to $400 million. Diversity
to be more than just a group purchasing organization has led to
program expansions in e-commerce, data mining, business
development, physician practice management, et cetera.
Today, working as a consultant in GPO Concepts, we hear the
same question from two sides of the marketplace, the medical
manufacturers and the hospitals. The medical manufacturers are
concerned about the value they receive from the fees paid. How
much of it makes its way down to the hospitals is also a major
concern. The hospitals are questioning where and how the fees
are spent, and yet hospitals face even more pressure to
continue to lower their costs.
Probably the remaining question in today's marketplace, are
hospitals not competing for the same dollars that today go to
the GPOs? It is a question the committees and GPOs have to face
in the future. The solution rests in their management and with
the marketplace demands upon how they function and how they
behave. Thank you.
Chairman Kohl. We thank you, Mr. Detlor.
[The prepared statement of Mr. Detlor follows:]
Statement of Lynn R. Detlor, Principal, GPO Concepts, Inc.
My professional career in health care began in 1972. Group
purchasing in hospital health care was in its infancy.
Hospital medical supply costs averaged 6 to 7 percent of annual
expense budget as compared to today in a hospital where the expense for
medical supplies could range anywhere between 23 to 28 percent
depending on the acuity of care delivered. The growth in new technology
has helped to expand the growth in supply costs.
The political impact of Medicare legislation in the mid-70's on
operating expenses had a direct impact on hospital executives targeting
areas to lower expenses. Salary impact as a potential target caused
adjustments in nurse-patient staffing ratios and supply costs reduction
through material management were the major targets. This drove the
rapid growth of State and local group purchasing organizations to
emerge.
In 1974 I was hired by Adventist Health System West to organize and
establish a collective purchasing program for 17 Adventist hospitals in
the Western United States. This shortly led to the expansion of the
program to all 84 Adventists throughout North America. In 1986 I was
hired by American Healthcare Systems to organize and develop a national
group purchasing organization which ultimately grew to 40 multi-
hospital systems representing approximately 1400 hospitals. This growth
and expansion was directly related to the continued pressure to lower
operating costs. Also in response to competition from the for-profit
health systems in select markets through North America, American
Healthcare Systems operated with approximately 60 employees and annual
operating budget of 10-12 million dollars. Income was derived from
dollars. Income was derived from annual dues. Over time dues were
replaced by fees charged to select group of manufacturers called
corporate partners. Fees were not taken on all contracts. Instead,
management's time was spent on helping the selected manufacturers
reduce their costs of selling and passing it along to the hospitals.
The elimination of dues was seen as an additional cost cutting
strategy. Other group purchasing organizations were already solely fee
funded from the medical manufacture industry.
Pricing of products was implied by medical manufacturers to be
linked to the largest compliant customers. This in turn led to
consolidation of the market place. Local and State group purchasing
organizations began consolidating with larger national organizations in
the quest for lower prices for their members. Today, less than a dozen
group purchasing organizations represent the majority of the nations
hospitals. Two, Novation and Premier represent over 60 percent of the
nations hospitals.
In 1995 American Healthcare Systems and Premier (A group purchasing
organization out of Chicago) merged and 6 months later Sun Health
merged to form what today is the new Premier. Novation was formed by a
linking of the University Hospital Consortium and the Voluntary
Hospitals of America.
The outcome of the mergers has led to larger organizations with
operating budgets in excess of $300-$400 million dollars. Diversity, to
be more than just a group purchasing organization, has led to program
expansions in e-commerce and data mining, business development,
physician practice management, etc.
Today, working as a consultant at ``GPO Concepts'' we hear the same
questions from two sides of the market place, the medical manufacturers
and the hospitals.
The medical manufacturers are concerned about the value they
receive from the fees paid. How much makes its way down to the
hospitals is also a major concern. The hospitals are questioning where
and how the fees are spent and yet hospitals face even more pressure to
continue to lower costs. Are the hospitals now competing for the same
dollars that today goes to the group purchasing organizations?
Chairman Kohl. Finally, we come to Elizabeth Weatherman,
who is the Managing Director of Warburg Pincus, where she has
been a member of the health care group since 1988.
STATEMENT OF ELIZABETH A. WEATHERMAN, VICE CHAIR, MEDICAL
GROUP, NATIONAL VENTURE CAPITAL ASSOCIATION AND MANAGING
DIRECTOR, WARBURG PINCUS, LLC, NEW YORK, NEW YORK
Ms. Weatherman. Thank you, Senator Kohl, Senator DeWine.
Yes, Warburg Pincus is one of the largest venture capital firms
in the United States and, therefore, in the world, since the
United States is the most vital community for venture capital.
We have also been a leader in health care investing for over 30
years. I have been with the firm for 14 years, and for the last
13 of those have been actively investing in medical technology
companies.
I am also the Vice Chair of the medical group within the
National Venture Capital Association and am here today on
behalf of the more than 475 professional venture capital firms
dedicated to stimulating the flow of equity capital to emerging
growth and developing companies. Our members currently invest
more than $36 billion per year in such companies and have
invested nearly $210 billion in aggregate over the past 20
years, funding many of the most important technological and
medical breakthroughs of that period across the fields of
biotechnology, drug development, medical devices, and health
care services.
First, I would like to thank you, Senator Kohl, and your
committee and your staff for bringing forth and taking the
initiative to examine this very critical issue to the venture
capital medical device industry and the medical community at
large and patients and Americans at large.
During the past 30 years, the venture community has
financed over 1,300 innovative medical companies with more than
$20 billion in start-up capital, including more than $4.2
billion last year alone. These companies now have sales of tens
of billions of dollars and employ more than two million people,
and most importantly, have revolutionized medical care for
nearly all Americans.
In fact, it is fair to say that virtually every U.S.
citizen born during the last 30 years will benefit personally
and significantly from one or more of the drugs or medical
devices developed with venture capital. These include MR
imaging, ultrasound, coronary angioplasty and stints,
implantable cardiac defibrillators, spinal implants, pulse
oximetry, and drugs for cancer, heart attacks, and anemia, to
name a very few. Clearly, what these companies do is critically
important to the well-being of the American public and the
world at large.
A second point is that bringing medical innovation to
market is very hard. It entails taking enormous risks. These
include refining and perfecting the technology itself, proving
the safety and efficacy via well-conceived and executed human
clinical trials, obtaining the FDA approval to market the
technology, developing the means to assure high-quality
manufacture of the technology, and obtaining an efficient means
to sell and distribute it to the market. Like any market, it
also entails for new entrants contending with established
competitors who already have significant share with the
customer base.
Any one of these risks alone may lead to a venture-backed
company's failure, and many companies focused on medical
innovation actually do fail. Venture capitalists accept these
legitimate risks every day, while traditional financial
institutions and government-supported programs cannot. It is
the function of the venture capital community to take risks
like this.
However, it is our view that the anti-competitive practices
of the GPO community as currently configured disrupts the
already highly fragile and risky process of bringing medical
innovation to market. The new reality is that GPOs are now
financed, and therefore too controlled by, large medical
products companies rather than by the hospitals they are
intended to represent.
GPO practices such as long-term contract exclusivity,
substantial fee structures, and product bundling, if allowed to
continue, will so constrict potential markets that product
segments where these practices are widely adopted will simply
not be considered for venture capital backing. This investment
drain will result in a stagnation of product innovation and
stymie improved patient care in these product segments.
It is hard enough for a small company to overcome the power
of a large entrenched competitor even in an open and
competitive marketplace. It is nearly impossible when
monopolistic producers collude with monopsonistic buyers, such
as GPOs to suppress competition.
While the government would not tolerate such practices in
any other sector of the economy, for it to tolerate or even
encourage the situation in medicine is very disturbing, because
one of the clear effects is to impede innovation, certainly not
the government's intent. In medicine, as much if not more than
any other sector, in contrast to any other sector, reduced
innovation ultimately affects patients' lives and health, and
there is no doubt that patients' health have suffered as a
result of GPO activities. In light of this, the anti-
competitive activities of the GPOs should be viewed with even
more, not less, skepticism.
Finally, the idea that GPOs save money for hospitals by
extracting larger price discounts from manufacturers than
manufacturers could achieve themselves is unprovable and most
likely wrong, unprovable because no one knows what the real
market price would be in a truly competitive market among
producers in the absence of GPO gatekeeping. In fact, the
product areas where GPOs collude with producers who already
have virtual monopolies, the ``discounted'' price, quote-
unquote, that the GPOs claim to achieve, is almost certainly
well above what the market price would be in an open and
competitive marketplace.
In summary, the venture capital community believes there
are enormous opportunities to continue to improve the health of
the American public through the development and application of
new technology. These efforts are already very expensive and
risky. Despite this, my community is committed to further
investments in U.S. health care technology. However, the
increasing powers of GPOs and their collusive and anti-
competitive activities with larger entrenched medical companies
threatens to undermine the open and competitive markets that
have served the American public well by stimulating fair prices
and vast technological innovation. We would strongly encourage
the committee to correct these abuses and again open these
markets to fair and vigorous competition.
Chairman Kohl. We thank you, Ms. Weatherman.
[The prepared statement of Ms. Weatherman follows:]
Statement of Elizabeth A. Weatherman, Vice Chair, Medical Group,
National Venture Capital Association and Managing Director, Warburg
Pincus, LLC
Good Morning. My name is Bess Weatherman and I am Vice Chair of the
Medical Group of the National Venture Capital Association. I am here
today on behalf of the more than 475 professional venture capital and
private equity firms dedicated to stimulating the flow of equity
capital to emerging growth and developing companies. Our members
currently invest more than $36 billion per year in such companies and
have invested nearly $210 billion in aggregate over the past 20 years,
funding nearly all of the most important technological breakthroughs of
that period. A substantial number of these firms invest heavily in the
life sciences field that includes biotechnology, drug development,
medical devices and therapeutics and health care services. In 2001, the
venture capital community invested more than $4.2 billion, or more than
10 percent of all venture investing last year, in these medical
industries.
Venture investment in the life sciences has given new hope to
people who suffer maladies across virtually the entire spectrum of
diseases and afflictions. In fact, without patient investment from
venture capitalists, the biotechnology and medical technology industry,
for example, would be virtually nonexistent. Almost every biotechnology
product that has been approved for sale by the Food and Drug
Administration has been financed by the venture capital community. The
venture community also provided financing for many of the medical
devices and therapeutics we take for granted today, including the
entire interventional cardiology or stent industry. These now standard
medical treatments allow patients to lead longer and healthier lives.
The venture community's dedication to the medical technology industry
exists despite heavy government regulation and the longer-term
investing strategy required for successful development of new medical
technology, even when compared to other emerging market investments.
Few can argue that what these companies do is critically important
to the well being of the American public and the world at large.
However, the results of the debate we are holding today on reforming
group purchasing organizations to ensure a competitive and open market
for all medical industry producers will directly affect the future of
emerging life science companies and in turn impact the availability of
the important medical products these companies are developing.
Let me be clear, companies subject to, or potentially subject to,
anti-competitive practices by GPOs will not be funded by venture
capital. As a result, many of these companies and their innovations
will die, even if they offer a dramatic improvement over an existing
solution. Permitting this innovation stifling practice is unnecessary
and counter to what we believe should be a fundamental role of the
government: enhancing health by making new or improved products widely
available as quickly and efficiently as possible.
the role of venture capital in improving america's health
Venture capital plays an integral, often-unsung role in the
development of medical technology. In fact, venture capital is the
single most important source of early stage financing to new and
emerging health-focused companies. During the past 30 years, the
venture community financed 1,324 innovative medical companies with more
than $20 billion in startup capital. These companies now have sales of
tens of billions of dollars, employ more than 2 million people and most
importantly, have revolutionized medical care for nearly all Americans.
It is fair to say that virtually every U.S. citizen born during the
last thirty years has benefited or will benefit, in his or her
lifetime, personally and significantly from one or more of the drugs or
medical devices developed with U.S. venture capital. These include MR
imaging, ultrasound, angioplasty/stents, implantable defibrillators,
spinal implants, pulse oximetry and drugs for cancer, heart attacks,
and anemia, to name a very few. It is also important to note that the
real medical impact of venture investments is also significantly
greater than even these numbers would suggest, since our investments
are normally focused only on ground breaking or revolutionary
technology by the very nature of our investment selection process. Many
of these companies' names are now synonymous with progressive medical
technology including Guidant, Amgen, and Genentech.
why medical device and biotechnology companies need venture capital
Medical device and biotechnology companies need venture capital
because their capital needs are so large, their time to market so
long--due in large part to regulatory compliance--and their risks so
high. There are enormous entrepreneurial risks in bringing medical
products to market--risks that include proving product safety and
efficacy, securing patent protection, securing a good distribution
channel, facing entrenched competition, and possibly running out of
money before the product can reach a significant portion of the
market--to name just a few. Such characteristics make these young
companies ineligible for bank financing or other sources of private
capital.
It is important to note that venture capitalists will accept these
legitimate risks that traditional financial institutions and government
supported programs cannot--it's part of our function. But, VCs do not,
cannot, and will not accept unnecessary and unfair risks. We need to
provide our investors with justification that substantial capital
investment can result in successful product development and financial
gain. Thus, we have no interest in products that can be blocked from
fairly competing for a share of a market, even after a long, expensive
and risky product development cycle. Simply put, venture capitalists
will increasingly stay away from many investments in long-term, high-
risk medical breakthroughs if the government continues to allow
anticompetitive business practices to artificially limit access to
medical market.
standard business practices by group purchasing organizations affect
venture capital investment emerging medical companies, and patient care
GPO roadblocks have greatly diminished the attractiveness of
medical device and biotechnology investments because they reduce the
confidence of venture capitalists that they will have fair access to
medical markets and thereby will achieve a return on very risky
investments. To put this in perspective, between 1990 and 1994 at least
22 percent of all companies financed by venture capitalists were
medical device or biotechnology companies, with medical device
companies accounting for approximately 9 percent and biotechnology
companies accounting for 13 percent of the 22 percent. By comparison,
during the period 1999 to 2001 these companies made up only 8.9 percent
of all companies receiving venture capital financing. Of this 8.9
percent, device companies received 5.0 percent and biotechnology
companies receive 3.9 percent.
These numbers dropped dramatically from 1999--2001 when 9.8
percent, 7.1 percent and 11 percent respectively of the companies
funded were medical device or biotechnology companies. For these years,
medical device companies dropped more, making up only 5.5 percent, 3.9
percent and 6.2 percent of the combined totals.
One of the reasons for this relative decline new investment is a
lack of market access brought about by the business practices and the
increasing power of GPOs. GPO practices such as contract exclusivity,
substantial fee structures, and product bundling, if allowed to
continue, will so constrict potential markets that product segments
where these practices are widely adopted will simply not be considered
for venture capital backing. This investment drain will result in a
stagnation of product innovation and stymie improved patient care
across these product sectors.
The arguments made by GPOs about the ``administrative'' savings
they provide to members could be applied to every single sector of the
economy and are virtually identical to the arguments made by the
anticompetitive ``trusts'' of the early 1900's, which led to the
landmark Sherman Antitrust laws. The idea that the GPOs ``save'' money
for hospitals by extracting larger price discounts from producers than
they could achieve by themselves, is unprovable and most likely wrong--
unprovable because no one knows what the ``real'' market price would be
in a truly competitive market among producers (in the absence of GPO
gatekeeping). In fact, in product areas where GPOs collude with
producers who already have virtual monopolies, the ``discounted'' price
that the GPOs claim to achieve is almost certainly well above what the
market price would be in an open and competitive marketplace. The
impact of the GPOs in healthcare is equally anticompetitive and
stifling of innovation, and there is no special reason why the
healthcare system should be the only sector of the economy where such
practices are tolerated.
The venture capital industry exists, in part, because the antitrust
philosophy of the United States prevents entrenched, unmoveable
competitors from abusing their market power to unfairly restrain
competition. By their very nature, virtually every company we finance
is a ``revolutionary'' and a threat to the established order. The
technological innovations they develop, whether in computers,
electronics, software, telecommunications or medicine, are inevitably
threats to some existing larger competitor who will use all means at
its disposal to defend itself. It is hard enough to overcome that kind
of power in an open and competitive market place. It is nearly
impossible when monopolistic producers collude with monopsonistic
buyers such as GPO to suppress competition. This is precisely what is
now happening in healthcare.
As the GPOs become more powerful and add more technologically
sophisticated products to their portfolios (instead of the more
commodity-like products such as rubber gloves, syringes and cotton
swabs that they originally focused on) the adverse impact on innovation
will increase. There will be fewer and fewer areas in which venture
capital will invest. The current trend is not encouraging.
The venture capital community believes that collusion between GPOs
and providers of medical products to limit market access to competitors
is extremely anticompetitive and not justified by any peculiarities of
the medical sector. On the contrary, while the government would not
tolerate such practices in any other sector of the economy, for it to
tolerate (and even encourage) this situation in medicine is disturbing,
because one of the clear effects of these practices is to impede
innovation. In medicine, in contrast to any other sector, reduced
innovation ultimately affects patients' lives and health. There is no
doubt that patients' lives have been lost and other harm done as a
result of GPO's activities. In light of this, the special exemptions
from the normal operation of the antitrust laws granted to the GPOs
should be viewed with even greater, not less skepticism.
Conclusion
The venture capital community believes that there are enormous
opportunities to continue to improve the health of the American public
through the development and application of new technology. These
efforts are already very time consuming, expensive and risky,
particularly given recent increases and uncertainties in the U.S.
regulatory environment.
Despite this, the venture capital community is committed to further
investment in U.S. healthcare technology. We welcome open and
competitive marketplaces, and we believe that competition has served
the American public well by stimulating fair prices and vast
technological innovation. The increasing power of GPOs, and their
collusive and anticompetitive activities with larger medical companies,
threatens to undermine the open and competitive markets that have
produced such obvious benefits for the American public, not only in
healthcare, but also across the entire economy. We would strongly
encourage the committee to consider legislation to correct these abuses
and again open these markets to fair and vigorous competition.
Thank you.
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
Chairman Kohl. Before I begin my questioning, Senator
DeWine, who has to leave for another unavoidable commitment,
has asked to make a comment.
Senator DeWine. Thank you, Mr. Chairman. I do apologize to
the panel and to you for having to leave. Our voting schedule
has thrown off my schedule a little bit today, but I look
forward to hearing your comments and reading your comments, and
I will, Mr. Chairman, be submitting questions for the record
for the different panelists.
I have found, Mr. Chairman, that the testimony of Mr.
Kiani, Dr. Goldstein, and Ms. Weatherman to be extremely
troubling, and I am anxious for Mr. Norling and Mr. McKenna, to
hear their answers, because each one of us has benefitted from
technology, medical technology. There is not a person in this
room who has not, and the older we get, the more we benefit,
but we also see it in our children and our grandchildren.
So I am always alarmed if there is any possibility that any
kind of practice that this Congress is permitting, which we
have with the law that we passed a few years ago, that might
impede that kind of research, might impede people taking
changes with their money, might impede smaller start-up
businesses that have an idea from getting a fair hearing, and
more importantly to get a fair hearing, to get the opportunity
to make that sale.
So, again, I apologize to you, Mr. Chairman and the members
of the committee. I think the testimony has been very good and
I will take a look at the answers to your questions and the
rest of the hearing and I will be submitting questions for the
record. Thank you.
Chairman Kohl. We thank you very much, Senator DeWine.
Ladies and gentlemen, it is good to have you here. We think
there is some opportunity to accomplish some significant
things, not just today, but tomorrow, next week, and next
month, and this whole area of GPOs and their impact on health
care in our country.
I was interested and satisfied, very pleased to hear you,
Mr. Norling, say that you were willing and more than willing to
be part of a group that is put together to study how we can
improve, if possible, improve the practices of GPOs. I assume,
or I would like to hope, Mr. McKenna, that you would be equally
willing to be part of a group that would include not only your
two companies, but perhaps some manufacturers, device
manufacturers from hospitals, a small group, but a
representative group of this entire industry, to do what we can
collectively do to improve something that you would like to
improve yourself, if possible, is that correct?
Mr. McKenna. That is more than a fair statement, Senator.
In fact, if you looked at my chicken-scratched notes, it said
to add something at the end to acknowledge that----
Chairman Kohl. Right.
Mr. McKenna [continuing]. In the crush of the schedule, I
did not do that. But I overwhelmingly would be in favor of
principles of operation, things that would make us better. We
always have room for improvement.
Chairman Kohl. Mr. Norling.
Mr. Norling. I reiterate my comments, Senator. Anything
that is ultimately going to benefit patients, you are going to
find us thoroughly supportive of.
Chairman Kohl. So we will be able to discuss whatever the
law permits us to discuss. I think that would be significant
and I believe that that will result, and I say this not just
optimistically, but I believe that it is your intention and
your sincerity in wanting to run a business as well as you can,
as clean as you can, and as efficiently and effectively as you
can and you would be happy to discuss it. So I think that is a
good start.
Now, we would like to ask the two of you this question of
financial interest in companies, either individually or
corporately, that you do business with. I am sure you could
understand how, at least on the surface if not far deeper,
there is a concern on how, theoretically or in fact, you serve
more than one master. So in advance of asking you to desist, we
would like you to respond to our concern about financial
interests, either as individuals or corporately, in companies
with which you do business.
Mr. McKenna, would you like to speak first, and then Mr.
Norling?
Mr. McKenna. Certainly, Senator. Thank you. We have a very
specific conflict of interest policy and a code of ethics that
we have provided and put into the testimony. So we have
employees in our company that, like many companies, can own up
to 1 percent of a public company. In regard to that matter, and
what I personally own, as the only member of the senior
management team that has individual stock holdings, I own at
this point in time five stocks that would be medically
related--actually, four medically related and one other, and
the total holdings are 1,371 shares, with the highest holding
being 249 shares.
So what I would suggest in that regard, Senator, is that
with good clinicians like Ms. Barrett next to me and the over
23 advisory councils that we have, they have no knowledge of my
holdings nor would they have a need to. But they do not come
into play relative to the decisions that our clinicians and
others make relative to our contract process, which separates
both the non-financial or quality criteria from the financial
criteria.
Chairman Kohl. Wait, wait, wait. You are saying you do hold
stock in companies with which your company does business?
Mr. McKenna. Yes, sir.
Chairman Kohl. You are saying this is OK?
Mr. McKenna. We have a code of conduct, an ethics policy
for our company, and that policy allows for ownership in public
companies of up to 1 percent.
Chairman Kohl. Well, that may be your company's policy.
That is what we are discussing.
Mr. McKenna. Yes, sir.
Chairman Kohl. I would like to hope you could understand
how people like myself and others would be skeptical about such
ownership. In fact, if you want to be as clean as clean can be,
then you might consider having a policy--after all, there are
many stocks to own in this world----
Mr. McKenna. Certainly.
Chairman Kohl [continuing]. You could own a plethora of bad
stocks or good stocks.
Mr. McKenna. That is true.
Chairman Kohl. So why not just say, look, it is a bad idea.
Some people who are reputable consider it to be questionable,
so I and all of those with whom I am associated in my company
will not do business stock-wise with companies that we buy
from, or who buy from us.
Mr. McKenna. Certainly, Senator. I think it is worth a
review. We are in the process of looking at our code of
conduct. It has served us well, we believe, up to now. We do
not believe there is any conflict of interest. Even our
advisors are asked to abide by the same conflict of interest as
they make decisions for us. But I think taking a look at it
certainly would be in order.
Chairman Kohl. OK. Mr. Norling.
Mr. Norling. Senator, we also have a code of conduct/
conflict of interest policy. It speaks to individuals, and we
also have a practice with regard to corporate conflict of
interest.
As regards individuals, first of all, to clarify that
policy, in any cases where an individual is appointed by
Premier to any kind of an outside board, it is against our
policy for those individuals to financially benefit. Very
specifically, the policy suggests that any income earned
through that sort of process, be they director's options,
director's fees, or anything else, would accrue to Premier and
thus accrue to Premier's hospitals. So we are very specific on
that.
Cases have been reported in the media that suggest that
practices have occurred otherwise. That dates back to the early
history of the new Premier. There are no such cases at this
time. Those cases that were reported are under investigation by
our outside counsel. We are awaiting a comprehensive
recommendation case-by-case as to what we ought to do in the
four specifics that were noted. We have also been advised to
maintain confidentiality of the individuals involved until we
conclude our action.
So specifically in that regard, as regards holdings by
members of management in this area, our policy is clear. Some
exceptions to that have been noticed. They are historic, but
that does not mean that they are not significant. They are
being dealt with in, I think, an appropriate way that once we
learn about the conflict or the inconsistency of disclosure,
we, in turn, pursue it. So with regard to that point, I think
it is pretty clear.
Regarding investments by employees in companies that we do
business with or might do business with, our policy currently
calls for disclosure, number one, and recusal, number two. I
get a sense of where you are going here, and we are in the
process of reviewing this policy. I can tell you that I
personally, as regards employees in our company and having
shares in companies we do business with, I am in personal
support of a prohibition of that. So as we review our policies,
we, indeed, will do that.
Now, regarding board members, for example, who may have a
relationship with a company in the medical area, our policy
also calls for disclosure and recusal and I happen to believe
that is appropriate. Board members serve a defined time period.
More often than not, they come to the board with a set of
experience, et cetera, and to say that to join this board, you
must change your retirement account that might perhaps have X
shares of some medical products company does not, to me, make
sense.
We think the policy of disclosure, and we do have a
conflict of interest policy that requires full disclosure and
the policy-related recusal should any issue come to the board
regarding that, is an appropriate one, but as in all things, we
are open to improving and we are open for dialogue in that
arena.
Chairman Kohl. Great. I think that is great. All right.
Mr. Kiani, I am sure you would say, made some very strong
testimony here today. He says he has an outstanding product. He
says that he has sold that product to independent hospitals all
across this country very successfully and the product is
recognized as a legitimate, legitimate, very legitimate tool.
Now, why would you not have him on your list? I mean, the
man has tried to get on your list. He has clearly got a product
that is on the list of many hospitals. He is not able to do
business with you fellows. I would think that one of your
sensitivities in your job is to recognize, as has been pointed
out by people on this panel, how important innovation is, that
one of your proclivities should be to bend over backwards to
find ways to encourage innovation, which really means to get on
your list. If they cannot get on your list, as they have
pointed out, they are out of business.
So here is one example of a man who has got a product which
we would like you to comment on and perhaps tell us why, in
your esteemed judgment, he doesn't belong on your list. Who
wants to be first?
[Laughter.]
Mr. McKenna. In our case, Senator, Mr. Kiani's company did
participate in our process. As I mentioned, it is open and fair
and he went through the entire process along with two other
companies that went through the bid process. This process
involved an 18-month period where we utilized over 40 hospital
professionals from five of our advisory councils and also got
research returned to us from 850 of our member organizations.
Utilizing the process that our members have helped us
develop, which is called low best bid, we separate out the non-
financial criteria, very important, things to do with quality,
safety, availability, education, and service, from the cost
factors, and taking the entire submissions through that
process, our clinicians overwhelmingly endorsed the company
that we made an award to.
Now, I would point out that 30 percent of our portfolio is
offered on a dual or a multi-source basis, and so directly to
your question, in this case, we found that this technology was
different from the other technology that we selected. We did
not find it at the time to be new or innovative, and,
therefore, we looked at what value would we put on the table
relative to the decision process, and once again, the task
force that drove this decision, over 40 individuals strong,
overwhelmingly came in favor of the company that we selected.
We would, if we have not already submitted it into the
record, would be happy to give a detailed report to you,
Senator Kohl and all of the committee members, to review our
process of cost divided by quality resulting in low best bid.
Chairman Kohl. Before we ask Mr. Kiani and maybe Mr.
Goldstein to respond to you, Mr. Norling, would you like to
respond?
Mr. Norling. Yes, indeed. Thank you. First of all, I am not
a clinician, so obviously I listen to a presentation both by
Mr. Kiani and by Dr. Goldstein and it sounds very, very
compelling. I will tell you very frankly, in the role I am in,
I get the benefit of multiple inputs from multiple
manufacturers, frankly, all of whom suggest their product is
unique and differentiated and I am not one to make that
determination. My role is to see that there is a fair and
effective process, so let me speak to that.
First of all, Premier facilities are free to choose
Masimo's product. Now, I would acknowledge that we do have a
contract. It has a target commitment percentage, but there is
plenty of room for the use of Masimo's product, and if I could,
Senator, I have a couple of letters from some very key
institutions that speak directly to this and I wonder if I
might be able to quote from those letters.
Chairman Kohl. Sure. Go ahead.
Mr. Norling. Thank you very much. First of all, from St.
Vincent Catholic Medical Centers in downtown Manhattan, an
organization that really distinguished itself during the 9/11
tragedy, David Campbell is the President and CEO of that
organization. He writes in a letter to the editor of the New
York Times in response to a New York Times article, he wanted
to highlight the positive relationship he had with Premier. He
indicated that they internally estimate that they have saved 7
to 10 percent through that relationship.
He highlights, ``the flexibility within Premier's contracts
also allow us to choose those products that physicians require,
whether or not Premier has arranged a group contract. There are
instances when we have chosen to use products not on contract,
such as Masimo's pulse oximeter, to support our caregiver's
preference with no penalty from Premier. We currently,'' as Mr.
Campbell says, ``use Masimo's technology in our hospitals,
although,'' and the rest speaks to the Times and their article.
Likewise, I have a similar letter here from the Henry Ford
Health System in Detroit, a large organization serving all of
Southeast Michigan. I, frankly, could come up with additional
letters, but there is certainly the opportunity for the Masimo
product to enter Premier hospitals, and so I would take
exception to the suggestions that that is not the case. I have
two letters here and, frankly, could produce others over time.
If you are willing, sir, I would submit these for your
consideration in the record, and that is up to you, if you
would like to do so.
Chairman Kohl. All right.
So now I would like to go to Mr. Kiani. I think I am
hearing at least Mr. McKenna say that your product is not all
that good in comparison to its competitor and that it does not
belong on their list. Incidentally, Mr. McKenna, is the other
product sole source?
Mr. McKenna. In this case, it is a sole-source contract,
Senator----
Chairman Kohl. Sole source, all right.
Mr. McKenna [continuing]. It may have been as good, but
just not--we did not find it to be--clinicians did not find it
to be innovative, but just different technology.
Chairman Kohl. Then the question that I would also like to
keep on the table here is, recognizing your responsibility to
be sensitive to innovation, I still wonder why the pulse
oximeter, is that what it is?
Mr. McKenna. Yes, sir.
Chairman Kohl [continuing]. Should be a sole-source
commodity, unless you can make the case, not only with respect
to this product but many other products, that the alternative
does not belong on anybody's list.
Mr. McKenna. Not at all, Senator.
Chairman Kohl. Then why sole source? Before I get to Mr.
Kiani, why sole source?
Mr. McKenna. In this case, the differential in value is
such, offered both in pricing as well as, more importantly,
non-financial criteria, the clinicians overwhelmingly endorsed
this product and found the technologies to be different, but
not new and innovative. So when looking at then making an
award, we went through our low best bid process and the greater
value accrued to our membership by the decision that we had
made.
Mr. Kiani has a fine product, and as Mr. Norling has
stated, in our organization, our members are free to choose. We
have members that use us to a great degree. We have members
that use us very little. Of the 70 percent of the products that
we cover that members use, that means 30 percent we do not have
contracts for, we probably have in the vicinity of a little
over 50 percent, 50 to 60 percent of their business. So about
60 percent is bought off-contract to begin with and 40 percent
is bought on-contract, and then that level will vary.
If I could, I sense Ms. Barrett has some information that
could be helpful relative to----
Chairman Kohl. All right, and then we will hear from Mr.
Kiani and Mr. Goldstein.
Ms. Barrett. If I could, I would like to take Mr. McKenna
off the hot seat a little bit in that we who participate on the
panels often discuss that issue as we see a marketplace of
items. I have to again ask the committee to consider the fact
that we, as individual professionals who serve on these
councils, take that duty to look at innovation, look at the
marketplace, consider patient safety, very heavily in our
deliberations.
In many cases, we will be advising the Novation staff
whether we think what we have seen and reviewed warrants a sole
source or dual source or, in some cases, triple source. We as
individual members have to realize that when we make that
advice to Novation, we probably will be giving up on some
financial value, but those are decisions that we, as clinicians
on these panels and councils, take very seriously.
Chairman Kohl. OK. Mr. Kiani, then Dr. Goldstein and Ms.
Weatherman?
Mr. Kiani. Senator Kohl, if you do not mind, I would like
to just make a few points. Number one, we do not disagree with
Ms. Trisha Barrett that the advisory group that Novation has
put together does meet and does diligently try to come up with
the best solution, but we have reasons to believe that the
advisory groups, when the votes are taken, they are not
listened to and they are taking another way or format where
people really know what all the people on the advisory group
really want to do.
Now that I have made that point, because I do respect UCSF,
I do respect the advisory groups and the members. I have met
with a lot of them. They are very good people. It is just not
being listened to.
I would like to address both Premier and Novation, if I
may, of what has happened in those particular situations. First
of all, Premier's technology assessment team, which supposedly
does technical evaluations for Premier and the hospitals, did
come out with a report that said Masimo is a breakthrough and
should be allowed and is necessary for certain types of
patients. After completing this report, Premier stalled us for
2 years. In the meantime, Premier extended the sole-source
contract with Tyco-Nellcor to 2007 without even asking us for a
price. Now, I do not understand how they could be saving their
members----
Chairman Kohl. Let me say this again, because I want to be
sure. You are saying they came up with a conclusion that your
product does represent a breakthrough technology?
Mr. Kiani. Yes, sir.
Chairman Kohl. Yet, at the same time, they extended the
contract with their other supplier sole source?
Mr. Kiani. Yes, sir.
Chairman Kohl. To 2007?
Mr. Kiani. To 2007. This contract has been in place since
1996 and it was extended to 2007 and not once did they even ask
us, what is our competitive bid, so they could use that to
hopefully get a better price from Tyco-Nellcor. In fact, I have
a chart that is in the back of your book that I could also put
up. That price has been constant since 1996.
Chairman Kohl. You are talking about independent hospitals
where you have made a sale. How many hospitals are there? I
think you said 44 percent, but I did not get the number. Did I
miss the number of independent hospitals where your pulse
oximeter is----
Mr. Kiani. Yes. I do have the exact number. It is probably
in the area of about 60 to 70 hospitals where we were able to
make sales, and the testament that Premier and Novation
hospitals wish to have our product is that they buy our
product, but they stay below the 5 percent compliance level, or
the 5 percent exclusion level that Novation has and the 10
percent level that Premier has.
Chairman Kohl. OK.
Mr. Kiani. But if I may just take you through the Premier
process, once they renewed it, then later Premier pronounced
that because Tyco-Nellcor had purportedly a competitive
product, it would not further consider Masimo as a breakthrough
technology. Now, I do not want to take you through 50 clinical
studies. I have charts. I do not think it is your--you are not
here to decide if we are better or not. They are not capable of
deciding that. It should be clinicians that decide what is best
for the patient.
I also mentioned that they also said we can get into
hospitals. We know the Premier hospitals continue to petition
Premier for exemptions to permit them to purchase Masimo
technology. To date, all of these have been denied or not
responded to. During the same period, at least two of our
licensees who manufacture patient monitors with our technology
were threatened by Premier to not even show Masimo to Premier
hospitals. In fact, one of them refused and, maybe
coincidentally, their contract was not renewed.
Now, Senator Kohl, over 40 companies, companies like GE
Medical Systems, Dataskove, Zoehl, they did their own
evaluation. They decided Masimo SET was a breakthrough and they
made it their standard product, but they cannot sell it into
Premier and Novation hospitals because of these impediments.
I would like to just briefly tell you about the Novation
experience. Novation initially said it was not going to grant a
sole-source contract for pulse oximetry. They said they were
going to do a dual source. Masimo was told that many of
Novation's hospitals wanted our technology and had listed
accuracy, motion performance, which is what we pioneered, and
price as key to any decision. Now, not only did our product
beat Tyco-Nellcor's, respectfully, even though Mr. McKenna says
we are just different, on accuracy and motion performance by 2-
to 10-fold to 20-fold to 30-fold, depending on which study you
look at--independent studies, not ours--but we have since
learned that our bid price to Novation was 30 percent lower
than Tyco-Nellcor, who got the contract.
Now, here is a group purchasing organization that granted a
sole-source contract, so frankly, Senator Kohl, we assumed
Nellcor must have given a better price, but we gave a price
that was 30 percent lower, and I have a chart that I could show
you if you would like me to.
Chairman Kohl. All right.
Mr. Kiani. One last thing. I am sorry. You asked a very
important question. You asked, why was Masimo excluded?
Chairman Kohl. Yes.
Mr. Kiani. You asked why Masimo was excluded. We have been
told that up until the sixth week of the 18-month process, this
was going to be a dual source, and Tyco-Nellcor went in in the
11th hour and offered a kicker, more than $6 million more per
year to Novation through an extra 10 percent fee for Novation
to put their brand name on Nellcor-Tyco sensors and sell it.
So if you ask why we get excluded, it is because of the
payments that are being paid by these big suppliers who have
learned how to manipulate the system to keep their competitors
out. In fact, we actually believe they are paying between 12 to
23 percent kickbacks to Novation in order to get this
exclusion, and if you would like, I even have letters from
UCSF, I have letters from St. Francis Hospitals, and I would
just like to read maybe even UCSF's letter.
``Dear Mr. Wilson.''
Mr. Wilson is one of our clinical specialists,
``We have evaluated the new Masimo Corporation pulse oximetry
and found them superior to existing Nellcor monitors. I
strongly recommend them for the pediatric intensive care unit
as well as the operating room.''
This is by Dr. Mohan Reddy from UCSF, which Ms. Trisha
Barrett is at.
Another letter from UCSF, Dr. Scott Soifer, who is the
Professor of Pediatrics and Vice Chair of Clinical Affairs. He
writes,
``Dear Mr. Wilson, I would like to thank you''
and this is October 12, 2001.
``for the support Masimo provided during our evaluation of
pulse oximetry and inquire about when we might be receiving new
oximeters. After comparing the Masimo to the new Nellcor''
this is the device they say is as good as ours and we are just
different
``and HP on dozens of patients, I am eager to see a Masimo at
every bedside in the pediatric intensive care unit. I was
impressed with the performance of your monitor on patients that
presented challenges for the other monitors and feel that
Masimo will help improve our ability to assess and treat our
patients. Please provide me with an update on your progress
toward supplying the pediatric intensive care unit at UCSF with
Masimo monitors. If I can help the process, please tell me what
is needed to move this along.''
Ms. Barrett. May I respond to that? I did not know that was
going to be coming up today. As a result of some of the new
technology coming our way, regardless of our contract
situation, we invited both Nellcor and Masimo back into the
institution just recently, as Mr. Kiani suggests. Both the
pediatric intensivists as well as the adult intensivists as
well as all of our respiratory therapists who have a stake in
this hearing were invited to those presentations. There was
about an hour-and-45-minutes allotted. Both manufacturers were
provided the opportunity to make another presentation and come
back for questions and answers.
To that extent, that is still under consideration at our
institution at this very moment. I think it speaks to the
opportunity that we can make an individual decision. Should all
of the stakeholders, not just the two that were mentioned,
reach a consensus, we can do that, and if we choose to do that,
we will take into account whatever value we are giving up in
doing that, as well as I think one thing the committee has to
consider in looking at what we are facing every single day in
constrained costs, and that is considerable capital equipment
to balance with rewiring the whole place. We had just
instituted all new critical care units for the adult side. So
that is not an inconsequential consideration for us as we move
forward to try to standardize.
I would also like to take this opportunity to make the
point about standardization. A lot has been discussed here
about innovation, and again, I am a health care provider who
has worked in no other industry, waiting for new innovation
every year of my nursing career, and so I am excited about
innovation. I am worried about innovation and it getting to our
patients for a lot of reasons.
But I also have to consider the constant churn of new
product and technology as it faces our clinicians, because with
every new device, especially more complex devices, we face an
enormous education, patient safety, and in some cases health
care worker safety, and we have to make that balance.
You, Senator Kohl, spoke very eloquently about some balance
in decisions, and that is a balance that we are looking at
continually as we meet that innovative part of our mission and
discovery, as well as trying to standardize and make care for
our providers as quick and efficient as possible, in the safest
possible manner.
Chairman Kohl. I want to just pose this question and maybe
get some input from some of the other panelists, which hits on
what we are talking about here. Why do we have so many GPO
contracts that require hospitals to purchase the vast majority
of their supplies in a product category from the manufacturer
with the GPO contract in order to gain the GPO negotiated
discount price? Sometimes this commitment, as you know, is as
high as 90 percent. In fact, it may be in Mr. Kiani's case. Why
not give the hospital a choice?
I do not understand this sole source, unless there is so
little innovation, so few products that compare to the one you
choose. I do not understand this business of sole source unless
it is very rare, it almost never occurs, it only occurs where
there clearly is no alternative. We are very sensitive to
innovation. We bend over backwards to encourage innovation.
That is why sole source never occurs or rarely occurs.
But that is not our understanding here, that sole source is
not an extremely rare occurrence. You hear all the other people
on the panel say you have got to have, they have got to have
access to you fellows or they are out of business or they are
not even in business. Recognizing that, what is with this sole
source?
Mr. McKenna. First of all, Senator, all of these gentlemen
do have access. I just would comment, the last meeting I had
with Mr. Kiani was on an invite to come in when he did not get
the contract award. We sat down and reviewed the process. Since
that time, I have not heard from Mr. Kiani, and so I would be
always open-minded in our business practice to sit and meet
with innovative companies. Seldom, if ever, do I ever get a
call from a venture capitalist. I do not think my staff does,
either.
In regard to your direct question about sole source versus
dual source, we have many multi source, which is more than two,
and dual source arrangements where the value and the
innovation, or the combination of both, is perceived, and, in
fact, laid out by our clinicians and others that evaluate our
products to bring them the best value. But in many of our
contracts, after evaluation of the submitted bids on criteria
that the clinician set prior to the bid going out and putting a
weighting on it, in the evaluation coming back, looking at cost
factors and quality factors and dividing cost by quality and
looking at the differential that would be left, from one
decision to standardize on a sole-source product that more than
meets the clinical requirements, and going to two sources of
supply, which would leave value on the table that would not be
able to inure to people like Ms. Barrett and her organization,
we go with a sole source.
So we have a blend of both. Our members who we are here to
serve and whose bidding that we do really drive those
decisions.
Chairman Kohl. Ms. Weatherman, do you want to make a
comment?
Ms. Weatherman. Yes, I would make a couple comments. I
think it is very important, as I have highlighted here, and I
think everyone in this room would agree that medical innovation
is important. But I think it is also important that innovation
for innovation's sake is not what we should be focused on. What
we need to focus on is, is a new product or an existing product
truly serving a clinical need? Is it delivering value to the
marketplace? Maybe it is because it is cheaper. Maybe it is
because it is better, it is more accurate, it is easier to use.
I mean, there are a lot of criteria for value that hospitals
would perceive in a new or existing product.
I think it is important for the committee, and my
suggestion would be to investigate or gather the information to
try to understand what the total revenues are and the prices
that Tyco-Mallinckrodt-Nellcor charge for their sensors, how
significant is that market and how much of a share do they own,
and really look at, regardless of whether Mr. Kiani's
technology is the same or better--I think no one has said it is
worse in terms of delivering or serving a clinical need--I
think it is very important to look at the context of how big is
Nellcor-Tyco's position and what are their total fees that they
have been paying over the years to Premier and Novation. It is
a very important fact that needs to be looked at.
I would contrast that, if you also wanted to investigate
the situation with the given technology that was also
highlighted, that in that particular situation, there is no
significant incumbent that is being threatened by the entrance
of that new technology. In fact, I would even ask you to look
at what the true market potential is for that product. Where
are the clinicians out there crying out for that technology to
solve an unmet clinical need? I do not think you are going to
find nearly the outcry or the market potential that you will
see that Nellcor's sensors currently enjoy in the U.S. market.
Chairman Kohl. OK.
Mr. Detlor.
Mr. Detlor. Yes. One of the things that several parties
have said here, and it is one of the things that is a challenge
to a GPO in general, the first thing is that incumbent
clinicians in the sense of their historical experience deal
with adult products. The products in this pulse oximetry were
not, to Dr. Goldstein's conversation, were not originally
focused nor did they have the sensitivity or the capability to
deal with the neonatal. So you have got a segmented market that
has developed in the pulse oximetry issue. So the demands of
what was used in an adult marketplace, there was very little
product available that had any sense of accuracy in the
neonatal arena. Masimo's product bridges that type of issue,
the change in technology.
So if you go and survey in committees, which we used to
spend months and hours with, what you would normally get out of
a committee's feedback, unless they are focused solely on new
technology, is their historical experience with the existing
market incumbents, their satisfaction, the shortcomings, the
things they like, et cetera.
It takes an extremely expensive proposition for a start-up
company to put in a sales force that is going to equal what a
Nellcor has established over decades, so to develop the same
clinician exposure to new technology, which means somebody as a
clinician has to stop what they are doing in patient care and
spend a certain amount of time with new technology, it is a
very difficult task in today's health care environment.
So all things being equal, from a process perspective, it
does not surprise me that you wind up with these types of
scenarios. People who sit on committees donate their time, et
cetera. So many days out of a given year is all they can put
in, at best. A good portion of that is going to be the
historical experience, not the issue on future technology. They
have not seen a salesperson. The companies do not have the kind
of resources to make that type of intro and, therefore, it is
very hard to have that be a 50/50 proposition, an equal
footing, and I think you heard Dr. Goldstein kind of refer to
that.
The changes that are going to have to take place is the
fact that in the breakout, if there is a neonatal niche for
this technology, which has an undefined market--who knows the
size of it, I think that is still one of the issues in the
marketplace--then that has to be treated separately than the
issue of what we do with adult pulse oximetry. Right now, it is
lumped into one contract, and historically, the GPOs would do
that, not because they meant to do any harm to anybody, but
because of the commission input they have had historically,
based on what they have used over years in the past. It has a
tendency to favor the incumbent manufacturers.
It is a process adjustment that has to take place. It is an
issue that if we are going to look at more and more future
technology, everyone has to guard against, the management team
that chairs those committees of clinicians, et cetera, has to
constantly challenge them not to take the shortcut, not to talk
about what they have historically done, but take a look at what
is new and current on the marketplace. It is not the clinicians
are not willing, but they are also competing for their own day-
to-day jobs and time and what they can give to the GPO.
So, hopefully, out of this process, maybe both GPOs, and I
have heard the comments and the commitments, which is
understandable, you know, you have to go back and reengineer
your processes to make sure these things do not happen in the
future as you move forward.
Chairman Kohl. All right. Dr. Goldstein, do you want to
make a comment?
Dr. Goldstein. Thank you. I certain can appreciate cost and
cost savings incentives and I understand what GPOs are all
about and I can appreciate efforts involved to save money, but
I would really at this point like to let some of the clinical
studies talk. If you would not mind, I would like to bring out
some of the placards that we have prepared.
This first one shows a study that was done in an NICU
looking at false alarms, missed true events, that is where the
saturation, the amount of oxygen in the blood went down and the
oximeter did not appreciate it, and measurement failures of the
oximeter. As I mentioned, this took place in a neonatal
intensive care unit, which is certainly my focus population.
But you can see clearly the demonstrable improvement that
Masimo SET has relative to its competition in these particular
areas.
The next example I would like to bring up specifically
looks at one institution's experience with the Masimo SET
oximeter with respect to retinopathy of prematurity, and in
this, Dr. Sola, in a letter to Masimo, detailed his experiences
with and without Masimo technology, looking at eye damage, that
is, retinopathy of prematurity, as I alluded to in my
statement, in this target presentation. As you can see, in the
group that received pulse oximetry through Masimo SET, there
was no evidence of retinopathy of prematurity, and this is a
very significant finding.
The next study I would like to refer to is one--the Barker
study. This is a study that I performed, as well, in my
institution, again looking at Masimo SET, specifically with
respect to heart rate variability and heart rate changes. In
this, we found that at no point, more than 1 percent of the
time, Masimo had problems with respect to heart rate
variability tracking. Now, granted, this is in a target
population, neonates, where you have a great deal of heart rate
variability and, in general, in adults, you do not see as much.
But again, it points out my focus, that the target population
here is being ignored.
Looking at the objective studies that have been done
heretofore, notwithstanding studies that have been supported
outright by grants from either Nellcor or Masimo,
overwhelmingly, Masimo SET is superior to its competition.
To that, I would like to kind of ask, I mean, in terms of
talking to people who make these decisions to the GPOs, which
of you have been in an NICU for more than an hour within the
past 5 years?
Ms. Barrett. I have.
Dr. Goldstein. You have?
Ms. Barrett. Yes.
Dr. Goldstein. Have either of you been in the NICU for more
than an hour within the past 5 years?
Mr. McKenna. The clinicians that make our decisions
certainly have.
Dr. Goldstein. Personally, I am asking if you have been in
the NICU for more than an hour in the past 5 years.
Mr. McKenna. No, I have not.
Dr. Goldstein. You at the end, as well?
Mr. Norling. I have not.
Dr. Goldstein. OK. This is an important question, because
in the interest of looking at cost and cost containment, we
have to ask the question, what is the cost of a dead baby? What
is the cost of a baby who has gone blind from retinopathy of
prematurity? How do you explain this? What do you say to the
parents in defense of this action? After all, we do have these
overwhelming studies.
Ms. Barrett. Could I take the opportunity here to make an
observation and ask a question to capitalize on your expertise
in the field. One is that the studies that I just now saw
before us were published, I think, in the peer reviewed
literature either late 2001 or one said 2002. So what we are
aiming to do on many of the councils that I am involved with is
look at evidence-based decision making, and in that, our best
way of doing that is looking to the peer-reviewed literature
database, which admittedly it takes a long time for the studies
to work their way through, peer-reviewed studies, but we do try
to have that guide us wherever that is possible and where we
can.
If I am not mistaken, the studies that are presented here
may not have been available in a peer-reviewed manner at the
time that this particular decision was made. I was not on that
council.
The other question that I have has to do with the fact that
we were trying to relook at--many of your studies talk about a
neonatal patient population. We also, in reconsidering this
technology, wanted to see, was it applicable in adult
population for the reasons that I am sure you are aware of. In
hospitals, we do our best to standardize out of patient safety,
because we have a cross-training that goes on for many of our
physicians as well as our therapists, and having one
standardized system they can use can become a patient safety
issue.
So my question is, to what extent do you think this
technology is applicable to the adult ICUs, where it was also
recently reconsidered by our adult therapists in that regard?
Dr. Goldstein. With respect to the adult ICUs?
Ms. Barrett. Yes.
Dr. Goldstein. Again, I am a neonatologist and I do not
profess to practice adult medicine. I am addressing a segment
of the population that is often ignored and often not, I guess
you could say, recognized in terms of the significance that
newer technologies bring to care of these individual patients.
Mr. Kiani. Senator Kohl, if I could say something, although
as the CEO of Masimo and the person who founded it, I am
enjoying all this conversation about Masimo pulse oximetry, how
it is better, this is not what this meeting is about, of
course.
We have a systematic problem where large companies like
Tyco-Nellcor have figured out how to use the, excuse the
expression, almighty dollar to get large GPOs like Premier and
Novation to exclude their competition. That is the problem, and
we are just one example. There are adult examples right in the
back of your hospitals you guys usually go to, unfortunately,
where patients are being saved because of our technology and
other stuff did not work, but that is not what it is about.
I hope that there can be changes by the two groups sitting
down and solving it, but I have to say that this is going to
cause delay and delay means harm to patients and there needs to
be something quick. It is not just about Masimo and this
situation.
Chairman Kohl. As you know, what we have concluded here
this afternoon is that we are going to have an immediate forum
composed of these two companies plus people like yourselves and
we are going to get together on opening up this system, if we
can, on eliminating all conflicts of interest, if we can, on
trying to eliminate, if it is true, as you are suggesting,
companies buying market share. They deny it, but if it is
there, they are prepared to work on that problem, and getting
this done in three months and reporting back in a public manner
as to what we accomplish.
So this, I hope, is not a hearing which, as so often on
Capitol Hill hearings, there are hearings and then they vanish
into history. I am very hopeful that this hearing will result
in something that is a new and improved GPO system, and I do
not find the principals who are here today, the two major
principals in the industry, unwilling to engage in that process
to see what improvements can be made.
Mr. Norling. Senator, can I speak to the question you
asked, as I believe it has not been answered yet. You were
speaking about sole-source contracts, and I do have some data
for you that might be useful.
Chairman Kohl. All right.
Mr. Norling. I would also like to, if I could, speak to a
few of the other points that have been raised. Specifically, I
think I mentioned earlier that Premier has contracts with about
450 different manufacturers and a total of 750 contracts. Of
them, 377 are what you would call clinical. They essentially
relate to products where there are a clinical use and, in
effect, where physicians may have various degrees of
preference.
I think the issues we are talking about here are
specifically in areas of high physician preference, where you
do not have a commodity, in effect, you have got something
where there are some of the agreements that, frankly, have
surfaced here. So I think it is important to get at this issue,
and I think Mr. Detlor, in some ways, was trying to get at that
also, this issue of high clinical preference and what is to be
done.
Premier's data is as follows. Of 377 clinical contracts, we
have 20 sole-source contracts. I can tell you that as we have
looked at this process and as we have come to think about it
more fully, and frankly, as the terms of some of our longer-
term contracts have now reached the expiration dates, our
conclusion is that in some of these areas, the idea of sole-
source contracts in high clinical preference areas do not make
a lot of sense.
So in terms of a practice going forward from Premier, I
expect what you will see in these areas is as existing in-force
contracts reach their expiration date, and prior to that, as we
begin to renegotiate them, and even prior to that, as
successful applications of our breakthrough technology clause
are pursued, what you are going to see is a movement away from
any sole source in high clinical preference to dual source or,
in some cases, not even a commitment target of any kind but a
preferred contract. So that is a leaning in a direction that I
think makes sense and is a good solid learning here.
I would make a couple of points, and just for factual
accuracy, Premier's Nellcor contract expires in December of
2004. I do not believe that is 7 years from now, nor was it 7
years from the time that was quoted.
Premier's administrative fee with regard to this is 3
percent, no more. Very frankly, since there is some inference
of decision making based on fees, we get greater administrative
fees, because I do not believe the Nellcor 3 percent fee would
change, if we contracted with Masimo, and if product flowed
through that contract, we would actually get more
administrative fees than we do now, and that is just a true
economic fact of how this all works.
Specific to the comment of being threatened by Premier
members, I, frankly, have no knowledge of that. I have had no
reports of that. If that were possibly true, I would agree that
it was totally inappropriate. I seriously question whether it
is true, but I will tell you that if, indeed, there is any
inference of that, it would be totally inappropriate.
I would also like to deal with this issue of the inference
that Premier delayed the process for 2 years, and if I can, I
would like to share with you a time line as I understand it. I
have told you again, and I would acknowledge, Senator, that I
have not been in a neonatal intensive care unit since I left
active practicing as a hospital administrator about four-and-a-
half years ago, but I used to spend quite a bit of time prior
to that.
The time line, as I understand it, is this. In 1999, Masimo
approached Premier and our technology assessment group with
regard to the technology that they had in place. As it has been
explained to me, and again, this is secondary, but again, I
think it is accurate, is that what they had then was an
algorithm, a calculation, if you will, and the related
software. They did not have a stand-alone product at that time.
Our technology assessment group said that this was an exciting
looking technology and actually encouraged them to work with
other manufacturers who have stand-alone products and encourage
them to make that technology available to them, and it sounds
like Masimo has been very successful in doing that, not with
Nellcor, but certainly with others. As regards the time frame,
that was the interaction with our technology assessment group.
In January 2000, Premier received and was made aware of the
Nellcor 395 pulse oximeter and contracted in January 2000 for
that item. As I said, the contract goes with a term through
2004.
In March 2000, Nellcor approached Premier, indicating that
they would--excuse me, Masimo approached Premier, indicating
that they did have a product, a stand-alone product that they
intended to bring to the market and data from Masimo suggests
that product was first commercially available in August 2000.
So in March 2000, we began the technology breakthrough process
and the initial panel review suggested that this was worth
further look, which is obviously you have to sort through all
these requests to get to the absolute answer.
We did bring together a panel, and at that time, based on
the data that was available to our group and based on the
comparison to the existing contract, namely the Nellcor 395,
Premier made the distinction that this was not a significant
breakthrough. Now, that does not mean that this is not a great
product. I am sure it is. It does not mean that it is not
particularly relevant in neonatology. Certainly, an expert here
has suggested that it is.
Our belief is that our contract leaves room for its use in
that setting, and our other belief is, very frankly, that if,
indeed, these additional studies suggest this kind of power as
regards this particular product, particularly in neonatology,
although I, indeed, want to explore its relevance elsewhere,
that I would invite a resubmissions under the breakthrough
technology program with that data, and I would tell Mr. Kiani
that I personally will pay attention to this and make sure that
process is expedited, because if, indeed, there is that kind of
differential, there is no reason on earth that we would not
want to have that kind of a product available for patients.
Chairman Kohl. OK. We are going to wrap this up in a couple
of minutes. I would like to just touch on two other areas.
Is it true that some hospitals can go outside the GPO and
get a better price on a particular commodity?
Mr. Norling. That is a fairly complex question. The answer
is, often, that is true. The question is whether they can do it
consistently and sustained and create value.
Chairman Kohl. So you have suppliers who will give a
hospital of some size a better deal than they are giving you?
Mr. Norling. In general, it would not be suppliers who work
with us. It would be a situation where we would have a contract
in place and a supplier who did not participate in that
contract would come in and suggest that they would undercut the
contract price.
Chairman Kohl. So it----
Mr. Norling. That, frankly, is the marketplace at work in a
very productive way.
Chairman Kohl. It is not the same product? It is not the
same commodity?
Mr. Norling. It may be the same product, essentially, but
it may be different manufacturers. Now, in some cases, you may
get the same manufacturer doing some of that. It is pretty
infrequent in our experience. But, in general, and specific to
the GAO report, there are a number of other reports that I
believe were much more thorough and comprehensive in what they
cover, such as the recent Lewin study that was submitted as
part of the Health Industry Purchasing Group Association
submission, studies out of Arizona State University, a study by
Mr. Muse that suggests pretty significant benefits from GPO
contracting, to the tune of 10 percent.
Senator, just to give you one good example of--again, I
have been trying to stick to factual data here--we have a
process we call portfolio analysis. We have a team of supply
chain folks who go out into the hospitals and collaboratively
with them ask them for a computer dump of everything they have
bought for a year. Now, we do about 200 of these assessments
every single year and we get a sense of, here is everything
that ultimately was purchased. We go through them and
particularly highlight purchases for items in areas where we
have a contract but that were not purchased through our
contracts. We look at those not to penalize but to suggest what
the benefit might have been for using our contracts.
When we itemize these routinely, and it is a very
significant amount of money, we have found consistently over 2
years in more than 200 hospitals that they are leaving 9.5
percent on the table by using contracts, or by buying product
outside of our contracts in areas where a comparable product is
under contract. That tells me that the marketplace, in general
out there, is certainly not as competitive as the group
purchasing prices that we have in place, and it is a very large
number of hospitals and it is a very large number of dollars.
Chairman Kohl. You are estimating to the tune of maybe nine
to ten percent?
Mr. Norling. Yes, I am.
Chairman Kohl. Again, I want to ask this question. Is it
possible that some hospitals go outside of the GPO and buy the
same product with the same label for less?
Mr. Norling. My answer is sometimes.
Chairman Kohl. So that can happen and probably does? How
can it happen?
Ms. Barrett. I could shed some light on that. You are
speaking about price. What we are looking for is a contract
that offers us not just price, but some other value and quality
criteria. So it is quite possible that a vendor may come in and
give us a very low price, and yet when we ask, will they
provide some educational support, will they provide some
conversion support, then the price alone is not the only
feature. So it is, indeed, possible for them to undercut us on
item-by-item pricing, but indeed, we as the individual
department materiel services managers have to look at the whole
package that they might be offering, where price alone may not
be the only thing that we need to look at.
Chairman Kohl. Well, I want it to be just raw in my
question. I am going to take Johnson and Johnson band-aids,
which I do not know if it is on your list, but maybe it is.
Mr. Norling. Probably.
Chairman Kohl. Is it possible for a hospital to get a
better price on that item than is on your list?
Mr. McKenna. I think it is possible. In our industry, there
is a practice that we would call cherry-picking, maybe it is
used in other industries, where, for the work that we do, and I
think our numbers would be consistent with what Mr. Norling has
pointed out for what is being left on the table, but if a
member of one of our organizations chooses to leverage what we
have already done and apply pressure on a supplier, there may
be a supplier that will buckle and provide a better deal.
But in the majority of instances, it is usually one of our
members that perhaps would leverage our contract price and go
with a company that did not get the contract award, which I
think proves the point relative to it is an open system and the
hospitals will make the decisions on their own.
Chairman Kohl. OK, last question. In the past, we have been
informed that GPOs return about 80 percent of their
administrative fees to their member hospitals, keeping the
remaining 20 percent to cover their expenses. Data that Premier
has provided to our subcommittee shows that for Premier's most
recent fiscal year, Premier retained 63 percent of the
administrative fee, instead of what we had understood to be
about 20. It retained about 63 percent of the fee it collected
from medical equipment suppliers, which was over $213 million.
So we understand that GPOs--we assume, we are presuming
GPOs are supposed to be merely nonprofit buying agents for
hospitals and that they are supposed to return to their member
hospitals the fees paid by suppliers less expenses. So where
did all that money go, Mr. Norling?
Mr. Norling. Thank you for your question, Senator. I think
that I will do my best to simplify this, because this has been
sort of an ongoing dialogue, both with your staff and with the
media.
There are two sets of points that have been made. First of
all, Premier is not just a GPO. We are an enterprise that is
about a $500 million a year enterprise. About $300 million of
that relates to GPO administrative fees. We are also in the
business of comparative clinical data, which charges fees. We
have a business of well over $100 million that repairs and
maintains clinical equipment. We also have a business that
helps underwrite excess layer professional liability,
professional and general liability. So we have a series of
other businesses that comprise Premier, the enterprise. That is
the organization that I run.
The piece of it called Premier Group Purchasing Services is
actually run by this gentleman here, Howard Sanders, who is
Senior Vice President of Premier for Group Purchasing. So to
the degree that I may not have had all the exact clinical data,
that is, in part, because I am running the larger aggregate
enterprise.
The numbers are as follows. We have returned, historically
since Premier began, 80 percent of the net income of Premier
back to our hospital owners. So 80 percent of the net income
generated across all of those businesses cumulatively since
Premier started has gone back to those hospitals.
Now, if you will take the administrative fee portion of our
revenues, which last year were about $300 million, and if you
look at a combination of the dollars that we send back to all
of our members, the dollars that go back to our hospitals and
our affiliates and the incremental value of the equity, just
the incremental value, not the in-place value, but the
incremental value earned per year, we have returned last year
67.4 percent of the administrative fee dollar back to our
members.
So it is two different numbers. One is the percentage of
net revenue in the aggregate and the other is a percentage of
administrative fee revenue, which is a subset. I would be more
than happy to document this clearly, to show you in our
submissions to the committee exactly where those numbers come
from, and those are, indeed, the numbers.
Chairman Kohl. OK. Mr. McKenna?
Mr. McKenna. Ours is a bit complex, but I will try to
simplify it, Senator Kohl. We are owned by both VHA and UHC.
After our expenses, everything that we have left goes to those
organizations based on the way their members purchase, since
they are set up as cooperatives. They, like as Mr. Norling has
outlined, invest in other programs. There are benchmarking
programs, clinical programs to assist local communities to
reduce the risk of heart damage or stroke damage, and other
services. After investing in those programs, which are board
approved, they return--I am pretty sure this number is accurate
for both alliances--100 percent of their net income.
If you were to translate that into, going back to the GPO,
I believe the numbers are, respectively, 32 cents and 40 cents
on the dollar for both VHA and UHC, respectively.
Chairman Kohl. OK. What I hope we have accomplished today
is that we have seen on the part of the head of the two major
GPOs a desire for a fairly extensive transparency with respect
to your companies and how they function, a willingness to
accept suggestions and comments from interested and sincere
people who are here only to effect an improvement in the
delivery of product and price and quality, and that we will get
to work immediately on putting together this group of
individuals, along with you all, who will work on achieving
this end and expect to have a report with, hopefully, some
positive results, inside of three months.
If we can move forward on that, then I think we have
achieved a lot and you will have demonstrated a sincere
interest and willingness to work in the public interest, which
is what this hearing was all about.
So we thank you all for being here. You have made a real
contribution.
Before adjourning, I would like to insert in the record a
number of documents. First, I would include statements from
Senator Orrin Hatch and Senator Strom Thurmond.
[The prepared statement of Senator Hatch follows:]
Statement of Hon. Orrin Hatch, a U.S. Senator from the State of Utah
Thank you, Mr. Chairman. I commend you and Senator DeWine for
holding this hearing, as well as for your continuing efforts to get to
the bottom of the important--and extremely complex--set of issues that
we are addressing here today.
I believe we need to examine how Group Purchasing Organizations--or
``GPOs''--affect the cost and quality of health care in America. Recent
studies and media reports have called into question whether the GPO
system has been effective in reducing costs without sacrificing the
quality of products available to hospitals. However, GPOs, various
academics, and certain industry participants continue to argue that
GPOs offer high quality products at significant savings.
I have received and considered numerous opinions from parties on
both sides of the GPO debate, including health care specialists,
academics, and industry participants both from my home State of Utah
and around the nation. To say that there is widespread disagreement
among the participants of this debate would be a considerable
understatement. News sources, commentators, and industry analysts offer
diverse opinions regarding whether the GPO system helps or harms
hospitals, consumers, and competition. Well respected academics
similarly disagree.
Although I believe that the concerns raised by those who are
critical of GPOs certainly warrant further analysis and consideration,
I do not feel that we have sufficient information to reach any solid
conclusions on the issues that have been raised. Despite the need for
further investigation, I want to emphasize that--based on the
information and analysis currently available--I have several serious
concerns regarding certain actions and practices of specific GPOs, as
well as the structure of the GPO system in general. Without going into
detail, I would like to summarize some of these in the hope that we
might address them as we go forward on this issue.
I am deeply disturbed by allegations that GPOs may prevent superior
technologies and products from being adopted by the hospitals they
serve.
These claims have arisen in several distinct sets of circumstances,
all of which raise significant questions. I am concerned about recent
press reports that senior executives have received or obtained stock or
stock options from product suppliers, creating serious conflicts of
interest that may have improperly affected GPOs' purchasing decisions.
Similarly, reports that large GPOs have favored products produced or
supplied by entities in which they have invested raise serious
questions as to conflicts of interest.
I am also concerned about certain practices that may limit
competition among small medical device manufacturers, leading to
decreased competition and innovation. Allegations that large suppliers
have effectively ``bought'' access to GPOs warrant further
investigation to ascertain how widespread such activities are.
Similarly worrisome are assertions that the products of favored
suppliers are included in ``bundled'' or ``sole source'' contracts that
create strong disincentives for hospitals to purchase competing
products, effectively shutting smaller competitors out of the market.
Finally, I note that many--perhaps even most--of the alleged harms
and abuses raised by GPO critics have pertained disproportionately to
the nation's two largest GPOs: Novation and Premier. The market shares
of these two ``super GPOs'' dwarf those of the next eight largest GPOs.
In fact, excluding Premier, Novation's estimated market share is
roughly equal to the combined market shares of its four largest
competitors. With the obvious exception of Novation, Premier's market
share is almost three times that of its largest competitor. The
enormous relative purchasing power of these two ``super GPOs''--
especially when coupled with allegations that this power has been used
anticompetitively--raises obvious concerns. At this point, although it
is unclear whether and to what extent the market power possessed by
Novation and Premier has enabled allegedly anticompetitive practices,
this question warrants further consideration.
I look forward to hearing from the witnesses testifying here today,
and hope that they will address these important issues. I commend the
members of this committee for their efforts to date, and hope that--in
conjunction with the appropriate government agencies and with the help
of industry participants--this committee will continue its attempt to
get to the bottom of these important issues.
[The prepared statement of Senator Thurmond follows:]
Statement of Hon. Strom Thurmond, a U.S. Senator from the State of
South Carolina
Mr. Chairman: Thank you for holding this important hearing today on
hospital group purchasing and its effects on patient health and medical
innovation. In particular, this committee should carefully examine the
role that Group Purchasing Organizations (GPOs) play in bringing
medical products to market. GPOs deserve antitrust scrutiny for two
significant reasons.
First, the organizations themselves are the result of hospitals
banding together in order to increase buying power. Second, GPOs have
merged and consolidated the industry significantly. The result is that
two large corporations, Premier and Novation, control purchasing for
approximately 60 percent of the Nation's hospitals. With these two
concerns in mind, we must determine whether the consumers of medical
care, the patients, are being well-served by GPOs.
The fundamental premise of a GPO is to allow hospitals to aggregate
their purchases and thereby negotiate lower prices. GPOs are generally
immune from antitrust scrutiny for an array of policy reasons. When
hospitals band together, they are better able to counteract the
significant market power of large manufacturers of medical supplies and
equipment. Additionally, the lower prices procured by the hospitals
enable them to maintain financial stability in the Medicare prospective
payment system. This prospective payment system replaced fee for
service plans and essentially resulted in caps on Medicare payments,
limiting what the Federal Government would pay hospitals for medical
services.
In addition to the relaxed antitrust scrutiny, GPOs have another
useful tool in procuring lower costs for hospitals. They are immune
from anti-kickback laws. This allows the payments for services provided
by the GPOs to be shifted from the hospitals, the buyers of the goods,
to the manufacturers of the goods. Therefore, manufacturers of goods
pay kickbacks, often called administrative fees, to the GPOs.
Administrative fees are commonly 3 percent of the value of goods sold
to the hospitals, and may be higher if disclosed in writing. These fees
go the GPO itself, and portions are remitted to the hospitals. Due to
this arrangement, hospitals realize lower costs.
At first glance, the lower costs attributed to group purchasing
power may appear to benefit patients. Indeed, group purchasing keeps
prices low, and that is certainly desirable in the medical marketplace.
However, a closer look at current policies reveals some disturbing
consequences.
Many smaller device manufacturers have voiced concerns that they
cannot break into the marketplace due to the power of GPOs. For
example, GPOs negotiate long term contracts, thereby making it more
difficult to bring new and innovative products to market. Long-term
contracts themselves would not generally be a cause for concern. Two
business entities may enter into these contracts if they wish. However,
due to the fact that hospitals have all joined together in the GPOs,
large numbers of hospitals are committed to these long-term contracts.
This scenario warrants antitrust scrutiny.
Smaller manufacturers may also have a more difficult time paying
the kickbacks, or administrative fees, required to sell their products
to the GPOs. Furthermore, the anti-kickback exception invites the kind
of abuse that anti-kickback laws were designed to stop. Larger
manufacturers have an incentive to pay higher administrative fees in
order to dissuade the GPOs from purchasing the products of smaller
competitors.
It is my hope that this committee will closely examine the
antitrust immunity and anti-kickback exception that GPOs enjoy. We
should not support policies that inhibit the abilities of smaller
manufacturers to introduce innovative products into the marketplace. If
patients are not benefiting from current practices, we should seek to
implement reforms that free the marketplace to function unhindered by
anti-competitive practices.
Another concern associated with the GPO system is the consolidation
of the industry. In many areas, one of the two dominant GPOs, Premier
or Novation, serves all of the hospitals while the other is almost
nonexistent. The result is a dominant buyer in the market, which has
been referred to as a monopsony, or a buyer monopoly. For antitrust
purposes, a monopsony may be just as troubling as a monopoly due to the
distortions that it creates in the market.
The buying power of the GPOs raises questions about the common
practice of ``bundling'' in contracts with medical manufacturers. A
bundled contract provides for numerous products to be purchased in one
order, benefiting the seller, who can sell more products, and allowing
the GPO to negotiate lower prices. While this practice may lower
hospital costs, it may also have the effect of keeping other
manufacturers out of the market. Because hospitals must usually
purchase a high percentage of their products through the GPO to take
advantage of discounts, there is less of an incentive for hospitals to
bypass the GPOs and negotiate with the manufacturers directly.
Additionally, recent media reports have indicated that Premier
invested in medical supplier companies, and then made contracts with
them to provide supplies to Premier hospitals. I am greatly concerned
about these allegations, and this committee should thoroughly study
these potential conflicts of interest. If Premier has engaged in such
activity, it has leveraged its buyer monopoly to procure goods from a
company in which it has an interest, effectively blocking out
legitimate competitors.
Mr. Chairman, I appreciate your work on this matter, and I hope
that we will learn more today about the role of GPOs in the health care
industry. While GPOs have almost certainly led to decreased costs for
hospitals, we should carefully examine whether patients benefit from
the current system of group purchasing. If innovative and crucial
technology is not reaching our Nation's hospitals, we should consider
reforming current practices. We should ask whether GPO immunity from
general principles of antitrust law and anti-kickback law best serves
those in need of medical care. I hope that our witnesses will address
these important questions, and I look forward to hearing from them
today.
Chairman Kohl. I would like to insert the GAO report that
has been referred to several times during this hearing,
entitled ``Group Purchasing Organizations: Pilot Study Suggests
Large Buying Groups Do Not Always Offer Hospitals Lower
Prices.''
I would also like to insert a number of statements that
have been submitted for the record. These are from Thomas J.
Shaw, President and CEO of Retractable Technologies, Inc.;
Larry Holden, President, Medical Device Manufacturers
Association; Thomas V. Brown, Executive Vice President of
Biotronik; Robert Betz, President and CEO of the Health
Industry Group Purchasing Association; Paul Hazen, President
and CEO of the National Cooperative Business Association; Einer
Elhauge, Professor of Law at Harvard Law School; Jeffrey C.
Lerner, President and Chief Executive Officer of ECRI; Dr.
Augusto Sola, Professor of Pediatrics and Obstetrics and
Gynecology, and Director, Division of Neonatal-Perinatal
Medicine at Emory University School of Medicine; Frederick M.
Valerino, Jr., President, Pevco Systems International, Inc.;
and Julia Naunheim Hipps, a registered nurse from St. Louis,
Missouri.
This hearing is now adjourned.
[Whereupon, at 5:00 p.m., the subcommittee was adjourned.]
[Questions and Answers and Submissions for the record
follow.]
[Additional material is being retained in the Committee
files.]
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