[Senate Hearing 108-329]
[From the U.S. Government Printing Office]



                                                        S. Hrg. 108-329

     HOSPITAL GROUP PURCHASING: HAS THE MARKET BECOME MORE OPEN TO 
                              COMPETITION?

=======================================================================

                                HEARING

                               before the

                       SUBCOMMITTEE ON ANTITRUST,
                 COMPETITION POLICY AND CONSUMER RIGHTS

                                 of the

                       COMMITTEE ON THE JUDICIARY
                          UNITED STATES SENATE

                      ONE HUNDRED EIGHTH CONGRESS

                             FIRST SESSION

                               __________

                             JULY 16, 2003

                               __________

                          Serial No. J-108-25

                               __________

         Printed for the use of the Committee on the Judiciary




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                       COMMITTEE ON THE JUDICIARY

                     ORRIN G. HATCH, Utah, Chairman
CHARLES E. GRASSLEY, Iowa            PATRICK J. LEAHY, Vermont
ARLEN SPECTER, Pennsylvania          EDWARD M. KENNEDY, Massachusetts
JON KYL, Arizona                     JOSEPH R. BIDEN, Jr., Delaware
MIKE DeWINE, Ohio                    HERBERT KOHL, Wisconsin
JEFF SESSIONS, Alabama               DIANNE FEINSTEIN, California
LINDSEY O. GRAHAM, South Carolina    RUSSELL D. FEINGOLD, Wisconsin
LARRY E. CRAIG, Idaho                CHARLES E. SCHUMER, New York
SAXBY CHAMBLISS, Georgia             RICHARD J. DURBIN, Illinois
JOHN CORNYN, Texas                   JOHN EDWARDS, North Carolina
             Bruce Artim, Chief Counsel and Staff Director
      Bruce A. Cohen, Democratic Chief Counsel and Staff Director
                                 ------                                

   Subcommittee on Antitrust, Competition Policy and Consumer Rights

                      MIKE DeWINE, Ohio, Chairman
ORRIN G. HATCH, Utah                 HERBERT KOHL, Wisconsin
ARLEN SPECTER, Pennsylvania          PATRICK J. LEAHY, Vermont
LINDSEY O. GRAHAM, South Carolina    RUSSELL D. FEINGOLD, Wisconsin
SAXBY CHAMBLISS, Georgia             JOHN EDWARDS, North Carolina
        Peter Levitas, Majority Chief Counsel and Staff Director
                Jeffrey Miller, Democratic Chief Counsel


                            C O N T E N T S

                              ----------                              

                    STATEMENTS OF COMMITTEE MEMBERS

                                                                   Page
DeWine, Hon. Mike, a U.S. Senator from the State of Ohio.........     1
Hatch, Hon. Orrin G., a U.S. Senator from the State of Utah, 
  prepared statement.............................................   161
Kohl, Hon. Herbert, a U.S. Senator from the State of Wisconsin...     3
Leahy, Hon. Patrick J., a U.S. Senator from the State of Vermont, 
  prepared statement.............................................   207

                               WITNESSES

Brown, Thomas V., Executive Vice President, BIOTRONIK, Inc., Lake 
  Oswego, Oregon.................................................    10
Everard, Lynn James, Healthcare Supply Chain Strategist, Coconut 
  Creek, Florida.................................................    13
Heiman, Gary, President and Chief Executive Officer, Standard 
  Textile Company, Cincinnati, Ohio..............................    11
Hilal, Said, President and Chief Executive Officer, Applied 
  Medical Resources Corporation, Rancho Santa Margarita, 
  California.....................................................     9
McKenna, Mark, President, Novation, LLC, Irving, Texas...........     8
Norling, Richard A., Chairman and Chief Executive Officer, 
  Premier, Inc., San Diego California............................     6
Weatherman, Elizabeth H., Managing Director, Warburg Pincus, LLC, 
  New York, New York.............................................    15

                         QUESTIONS AND ANSWERS

Responses of Mark McKenna to questions submitted by Senator 
  DeWine.........................................................    29
Responses of Mark McKenna to questions submitted by Senator Kohl.    49
Responses of Mark McKenna to questions submitted by Senator 
  Chambliss......................................................    74

                       SUBMISSIONS FOR THE RECORD

Bracco Diagnostics Inc., Robert L. Aromando, Jr., Vice President 
  of Marketing, Princeton, New Jersey, statement.................    81
Brown, Thomas V., Executive Vice President, BIOTRONIK, Inc., Lake 
  Oswego, Oregon, prepared statement.............................    93
Children's Health Corporation of America, Don Black, President 
  and Chief Executive Officer, Overland Park, Kansas, statement..   112
Community Hospital Network, William E. Corley, President, 
  Indianapolis, Indiana, letter..................................   115
Egliman, David S., M.D., MPH, Clinical Associate Professor, Brown 
  University, statement..........................................   116
Everard, Lynn James, Healthcare Supply Chain Strategist, Coconut 
  Creek, Florida, statement......................................   127
General Accounting Office, Marjorie Kanof, Director, Health Care, 
  Clinical and Military Health Care, Washington, D.C., statement.   135
Harding, William W., President and Chief Executive Officer, Union 
  Hospital, Dover, Ohio, letter..................................   160
Health Industry Group Purchasing Association, Robert Betz, 
  Arlington, Virginia, statement and attachment..................   163
Heiman, Gary, President and Chief Executive Officer, Standard 
  Textile Company, Cincinnati, Ohio, prepared statement..........   187
Hilal, Said, President and Chief Executive Officer, Applied 
  Medical Resources Corporation, Rancho Santa Margarita, 
  California, prepared statement.................................   189
LSL Industries, Inc., Ash Luthra, President, Chicago, Illinios, 
  statement......................................................   209
Masimo Corporation, statement....................................   211
McKenna, Mark, President, Novation, LLC, Irving, Texas, statement 
  and attachment.................................................   213
Medical Device Manufacturers Association, Mark B. Leahey, Esq., 
  Executive Director, statement..................................   229
Memorial Hermann Healthcare System, Dan Wolterman, President and 
  Chief Executive Office, Houston, Texas, letter.................   243
Norling, Richard A., Chairman and Chief Executive Officer, 
  Premier, Inc., San Diego, California, statement................   245
Oliver, William C., President, Forrest General Hospital, 
  Hattiesburg, Mississippi, letter...............................   256
OSF Healthcare System, James M. Moore, Chief Executive Officer, 
  Peoria, Illinois, letter.......................................   258
Premier Health Partners, Thomas G. Breitenbach, President and 
  Chief Executive Office, Dayton, Ohio, letter...................   260
Retractable Technologies, Inc., Thomas J. Shaw, President and 
  Chief Executive Officer, statement.............................   261
Saint Luke's Health System, G. Richard Hastings, President and 
  Chief Executive Office, Kansas City, Missouri, letter..........   271
Shelby County Myrtue Memorial Hospital, Stephen L. Goeser, Chief 
  Executive Officer, Harlan, Iowa, letter........................   272
University of Utah Hospitals & Clinics, Richard A. Fullmer, 
  Executive Director, Salt Lake City, Utah, letter...............   275
Weatherman, Elizabeth H., Managing Director, Warburg Pincus, LLC, 
  New York, New York, prepared statement.........................   276
Wenick, Joel, FACHE, President Chief Exeuctive Officer, Phoebe 
  Putney Health System, Albany, Georgia, letter..................   282

 
     HOSPITAL GROUP PURCHASING: HAS THE MARKET BECOME MORE OPEN TO 
                              COMPETITION?

                              ----------                              


                        WEDNESDAY, JULY 16, 2003

                              United States Senate,
Subcommittee on Antitrust, Competition Policy, and Consumer 
                 Rights, of the Committee on the Judiciary,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 11:09 a.m., in 
Room SD-226, Dirksen Senate Office Building, Hon. Mike DeWine, 
Chairman of the Subcommittee, presiding.
    Present: Senators DeWine and Kohl.

OPENING STATEMENT OF HON. MIKE DEWINE, A U.S. SENATOR FROM THE 
                         STATE OF OHIO

    Chairman DeWine. Good morning. I don't know if it is a good 
sign or a bad sign when the witnesses are here before the 
Chairman. Thank you for being prompt.
    Welcome to the Antitrust Subcommittee hearing on hospital 
group purchasing organizations. This hearing is, of course, 
part of the Subcommittee's ongoing efforts to help inject 
competition into the market of hospital group purchasing 
organizations, also known as GPOs, in order to increase the 
quality of health care that we receive and decrease the prices 
we pay for it. Senator Kohl and I have focused on this very 
important issue for a long time.
    At our first hearing on GPOs in April of last year, we 
heard testimony about GPO practices that, quite frankly, 
disturbed me. For example, there was evidence that some GPO 
executives, indeed, some GPOs themselves, owned financial 
interest in their suppliers. This type of cross-ownership 
raises, at the very least, the appearance of impropriety and 
was cause for great concern.
    Beyond these issues of business ethics, the Subcommittee 
heard testimony regarding the competitive impact of some GPO 
businesses and contracting practices. There were questions 
raised about whether the structure of GPOs and the basic 
business practices of most GPOs might be impeding the flow of 
new and innovative medical devices and technologies to the 
market, and more importantly, preventing these new technologies 
from getting to the patients and health care workers who need 
them. These concerns were aimed especially at Premier and 
Novation, the nation's two leading GPOs.
    In the wake of what we heard at that hearing, Senator Kohl 
and I called for the GPO industry to adopt voluntary codes of 
conduct to address the concerns raised by our investigation. To 
their credit, most of the GPOs, including Premier and Novation, 
and the industry as a whole, answered our call. After a great 
deal of work with the Subcommittee, the GPOs adopted codes of 
conduct reflecting a series of commitments regarding their 
ethical standards and their business practices.
    As promised, we are here today, 15 months later, to examine 
the progress. Our questions are relatively simple. Are GPO 
ethical standards stronger today? Are GPO business practices 
better than they were a year ago? Are new, innovative medical 
devices more available to hospitals than they were a year ago? 
Simply put, are the codes of conduct working?
    Our answers are a little more complex. The answers 
themselves are more complex. Based on a year of investigation, 
interviews with a broad range of industry participants, an 
interim GAO study, and examination of GPO business documents, I 
would say the answer is we have made some progress.
    We have made a lot of progress with regard to ethical 
standards. For example, both Premier and Novation now prohibit 
all their employees from owning shares of their suppliers, 
which removes even the appearance of impropriety. I think that 
both Premier and Novation and the industry as a whole should be 
applauded for these changes.
    It is fair to say, however, that the ethical guidelines 
are, as we might say, the low-hanging fruit. The biggest 
concerns of the Subcommittee are in regard to GPO business 
practices, where the progress is a little less clear and a 
little more difficult to measure. We will hear today some 
testimony, for example, from medical device manufacturers who 
believe they still face significant competitive barriers based 
largely on bundling, sole-source contracting, high commitment 
levels, and other GPO business practices. On the other hand, I 
think that many device manufacturers would agree that the 
marketplace they face today is at least somewhat more open to 
their efforts.
    And, of course, we must not lose sight of the fact that 
while many of these business practices may have the effect of 
excluding some competitors from the market, they also may allow 
GPOs to keep prices down, which is, of course, an important 
goal sought by GPOs and their member hospitals. In fact, I have 
heard from a number of hospitals in my home State of Ohio and 
they are very satisfied with their GPOs.
    Now, as I noted earlier, the answers we seek are complex 
and this hearing will necessarily be only one of a number of 
steps we take to lock in the positive changes made by GPOs and 
work with them on potential future changes, as needed. The 
General Accounting Office has released its interim report on 
GPO practices, and at the request of the Subcommittee will 
continue to examine the impact of GPO business practices on 
prices for medical devices.
    The Federal Trade Commission and the Antitrust Division are 
currently in the midst of a wide-ranging review of antitrust 
health care policy and are also at the request of the 
Subcommittee examining the specific question of competition 
within the GPO industry.
    And, of course, the Subcommittee will continue to work with 
all of the market participants, including the device 
manufacturers, the hospitals, and the GPOs themselves, to 
provide oversight and help increase competition wherever 
possible. We will spend some time today hearing from our 
witnesses with regard to any further specific suggestions that 
they may have.
    Before I turn to Senator Kohl, I would like to make a 
couple of additional points. We have seen some changes in this 
marketplace. We know that GPO business ethics have improved and 
we know that some of the smaller manufacturers who were 
virtually excluded from the process are starting to see some 
changes. We must recognize, though, that the types of changes 
implemented in the codes of conduct by the GPOs may take more 
time to generate significant impact in the market. Many of 
these changes in business practices have only recently been 
implemented and will, we hope, have a greater impact in the 
near future than they have had thus far.
    In addition, it is important to recognize that we cannot 
measure success only by examining how many different medical 
device manufacturers are awarded a GPO contract. Not every 
small device manufacturer deserves a contract on every device, 
and some of the most controversial business practices may save 
money for hospitals, at least in some circumstances.
    In this industry, as in most, one-size-fits-all solutions 
are not practical nor are they desirable. Instead, we must work 
to foster a dynamic marketplace in which many device 
manufacturers have a wide range of options to sell, and GPOs 
have a wide range of options to buy. Only then will patients be 
assured that competition is working to give them the best 
possible medical care at the best possible price.
    Let me now turn to the Ranking Member of the Subcommittee, 
Senator Kohl, who has certainly done a great deal of research 
and done a great deal of work on this particular issue. Senator 
Kohl?

 STATEMENT OF HON. HERB KOHL, A U.S. SENATOR FROM THE STATE OF 
                           WISCONSIN

    Senator Kohl. Thank you, Mr. Chairman, and thanks for the 
bipartisan effort you have made in pursuing this important 
issue.
    It has been more than a year since we first heard troubling 
allegations that patients and physicians were being denied 
needed medical devices because of anti-competitive and 
unethical actions of large hospital buying groups, known as 
GPOs. After a year of investigation and oversight, we are 
pleased that our efforts have begun to make the marketplace 
more open for innovative competitors. We are concerned, 
however, that not enough is happening and that it is not 
happening quickly enough.
    The primary allegation made against the GPO's business 
practices was that, in many cases, GPOs prevented hospitals 
from buying the best and safest products for their patients. 
For example, the inability of hospitals to purchase safety 
needles resulted in unnecessary injuries to health care 
workers, who in some cases developed HIV and hepatitis. Heart 
surgeons reported incidents where they were not permitted to 
use the pacemaker that they judged medically necessary because 
their hospital did not have a GPO contract with that supplier.
    The situation was dangerous to patients and compromised 
public health, so we launched an investigation into the 
hospital purchasing industry. We discovered that the GPOs' 
contracting practices, in many cases, froze out competition and 
entrenched the dominant positions of the large suppliers, often 
to the detriment of patient care.
    We held a hearing last year on our findings. We secured the 
agreement of Premier and Novation, the nation's two largest 
GPOs, responsible for over $28 billion of purchasing at two-
thirds of our Nation's hospitals, to implement substantial 
changes in their business practices. To their credit, Premier, 
Novation, and four other large GPOs promised to change the way 
they did business. They all agreed to important and voluntary 
codes of business conduct.
    Today, we ask two questions. What progress has been made in 
the marketplace since Premier and Novation made their 
agreements nearly a year ago? And what remains to be 
accomplished?
    We identified five major areas in need of reform in the GPO 
industry. The first was ending conflicts of interest, such as 
investments by GPOs or their executives in medical suppliers 
with which they did business.
    The second was sole-source contracts, in which one supplier 
has an exclusive deal for a product with the GPO.
    The third area was high commitment levels, in which a 
hospital must purchase a very high amount, as high as 95 
percent, from the GPO-approved vendor in order to get the best 
prices.
    The fourth was bundling practices, giving substantial extra 
discounts to hospitals that buy a bundle of different products 
in one contract.
    And the fifth was high administrative fees, GPOs collecting 
payments in excess of 3 percent of the value of the product 
sold from suppliers. The GPO codes of conduct addressed each of 
these issues.
    The evidence we have received from medical device 
manufacturers, hospitals, GAO, and the GPOs themselves tells us 
that while some progress has been made with respect to each of 
these issues, in many cases, much more needs to be done.
    While significant progress was made with respect to 
conflicts of interest, reform is much less certain in the area 
of contracting practices. In general, it appears that Premier 
has made more substantial reforms than Novation, but Premier's 
reforms are not without their shortcomings.
    With respect to sole-sourcing, Premier has promised to ban 
this practice with respect to physician preference items, but 
has not done so entirely. Novation did not make the same 
pledge, and one-third of current contracts for clinical 
preference items are still sole-sourced.
    With respect to commitment levels, Premier has banned GPO-
imposed commitment levels, but left the door open to commitment 
levels initiated by vendors. Novation expressly permits 
commitment levels above 75 percent with consent of their 
clinical councils.
    With respect to administrative fees, Premier took the 
laudable step of capping administrative fees at 3 percent in 
all contracts. Novation has only agreed to a 3 percent fee cap 
for what it designates as clinical preference products, and 
their revenues from high administrative fees continue to rise.
    Finally, with respect to bundling, both GPOs still engage 
in this practice. The GAO report said bundling contracts at one 
of the two largest GPOs still account for more than 40 percent 
of its revenue. Novation will not terminate its bundling 
program until 2004 at the earliest, although it could do so 
sooner if it wished.
    This clearly is only a start on the road to true reform. 
While we applaud the positive changes that have been 
implemented, the industry needs to do more and needs to do it 
now. The past year has taught us that promises to change and 
actual change, despite the best of intentions, are not the 
same. We need to be assured that the commitments we have seen 
so far and the ones that we will ask to be made today become 
permanent and will last once the spotlight of a Senate hearing 
room fades away.
    Today, we will send a letter to the Secretary of Health and 
Human Services to seek ways to make these good reforms 
permanent, including requesting the appointment of an officer 
to oversee the hospital group purchasing industry. We need to 
ensure that GPOs fulfill their mission to act on behalf of 
hospitals to obtain the best products at the best prices for 
their patients. We also plan to ask the Department of Health 
and Human Services to strengthen and revise its regulations 
governing the Medicare safe harbor that permits GPO to accept 
administrative fees from suppliers. And finally, we will 
reiterate our request that the FTC reexamine and revise the 
joint FTC/Justice Department Health Care Guidelines.
    Mr. Norling and Mr. McKenna, as leaders of the two largest 
GPOs providing supplies for nearly two-thirds of our Nation's 
hospitals, you particularly bear a special burden. Your 
companies' decisions on which products to put on contract 
affects the health and safety of millions of patients and 
health care workers every day. We depend on your good faith, 
your judgment, and your integrity to ensure that hospitals have 
access to the best medical products at the best prices. So it 
is essential that you continue to follow through on your 
industry's efforts to reform.
    Our investigation so far has determined that your reforms 
have made a good start in making the market more open, but the 
job clearly is not finished. We commend you for the reforms 
that you have made, but we will continue to oversee this 
industry to see that group purchasing never denies a patient, a 
physician, or a health care worker a needed medical device.
    Thank you, Mr. Chairman.
    Chairman DeWine. Senator Kohl, thank you very much.
    We have a vote scheduled around 12 o'clock. That is Senate 
language for nothing exact. That means that unless you all want 
to spend the day with us, we probably ought to try to get done 
before that vote.
    So we are going to have--we have your written testimony. We 
appreciate that. That will be made a part of the record. We 
would ask you to summarize your testimony. Tell us in three 
minutes what you think is the most important part of your 
testimony. We already have your testimony, so we appreciate 
that. Give us the highlights. Just off the top of your head, 
give us what you think is the most important thing that we 
know. We have seven very qualified, very important witnesses 
here. Give us three minutes.
    We are going to go by the rules. When you see the yellow 
light, that means you have got a minute left. When you see the 
red light, you are done and then we are going to go to the next 
witness. Then we are going to go to questions. Questions will 
start with Senator Kohl, and then I will have some questions. 
Unless the Senate changes its mind, we will have until 12 
o'clock, so you can see that doesn't give us a whole lot of 
time for questions.
    Mr. Norling, you are first.
    Mr. Norling. Thank you, Chairman DeWine.
    Chairman DeWine. You didn't know which way I was going to 
go, but that is where we are going.
    Mr. Norling. I had a suspicion.
    Chairman DeWine. Let me give the brief introduction. 
Richard Norling is Chairman and Chief Executive Officer of 
Premier. He has served as President and Chief Executive Officer 
of Fairview Hospital and Health Care. He has testified before 
this Subcommittee and we welcome him back.
    Mark McKenna is President of Novation. He has served in a 
variety of positions since joining Novation in 1987.
    Mr. Said Hilal is the President and Chief Executive Officer 
of Applied Medical Resources Corporation, the manufacturer of 
surgical devices, including devices used for minimally invasive 
surgery.
    Mr. Thomas Brown is Executive Vice President of BIOTRONIK, 
headquartered in Portland, Oregon. I am sure I messed that up, 
and you can correct me, Mr. Brown, in a minute.
    Mr. Gary Heiman is President and Chief Executive Officer of 
Standard Textile, based on Cincinnati, Ohio. Additionally, he 
is also on the Board of Trustees for the Jewish Hospital of 
Cincinnati.
    Mr. Lynn Everard is a health care business and supply chain 
consultant. His publications include a white paper detailing 
the future of the health care supply chain and the impact of 
group purchasing organizations on the financial prospects of 
the health care industry.
    Ms. Elizabeth Weatherman has been a member of the health 
care group of Warburg Pincus since 1988. Ms. Weatherman has 
testified on this matter in the past and we welcome her back 
again.
    Mr. Norling?

 STATEMENT OF RICHARD A. NORLING, CHAIRMAN AND CHIEF EXECUTIVE 
         OFFICER, PREMIER, INC., SAN DIEGO, CALIFORNIA

    Mr. Norling. Thank you again, Chairman DeWine and Ranking 
Member Kohl. As I stated at last year's hearing, if there is an 
opportunity to improve, Premier is going to take that 
opportunity. Last year, we made commitments, and I am pleased 
to report to the Subcommittee today that those commitments were 
kept, and are imbedded.
    With the adoption and implementation of the Premier code of 
conduct, I would like to share with you the highlights of what 
we have done with respect to our business practices.
    First of all, we contract for physician preference items on 
a multi-source basis, with no GPO commitment levels or bundling 
with unrelated products. We adopted a contracting approach in 
the last year that we call strategic sourcing. Fundamentally, 
this enables suppliers with products focused in very limited 
product areas to compete effectively with suppliers who offer a 
much broader product line.
    We have also substantially revised and improved our 
technology assessment and breakthrough process, which offers 
access even in the face of existing contracts. We have worked 
with outside firms, such as ECRI, a very well-known national 
firm that conducts research with respect to medical device 
products.
    I am pleased to see on the panel today Tom Brown of 
BIOTRONIK. BIOTRONIK is a relatively small producer of 
pacemakers and defibrillators that Premier recognized as 
embodying innovative technology. We were pleased to give the 
company an award this May through our technology breakthrough 
program.
    I am also pleased to see Mr. Hilal from Applied Medical. We 
have a pending contract proposal for its GelPort product, and 
last December, we sent the company details about our technology 
breakthrough process, and encouraged it to submit other 
products as well. We have yet to receive such, but certainly 
look forward to it.
    We have implemented, as you indicated, our conflict of 
interest of policy, but let me be specific about other items. 
We do limit fees to 3 percent. We do not charge up-front fees 
or marketing fees. We do not accept administrative fees. We do 
not require vendor participation in other services. We do not 
private label. We have begun a process of standardizing 
administrative fees, which Professor Hanson, who we brought in 
as a third-party ethicist, conveyed as important in limiting 
the potential of the perception that fees could influence 
product selection--very, very important. We contract for 3 
years or less; the few exceptions being in the interest of our 
owners. We seek out diversity. We have hired an ethics and 
compliance officer.
    When we introduced our code, both of you gentlemen had some 
nice things to say about it. You characterized it as industry-
leading, and I would agree with you. The code is a very 
important start and we, indeed, have implemented that code 
fully.
    But I want to commit to you and other members of the 
Subcommittee in good faith that we are going to be productively 
involved in continuing to improve the group purchasing 
industry, as well as health care in America.
    In conclusion, I want to emphasize that you can count on 
our continued cooperation and support. Simultaneously, we 
believe that the time is right to encourage others to do their 
part in an ongoing effort to ensure the quality and 
effectiveness of our Nation's healthcare system, and I believe 
you made those comments.
    The title of this hearing asked the question, ``Has the 
market become more open to competition?'' From Premier's 
perspective, the answer to that is an emphatic yes. Thank you.
    Chairman DeWine. Thank you very much.
    [The prepared statement of Mr. Norling appears as a 
submission for the record.]
    Chairman DeWine. Mr. McKenna?

 STATEMENT OF MARK MCKENNA, PRESIDENT, NOVATION, LLC, IRVING, 
                             TEXAS

    Mr. McKenna. Thank you, Chairman DeWine and Ranking Member 
Kohl. Like my colleague here, a year ago, we were sitting here 
and weren't sure what to expect. This year, though, we feel 
very prepared relative to reporting to you the results of what 
we committed to deliver to the Subcommittee on behalf of our 
member hospitals that look to us to save dollars on high-
quality clinical products and commodity products.
    We committed to promote industry best practices. You made 
it clear to us that you wanted us to ensure that small vendors 
had an opportunity to participate in group purchasing programs 
and that member hospitals had ready access to innovative 
technology. We heard you.
    On August 8, we committed to implement seven operating 
principles. Today, less than a year later, I am pleased to 
report that we have not only met but in many cases exceeded 
those principles. We have also systematically trained all of 
our employees on their responsibilities to follow through and 
implement these principles as a part of their daily business 
practice. Let me take a few minutes to highlight a few 
examples, and I would like to begin with technology.
    Novation has dedicated new resources to the identification 
and evaluation of new and emerging technology. We have also 
launched a web-based technology forum. We believe it is the 
only one of its kind in the industry. The forum invites vendors 
to post information about their new products, whether they are 
on contract or not on contract, and through our technology 
pipeline program, Novation is constantly searching the 
marketplace for emerging medical technology. Once we find a new 
product, we take the initiative to contact the vendor and work 
towards a contract position.
    The results have been gratifying. In just 7 months, vendors 
have posted information on the technology forum in 50 product 
categories, and as a result of that, we have made 20 contract 
awards to companies with innovative or new technology, and this 
has been done outside the regular bidding cycle. There 
currently are an additional 20--excuse me, a dozen more 
products that are under review, so a total of 32 events in just 
8 months since we put the technology forum in place.
    Our progress in other areas of the operating principles has 
also been significant, and let me report out. First, we have 
revised our Opportunity Spectrum Program around commitment to 
reemphasize that participation is purely voluntary. We have 
eliminated all penalties in the event that a member elects to 
drop from the program, and finally, we have eliminated any 
requirement that the members purchase a combination of capital 
equipment and disposables.
    Novation has awarded multi-source contracts in six separate 
clinical preference product categories that were previously 
offered under a sole-source contract. For example, when I was 
here last year, we had one safety needle under contract, 
Senator Kohl, as you pointed out. This year, we have four.
    Novation has also enhanced its processes for addressing 
vendor grievances. Today, we have a formalized process and 
commit to get back to suppliers within a 90-day period with a 
result. And, in fact, we have done so with one vendor, 
resulting in a contract award.
    In conclusion, I want to emphasize to you that while I am 
proud of the progress that we have made in just over 11 months, 
we at Novation recognize that we have a continuing obligation 
to live up to the letter and to the spirit of these operating 
principles. It is an ongoing process that requires resolve, 
diligence, leadership, and commitment. For its part, Novation 
will continue to dedicate ourselves to these operating 
principles and to ensuring that hospital members have unimpeded 
access to a broad array of high-quality products at the lowest 
possible prices.
    Chairman DeWine. Thank you very much.
    [The prepared statement of Mr. McKenna appears as a 
submission for the record.]
    Chairman DeWine. Mr. Hilal?

STATEMENT OF SAID HILAL, PRESIDENT AND CHIEF EXECUTIVE OFFICER, 
APPLIED MEDICAL RESOURCES CORPORATION, RANCHO SANTA MARGARITA, 
                           CALIFORNIA

    Mr. Hilal. We have only just begun. Chairman DeWine, 
Senator Kohl, thank you so much. Applied really appreciates 
this opportunity to be in front of you.
    Fourteen years ago, we started out the company with the 
concept of combining better clinical outcomes with better 
financial outcomes. Those are not mutually exclusive. They can 
be done together. We spend 22 percent of our revenue on R&D. We 
have over 380 pending or issued patents. We have the highest 
quality.
    You would think with a commitment like that and an 
accomplishment like that that we would have the doors open, 
that we would be doing well. We are not.
    We face markets as closed as a castle, with the GPOs as the 
most treacherous of outer moats. We are on the other side of 
the moat. Similar to how castles have concentric lines of 
defense, the dominant players have used GPOs as the outer moat 
and then moved on to more of the localized exclusionary 
contracts, bundling, grants, and so on. It is not one circle. 
It is not one issue. It is a market that is not open.
    In markets unencumbered by GPOs, we have done extremely 
well. In the clamp market, in the padded clamp market, for 
example, we went from no market share in 1990 to 70 percent 
market share today, the market leader. We obsolete our own 
technology three times in that period. In the progressive 
European markets, where GPOs are not a factor, we have five 
times the market share in the trocar market as we do here.
    Fourteen months ago, frankly, we were energized and filled 
with hope, and in May of last year, we went out to the largest 
40 customers and we offered them trocars at 60 percent 
discounts from their GPO prices. Now, that would have taken a 
$300 million market down to $120 million and the customer would 
have had the best product. But in the process, I agree, GPOs' 
income would have gone from $9 million to $3.6 million at the 3 
percent. But the issue is the customer is still waiting. The 
patient is still waiting. We can help.
    Admittedly, we have received some contracts and we are 
grateful for that, but we are not satisfied. We cannot be 
limited to the fringe markets where our impact is just the 
latest and the greatest. We can make a big difference in big 
markets, in markets where the dominant players day in, day out 
as the clock is ticking are making hundreds of millions of 
dollars of additional income. And in this process, we are not 
helping the patient. We are not helping the process through it.
    One hundred days ago, and at about the same time the 
Subcommittee released the agenda for the hearing, we saw some 
increased activity. We saw and we hoped the market would be 
changing. At that time, we asked Novation for an end to the 
contract with J&J which actually bundles sutures, trocars, and 
surgical products together. Novation initially turned us down, 
and as of late, asked us to submit a bid.
    In conclusion, Applied is again very grateful for the 
Subcommittee and for everyone that is following its lead. 
Fourteen months into the effort, we see no indication that the 
needed change will take root and grow without your continued 
intervention. I kindly urge--I respectfully urge you to 
continue your efforts and that you see that the changes to safe 
harbor and the prohibitions of sole-source contracts and 
bundling of unrelated products and vendors and limit to the 
term of the GPO contracts are done.
    This great nation has always been a bastion of free people 
and free markets and this market is not free and the field is 
not a level playing field. I urge you to help out. Thank you 
very much.
    [The prepared statement of Mr. Hilal appears as a 
submission for the record.]
    Chairman DeWine. Mr. Brown?

    STATEMENT OF THOMAS V. BROWN, EXECUTIVE VICE PRESIDENT, 
              BIOTRONIK, INC., LAKE OSWEGO, OREGON

    Mr. Brown. Chairman DeWine, Ranking Member Kohl, members of 
the Subcommittee, I, too, urge this Committee to continue your 
oversight of this very important issue that affects the 
innovation, quality, and cost effectiveness of medical care in 
this country. I would like to thank you for your efforts to 
date and stress the importance of legislation or comprehensive 
regulation in order to fix this problem permanently.
    I represent a small company. BIOTRONIK has 2.5 percent 
market share in the United States. But effectively, I am 
representing hundreds of companies throughout this great United 
States that have small market share. Over the past 10 years, 
these companies have found themselves generally locked out of 
group purchasing organizations due to their size. As a small 
company, they simply do not generate enough sales to cause GPOs 
to take notice. We are not considered a player. As a result, 
these companies have generally found themselves outside the 
market, looking in, when it comes to GPO contract 
opportunities. This situation, unfortunately, continues today.
    Last year, your Committee initiated hearings and study on 
this and we sincerely appreciate your efforts, and improvements 
have been observed. I am not going to go into those 
improvements because of the time constraints, but they have 
been mentioned and I would like to acknowledge those 
improvements.
    These are all positive steps that have resulted from the 
U.S. Senate Committee on the Judiciary's efforts, but as I 
noted earlier, there remains much to be done to create equal 
access for small and large companies alike. The establishment 
of code of conduct is a good start, but one cannot assume or 
believe that this action alone will change or radically impact 
the central problem, which remains fair and equal access to 
contracts regardless of company size.
    The problem continues to be perpetuated by GPOs, and, in 
fact, one of the reasons this problem exists is that GPOs have 
a very special privilege. That privilege is the exemption from 
the Medicare anti-kickback and fraud statute. So long as GPOs 
are allowed to charge administrative fees and so long as GPOs 
are allowed to return a large portion or any portion of that 
fee to the member hospitals, we have a serious conflict of 
interest that is automatically biased towards large companies 
with large market share holdings because of the potential fee 
dollars.
    Within our GPO industry, for example, within my industry, a 
GPO could do a multi-source contract, which is two companies, 
and they could lock up 80 percent of the market just by a 
multi-source contract. A dual-source is really what I am 
referring to. A multi-source contract is the answer. It is the 
way to allow everybody fair access.
    The administrative fee continues to be the core issue 
impacting small companies' access into GPO systems. GPOs should 
be required to allow all companies to participate in contracts 
that incorporate administrative fees. This will eliminate the 
bias towards large market share holders, eliminate the pressure 
from large companies on GPOs, and allow small companies to 
participate on the basis of price, quality, technology, and 
service. This should improve the competitive process, resulting 
in cost savings, broader access to life-saving products by 
physicians, and the creation of a level playing field for all 
vendors.
    Representing all of the small companies in this industry, 
Senator Kohl, we sincerely appreciate your leadership and 
interest in this problem. Chairman DeWine, your support has 
been invaluable and we look forward to your leadership in 
resolving this issue. Thank you.
    Chairman DeWine. Thank you very much.
    [The prepared statement of Mr. Brown appears as a 
submission for the record.]
    Chairman DeWine. Mr. Heiman?

    STATEMENT OF GARY HEIMAN, PRESIDENT AND CHIEF EXECUTIVE 
      OFFICER, STANDARD TEXTILE COMPANY, CINCINNATI, OHIO

    Mr. Heiman. Chairman DeWine, Ranking Member Kohl, and 
distinguished members of the Subcommittee, thank you very much 
for inviting me here today to provide my perspective as a 
vendor of hospital supplies who has extensive experience with 
the hospital supply chain. I am the President and CEO of 
Standard Textile Company in Cincinnati, Ohio, a closely-held, 
family-owned company that was founded by my grandfather in 
1940. Today in the United States, we employ about 1,200 people, 
including 350 employees in Ohio and 600 workers in Georgia, 
amongst eight other locations within this country.
    Standard Textile produces reusable products for health care 
facilities ranging from surgical packs and gowns to 
incontinence products and bed sheets. We also supply some of 
the other fabrics that you see around hospitals, such as window 
treatments, cubicle curtains, and upholstery fabric.
    We began working with hospital group purchasing 
organizations about 20 years ago, competing against much larger 
companies, for example, Baxter International, Johnson and 
Johnson, and Kimberly-Clark. Today, we have contracts with 
virtually all of the GPOs, including AmeriNet, Broadlane, 
Consorta, Kaiser, MedAssets, Novation, and Premier. About 75 
percent of our revenue is generated through GPO contracts.
    Using GPOs has helped us to reduce costs and increase the 
efficiency and efficacy of our marketing, sales, and customer 
service operations. Our bidding department used to be huge. 
Today, it has only three people. We have been able to cut our 
sales force by 15 to 20 percent. And while our prices have 
dropped significantly under GPO contracts, we also have the 
benefit and efficiencies of much greater volume. Today, we are 
still a medium-sized company competing against Goliaths, but we 
are seven times larger than we were 20 years ago.
    I would like to give you just one example of how GPOs 
helped us as a medium-sized manufacturer, and also helped 
hospitals to adopt a technically innovative product that 
greatly enhanced safety and efficacy.
    In 1990, Standard Textile developed a patented, proprietary 
fabric that we use to manufacture surgical packs and gowns and 
sterile wraps, all Class II medical devices, for operating 
rooms and other clinical procedures. This fabric has greater 
barrier resistance to fluids and viral penetration and, as 
such, enhances safety. it is also more cost effective and 
environmentally friendly than disposable products because it 
creates no medical waste on its own.
    When we developed these products, VHA, which is one of 
Novation's owners, already had a contract for disposable 
products with a much larger publicly traded competitor, 
Kimberly-Clark. It would have been easy, more convenient, and 
certainly the path of least resistance for VHA to turn down a 
small company like ours, but they didn't. Not only did they 
clinically evaluate our products, they brought in, at their 
expense, a third party, Deloitte and Touche, to analyze and 
evaluate our financial model and determine that we could create 
overall cost savings for hospitals.
    Standard Textile doesn't always win the GPO contracts that 
we bid on. At times, we have been defeated by other companies. 
As a supplier, we, of course, never like to lose. But the GPO 
committees that evaluate these contracts are representative of 
the hospital industry, are qualified, and are fair. We may not 
always agree or like their conclusions, but we do believe the 
process is open, fair, and honest.
    I can also say that whenever I have encountered a hospital 
or clinician who wanted to use my product, regardless of 
whether it was listed on their GPO contract, I have never had a 
problem getting it into their hands. They always have the 
freedom and the choice to buy directly from any supplier or 
manufacturer.
    In addition to being a supplier, I can also speak from a 
hospital perspective about the benefits of GPOs. I am the Board 
Chairman of the Jewish Hospital of Cincinnati, a medium-sized 
tertiary care not-for-profit hospital with about 200 beds, and 
growing, approximately 15,400 surgeries per year, and about 
$248 million in annual revenues. In 1998, the hospital was 
running an annual deficit of approximately $5 million. To help 
reverse that situation, the hospital made many significant 
operating changes, including greater utilization of GPOs to 
assist in managing costs. This year, I am pleased to say that 
the hospital will report--
    Chairman DeWine. Mr. Heiman--
    Mr. Heiman. --a net gain from operations of $12 to $13 
million.
    Chairman DeWine. We need to move on.
    Mr. Heiman. I have got three more sentences, if that is 
okay, Senator.
    Chairman DeWine. We are about there.
    Mr. Heiman. I have been following with great interest the 
recent discussions about GPOs. I think it is commendable that 
this Subcommittee has taken an active interest in the topic and 
I believe many of the changes in the GPO industry since your 
first hearing have been positive.
    But speaking as both a hospital supplier and a hospital 
board chairman, I think the existing GPO system brings enormous 
value to the health care system and I hope it remains that way.
    Again, thank you very much for inviting me to share my 
views at this hearing and I welcome any of your questions.
    Chairman DeWine. Thank you very much.
    [The prepared statement of Mr. Heiman appears as a 
submission for the record.]
    Chairman DeWine. Mr. Everard?

   STATEMENT OF LYNN JAMES EVERARD, HEALTHCARE SUPPLY CHAIN 
               STRATEGIST, COCONUT CREEK, FLORIDA

    Mr. Everard. Mr. Chairman and Senator Kohl, if there was 
ever any doubt in your minds about the importance of your 
mission here, let me say that our Nation will not be able to do 
its job of providing quality care and a safe working 
environment unless or until the GPO problem is resolved. And 
Senator Kohl and Senator DeWine, I would like to personally 
thank you for your commitment and leadership on this issue.
    You have already introduced me. I would like to let you 
know that I am a supply chain strategist and health care 
business educator, and for 22 years, I have worked in the 
health care supply chain, studying its strengths, its 
weaknesses, and its opportunities for improvement.
    I am here today because of my deep concern for the safety 
of patients and caregivers and the financial viability of our 
Nation's hospitals, all of whom continue to be harmed because 
competition in the health care supply chain is compromised due 
to the business practices of some large manufacturers and 
certain GPOs, fueled by the power granted to GPOs in the safe 
harbor exemption.
    I understand that almost a year ago, you were inclined to 
continue the safe harbor pending the results of this experiment 
with self-policing codes of conduct. I understand your desire 
to take a measured approach, and I think that you were wise in 
doing so. While I shared your optimism in that approach, a year 
later, we have seen very little progress and this market 
desperately needs to be open to competition. Robust competition 
in the health care supply chain is not only important for small 
manufacturers, but also for hospitals, as well. I believe that 
the evidence is insufficient to warrant the continuation of the 
special treatment in the safe harbor.
    Mr. Chairman, you asked me to discuss the progress made in 
the GPOs developing codes of conduct, and, in fact, GPOs have 
developed codes of conduct, much to their credit. 
Unfortunately, those codes of conduct may not have the results 
that were intended because they are not externally verifiable.
    The real question at this point for me is this. Are the 
GPOs really doing their job of saving money for hospitals? In 
its testimony before this Committee last year regarding the 
cost savings by his group, Mr. Norling of Premier stated, ``We 
estimate that we save our member hospitals over $1.5 billion 
per year.'' Hospitals need real science proving the savings 
produced by GPOs, not estimates. Last year's GAO study, the 
only independent analysis of GPO savings, reported that GPOs 
don't save money.
    What is the real truth? That is not an idle question. By 
granting the safe harbor, the Congress gave GPOs a great deal 
of power and a significant ability to create revenue for 
themselves.
    The GPO landscape is extremely complex and complicated. 
Sometimes it is difficult to know where the GPO ends and the 
side businesses begin. I believe that Congress must fully 
understand the flow of money in the health care supply chain 
and the GPO's role in the flow of that money in order to 
pronounce that the safe harbor is a benefit to patients and 
taxpayers. I do not believe that this body can in good 
conscience implement a code of conduct until all of the 
questions about GPOs are answered.
    GPOs seeking to end years of speculation on the part of 
their foes should welcome the opportunity to fully disclose 
their practices and sources and uses of revenue, and skeptics 
who say, ``Trust, but verify,'' will have what they need, and 
this entire industry can move beyond the GPO question and focus 
all of its efforts on providing quality patient care and a safe 
work environment.
    Recently, two major GPOs announced plans to go public with 
a stock offering. Does it seem right that while other hospitals 
continue to struggle financially, Broadlane and MedAssets will 
use the windfall granted to them by the Congress in the form of 
the safe harbor to enrich themselves by selling stock in their 
companies? Will this be the legacy of the safe harbor? I hope 
not, Mr. Chairman.
    In conclusion, this hearing has been about GPO behavior, 
but the implications of that behavior affect our entire health 
care system. Elsewhere in this Congress on this very day, other 
members of the House and Senate are grappling with other health 
care issues. The outcome of your decisions here today will 
clearly affect the work that they are doing and the health care 
system that hundreds of millions of Americans depend on to take 
care of them. Thank you.
    [The prepared statement of Mr. Everard appears as a 
submission for the record.]
    Chairman DeWine. Ms. Weatherman?

   STATEMENT OF ELIZABETH H. WEATHERMAN, MANAGING DIRECTOR, 
            WARBURG PINCUS, LLC, NEW YORK, NEW YORK

    Ms. Weatherman. Thank you, Senator DeWine and Senator Kohl. 
I would like to thank you for inviting me back. I would like to 
encourage you to refer to my written testimony for the details 
supporting the views that the National Venture Capital 
Association and myself, as a 15-year veteran investing in the 
medical device arena, hold very strongly as our views.
    But what I would like to do right now is very quickly 
emphasize what I think are the true take-homes from my 
testimony. First and foremost, it is really, really hard to 
bring innovative new breakthrough technology to market in the 
U.S. and around the world. There are major technological 
challenges to developing the technology. There are intellectual 
property barriers. There are regulatory barriers, the standards 
to which we must adhere in terms of demonstrating the safety 
and the efficacy of the devices that are being developed to 
assure that they are going to work for the American patients 
and that they are going to be safe. It is a veritable gauntlet, 
and more new technologies fail to reach market than succeed.
    So my second point, that to have an additional roadblock on 
the part of GPOs, where they can essentially block a new 
technology based on, I am sure their in some cases good 
intentions, simply puts up an additional barrier, an additional 
risk in the mind of venture capitalists who are already taking 
huge risks, huge amount of capital that they are investing into 
companies long before they know whether their technology is 
ever going to generate revenues, much less a profit.
    We thank you so much for the spotlight that you have put on 
the practices that the GPOs have used over the years and we do 
think that the code of conduct that you have asked them to 
adopt is significant progress. However, a major flag for us is 
the effort that Senator Eschutia attempted to make, the State 
Senator in California, to adopt the code of conduct that the 
GPOs themselves had adopted for themselves into legislation was 
fought by many of the GPOs very hard. It makes us wonder, how 
serious are these guys really about adopting a uniform code of 
conduct and implementing it and executing it and really being 
clear and that they are going to continue to be consistent with 
it and really take it seriously. They may be trying to address 
the letter of what you have asked them. We question the spirit 
of some of them.
    So in conclusion, we would like to ask you to do any and 
all things you can to assure that the abuses that they have 
committed over the years are corrected once and for all and 
forever. Thank you.
    Chairman DeWine. Thank you very much.
    [The prepared statement of Ms. Weatherman appears as a 
submission for the record.]
    Chairman DeWine. Senator Kohl?
    Senator Kohl. Mr. Norling and Mr. McKenna, we spent 
considerable time and effort working with you last year to 
draft new codes of conduct. We would like to spend some time 
today going through each of these most important issues your 
codes of conduct were supposed to address: Bundling, high 
administrative fees, sole-sourcing, and high commitment levels. 
In assessing this progress, one of our main concerns is the 
conclusion that the GAO reached in its report released to our 
Subcommittee today that, quote, ``Some GPOs' conduct codes 
include exceptions and qualified language that can limit the 
potential of the conduct codes to affect change.''
    One GPO practice which many fear can damage competition is 
known as bundling. This is the practice of entering into one 
contract for multiple products, either from one vendor or from 
multiple vendors. A hospital gets an added discount only if it 
purchases from the bundle, but typically, it must purchase 
virtually all of its requirements, often 95 percent, from every 
product in that bundle. If a hospital does not meet this 
requirement for just one product, then it loses the additional 
discount for every product. This makes it very difficult, if 
not impossible, for the small manufacturers of just one medical 
product to compete with the bundle offered by the large 
dominant suppliers.
    Mr. McKenna, you pledged to terminate Novation's bundling 
program, but only after it expires in the first quarter of 
2005. We understand that you are now considering revising this 
program sometime in 2004. Novation's vendor contracts have a 
provision in which they can be terminated on 90 days' notice by 
Novation. And so we ask, why not exercise this provision and 
abrogate the bundling contracts today? Why should those 
patients who benefit from the products outside the spectrum 
bundle have to wait another year or two, Mr. McKenna?
    Mr. McKenna. Senator Kohl, just as a basis, our program is 
entirely voluntary. There is access pricing for all of our 
members to utilize any product under contract with no 
commitment whatsoever.
    With that as a basis, as a hospital looks to maximize their 
value, there are different price points they can purchase at at 
different levels of commitment. But in no way does the 
committed program that you reference link one product to 
another. These contracts are put in place separately and the 
hospitals on their own determine whether or not they want to 
purchase at higher levels to gain greater value and benefits. 
There is no precondition of any of these contracts to contain 
base pricing. It is their decision alone.
    We have eliminated any penalties from a member removing 
themselves from these programs. That has been completed. We 
have removed any anti-competitive language that was in the 
program. We have removed any capital equipment requirements in 
the program. We have lowered purchasing levels in two 
particular categories, urology and pulse oximetry products, 
which we have now also gone to a dual-source on.
    And then, lastly, we have accelerated the work to put a 
next-generation program in place, Senator, and these programs 
bring significant value to our members. One of our primary 
obligations is to the hospitals we serve. And so we are very 
serious about doing this. We will do it ahead of schedule. But 
these things do take time to do them properly.
    Senator Kohl. Mr. Hilal, would you like to respond?
    Mr. Hilal. With all due respect, it sounds like a parallel 
universe because that is not what we see in the marketplace. We 
had the case of walking up to an account and showing a group of 
hospitals how we can save them $400,000 on purchases of about a 
little under $1 million. The answer came back that should they 
dare to do that, the cost on the other products would go up by 
$600,000.
    For us, it took a lot of work and a lot of arithmetic and a 
lot of meetings in order to show the folly of that approach. In 
our written testimony, you will see an analysis of how the 
customer is actually not only intimidated by such numbers, but 
confused by such numbers that actually come from the dominant 
supplier more often than not.
    So with the GPOs leading this whole bundling issue and its 
impact on penalties and price changes, it becomes very 
difficult for the customer to make a clear decision on where 
they can save money and where they can't.
    Senator Kohl. Again, Mr. McKenna, why don't you just 
terminate your bundling program right now?
    Mr. McKenna. Senator, our commitment program has been built 
at the request of our members, our hospitals. It brings them 
high levels of value with them making the sole decision as to 
whether they access base-level pricing by nothing at all or 
choose to participate in this program. As previously stated, we 
have accelerated our efforts to change practices in our 
committed programs. We have done that. We have communicated 
that to the supplier community and to our hospitals and we are 
on schedule to look at this program to make it more user-
friendly to all stakeholders in the supply chain way ahead of 
schedule.
    Senator Kohl. Why don't you do it right now?
    Mr. McKenna. Once again, our primary objective is to make 
sure that we serve the hospitals that we work at their behest 
and we--
    Senator Kohl. Why don't you offer them the maximum 
discounts without the bundling?
    Mr. McKenna. It has been our experience, and we recently 
just had one, that in some cases, discounts will change, and we 
want to make sure that as we go through our open competitive 
bid process, that we give them equal or greater value and it is 
our commitment to do that.
    Senator Kohl. Can you give us a pledge that you will work 
with even greater intensity to eliminate this practice by the 
end of 2003?
    Mr. McKenna. What I can commit to, Senator, is by the end 
of 2003, we will have initiated a pilot to get this new program 
out and running within our hospitals with the anticipation that 
in early 2004, we could then launch it to the broader hospital 
network.
    Senator Kohl. Okay. Mr. Norling, Premier has pledged not to 
engage in bundling of products across different vendors. 
However, the GAO's testimony indicates, 5 months later, one of 
the two large GPOs derived a whopping 40 percent of its 
purchase volume from medical-surgical products from contracts 
in which a single vendor bundled products together. Does your 
code of conduct permit this? This is the very type of bundling 
practice which Applied Medical has faced. Mr. Norling, will you 
agree to revise your code of conduct to ensure that this type 
of bundling is ended, as well?
    Mr. Norling. Thank you, Senator Kohl, and I would reiterate 
that we have already agreed not to bundle across multiple 
vendors. Let us be clear with respect to the single-vendor 
situation. I think I can illustrate this best, in terms of the 
challenges involved, with regard to Mr. Hilal's comments.
    Later this month, we will be issuing a request for 
proposals covering the endomechanical product area which 
includes trocars. We are also going to issue a request for 
proposals regarding sutures. These are areas that have been 
bundled traditionally, particularly under the influence of a 
particular large manufacturer. Applied Medical and all 
manufacturers in this product area will receive a request for a 
proposal. We will be breaking these products out into eight 
separate categories with no bundling.
    So specific to the example that has been presented here, 
and specific to the point I made earlier about what we called 
strategic sourcing--of trying to get product categories at a 
level in which small companies can compete effectively with 
large companies--that is exactly what we are doing.
    But large companies have traditionally insisted as a quid 
pro quo for giving the contract and giving the discounts on 
this kind of practice. We are seeking to make some changes, the 
commitments in the existing code. I don't think it needs a 
modification to the existing code. It needs continued 
implementation, which we are talking about.
    But can we do this alone? No. I think there are some 
manufacturer behaviors, in this case large manufacturer 
behaviors, that need to occur. And very frankly, with respect 
to all of our comments about the larger needs here--I ask where 
is the manufacturers' code of conduct that applies to these 
kinds of circumstances as well?
    Senator if you would forgive me, just to correct the 
record, I am told I made the statement that we don't accept 
administrative fees in my haste to respond to Senator DeWine's 
time period. I would like to clarify that what I was trying to 
say was that we don't accept up-front or marketing fees. It may 
have been Freudian, but we do indeed accept administrative 
fees.
    Senator Kohl. Mr. Hilal, before we move on, do you want to 
respond to Mr. Norling?
    Mr. Hilal. I am delighted. We are looking forward to this 
openness, to the fact that Premier has chosen to unbundle that 
package. We believe we can offer value to Premier. We look 
forward to working with them on that area.
    Senator Kohl. Does anybody else want to respond to this 
whole question of bundling?
    Mr. McKenna. I would like to offer one additional comment.
    Senator Kohl. Yes, Mr. McKenna?
    Mr. McKenna. We have also looked at--in our definition of a 
bundle, and time for debate, but it is linking one product to 
another to get a price discount. What Mr. Norling has described 
in this product category, we have also put on notice the 
supplier in question and are working towards unbundling those 
products so that we can open up this. But as Mr. Norling has 
stated, this has not been something that has been easy for the 
industry. Once again, our primary objective is to do no harm to 
those that we serve, so with that in mind, we are on a mission, 
as is our colleague here, to do similar activities.
    Mr. Hilal. Senator Kohl, if I may, if I may add just the 
comment that I truly believe that GPOs that comply with the 
spirit of what you are aiming at accomplishing also need the 
support from the dominant suppliers, because in some 
situations, they have no choice. Facing large organizations 
that are bundling, I believe that this has to be stopped at the 
source, also. So I believe there is a sincere attempt here that 
is moving in the right direction.
    Senator Kohl. Before we go back to Senator DeWine, I would 
like to get your comment, particularly Mr. McKenna, on 
administrative fees. Premier made an impressive commitment in 
this area, promising never to accept administrative fees higher 
than 3 percent from suppliers and standardized fees with 
respect to each product category.
    Mr. McKenna, Novation's pledge on this issue was much more 
limited and only applied to clinical preference products. Mr. 
McKenna, I am sure you believe that anything Premier can do, 
you can do better.
    [Laughter.]
    Senator Kohl. So will you pledge to us today to follow 
Premier's lead on administrative fees? Will you do that, Mr. 
McKenna?
    Mr. McKenna. Senator Kohl, we believe that--and I think it 
was made in one of the statements either you or Senator DeWine 
made, that multiple business models are good. They are good for 
competition. So our business model may be different than Mr. 
Norling's. I think our primary objective, however, is to 
deliver the highest possible quality products at the lowest 
possible prices.
    I also noted in reviewing the panel's testimony that our 
administrative fee percent, which has been declining over the 
past few years, was the exact same percent as noted in Mr. 
Norling's testimony, 2.1 percent.
    And if I may, we agreed to lower fees and reduce all fees 
on clinical preference products to less than 3 percent. For all 
those categories we have analyzed, we have done that. We agreed 
to standardize our fees on our private label, and we have done 
that. And we agreed not to enter into any new contracts for 
clinical preference products that provide fees above 3 percent, 
and we have done that.
    So with that in mind, we think the system is fair and open. 
We are committed to fully implementing the principles that we 
have agreed to with the Subcommittee and we will continue to do 
so.
    Senator Kohl. Senator DeWine?
    Chairman DeWine. Mr. McKenna, Mr. Norling, Mr. Hilal 
describes a kind of different world than the world you 
described. You tout your innovative technology programs as 
giving more access to small innovative companies, such as his. 
He describes a kind of medieval world where there is this 
castle and there is this moat, and he didn't describe it as 
such, but I see in this moat some alligators and crocodiles and 
he just can't get even close to the castle without getting 
eaten alive. So it is an entirely different world that I am 
hearing and Senator Kohl is hearing and the audience is 
hearing. How do you explain that to us? Why does the world look 
so different to Mr. Hilal than it does to you all? You are in 
the castle. The picture he paints is you are in the castle. You 
guys are, I guess, the knights in the castle and he is trying 
to get in. Why is the world so different?
    Mr. Norling. Actually, Senator, if I may, I thought he was 
portraying us as the moat, frankly.
    [Laughter.]
    Mr. Norling. I am not--
    Chairman DeWine. I don't know. I think you have got the 
drawbridge up, I think.
    Mr. Norling. All right, fair enough.
    [Laughter.]
    Chairman DeWine. You have got the drawbridge up. I think he 
would like the drawbridge down.
    Mr. Norling. I would respectfully submit that the 
drawbridge is certainly on the way down, if not totally down.
    [Laughter.]
    Chairman DeWine. Okay. Well, he wants it all the way down. 
Now, we have all had enough fun, but why is the world 
different, in all seriousness? Why are we seeing these 
different stories here and where are we going?
    Mr. Norling. Senator, let me go to a fundamental point 
here. It has always been the case that if a hospital wants to 
purchase a physician preference item off contract, it can, and 
I can tell you, with the implementation of our code of conduct, 
there are no consequences from Premier if it does so. So I 
think that is a significant step associated with the code of 
conduct.
    But beyond that, in 1997--
    Chairman DeWine. If they want to, technically, they can do 
it.
    Mr. Norling. If the hospitals want to buy, they can. There 
is nothing that Premier does, as of this point, that restricts 
them from doing so. I think that is a fundamental point.
    Chairman DeWine. Okay.
    Mr. Norling. I think the other point is--what is Premier 
doing to encourage access? And I would tell you that it was in 
1997 that we put our technology breakthrough clause in place 
which said, even if there is an existing contract, perhaps a 
sole-source with one of these big players, someone with 
innovative technology could access Premier resources, have that 
technology assessed, and be given the absolute opportunity for 
a contract.
    Now, that is one example, I think, of a very, very 
aggressive process by Premier to welcome this sort of thing. I 
am not suggesting we have done absolutely everything they could 
possibly have done, and I will suggest that we will continue to 
work hard on this. These not-for-profit hospitals out there are 
under great pressure. If there is a new technology that either 
is going to help with cost or quality for patients, it is our 
obligation to make it accessible, and we are working very hard 
at doing that.
    Chairman DeWine. But why do you think he is seeing the 
problem? If you were in his position, why do you see the 
problem?
    Mr. Norling. Number one, I am speaking for Premier, and so 
I will let Mr. McKenna make his points, and frankly, there are 
a lot of others who could very well be here speaking to the 
moats they--
    Chairman DeWine. You are not helping me understand it. Mr. 
McKenna?
    Mr. McKenna. Let me try to be brief but focused on 
responding. First of all, I think we have got some bridges 
built and they are down. I am not sure that we have made them 
visible to all the companies that need to have access. I think 
that is a tribute, however, and comment to the work that we are 
doing and the principles that the Subcommittee asked us to 
implement.
    Once again, our program is voluntary. If a clinician wants 
something and a hospital wants to buy it, they go buy it. It 
happens every single day.
    But more importantly, I think, in particular Mr. Said's 
company, timing is always an issue. But since we have 
implemented the principles, we have awarded through our amended 
agreements process one product contract on one item, and then 
we have several others in motion. We have started to build a 
relationship with the company, we have met several times, and I 
sense it is a speed issue. Our commitment would be to 
accelerate to a degree possible building this relationship and 
putting products on contract that our clinicians find 
advantageous to them and we are committed to do so.
    If you look at the access points now as far as building 
bridges across the moat, there is a technology forum that 
allows any supplier, whether they are on contract or not, to 
post their products, and we have trained all of our folks on 
that that touch contracting.
    Mr. Norling. Senator, can I give you a specific response 
with regard to Applied Medical--
    Chairman DeWine. Sure.
    Mr. Norling. --because I think Mr. Hilal--
    Chairman DeWine. And then we want to hear from the guy 
trying to get in the castle.
    Mr. Norling. Absolutely. On December 12 of 2002, we 
discussed all of Applied Medical's other products other than 
the one we already had on contract. We told the company about 
our tech breakthrough program and how to submit reviews for 
those products. The same day, another Mr. Hilal, their senior 
vice president, e-mailed a Premier staff member thanking her 
and indicating an intent to submit Applied's products. We sent 
the company the whole process of how to do that.
    So this isn't an effort--this isn't us holding back. This 
is us being straightforward and saying, here is how you access 
Premier, even though we have a contract in place. I have got 
Federal Express receipts, very frankly, displaying this 
process. So I am not trying to create a controversy here other 
than to say, this an example, with one of the members 
testifying here, where we have gone out of our way to say, here 
is how you can access this market via our tech breakthrough 
process.
    Mr. Hilal. Senator, if I may answer--
    Chairman DeWine. Yes.
    Mr. Hilal. Actually, we had that offer, and later on, 
Premier individuals advised us specifically to not pursue that 
route for two reasons. One is because it is very lengthy. We 
are good at development. We are fast at development. But if 
delays take two and 3 years at a time, our advantage is gone. 
Eventually--
    Chairman DeWine. Two or 3 years?
    Mr. Hilal. Two or 3 years of getting into an account or 
getting a technology to take hold. We have to implement--
    Chairman DeWine. What takes two or 3 years?
    Mr. Hilal. It takes two to 3 years usually to launch a new 
product and get the clinical results and get the clinical 
papers and the efficacy established, and then from that 
standpoint, the applications to get into these kinds of 
exceptional clinical. So from that standpoint, Premier advised 
us, Premier individuals advised us to hold off on that because 
they felt that the GelPort was already established. It had 
enough clinical papers behind it and they wanted to get it on a 
contract immediately, and that happened that way. So we did not 
have to take the longer route.
    Now, interestingly enough, as we got the GelPort in, one 
thing that we added to it was trocars, additional devices used 
with the procedure that happened to be on other sole-source 
contract. Now, we added them gratis. We added them with no 
additional cost to that device. I submit to you, Senator, that 
today, Mr. Chairman, that today, we see more hospitals, 
especially university hospitals, literally throwing away $300 
worth of value for fear of violating their contracts and their 
compliance, and then they turn around to Johnson & Johnson and 
buy these same equivalent products from them.
    And so the market is really not that open except to the 
niche products. Our issue is not whether or not we can go into 
niche markets, where our technology is superior, and sometimes 
the only technology. We would like to participate in the larger 
markets where we can bring not only innovation, but value and 
savings. We can make a difference if we are only allowed in.
    Right now, if I may push the analogy one more step, we are 
allowed into the hamlets. We are not allowed into the castle.
    Mr. Brown. Chairman DeWine--
    Chairman DeWine. Mr. Brown?
    Mr. Brown. If I may, sir. Thank you. To answer your 
question more directly about why is there a moat, the moat is 
really a direct result of the billions of dollars worth of 
administrative fees that are at stake within the GPO systems as 
a whole. Self-regulation is akin to putting the fox in charge 
of the henhouse. We really need your help in allowing equal and 
fair access to all companies because of this administrative fee 
issue. That is the moat. We can't get over it.
    Mr. Heiman. Senator DeWine?
    Chairman DeWine. Well, how would you do that?
    Mr. Brown. Well, I think there are a number of ways. I will 
give you an example. There is one GPO by the name of Health 
Trust that has taken--made the decision to create multi-source 
contracts, not dual-source. From the eyes of a small vendor, a 
dual-source contract is no better for the example I used 
earlier. But if you use a multi-source contract and allow all 
of the players to play, if you are going to charge a fee, if 
there is a better way, if the GPOs believe that they can get 
better pricing without allowing all vendors to play, then let 
them do that without charging the fee. But if you are going to 
charge the fee, everyone should have equal access.
    Chairman DeWine. Mr. Heiman?
    Mr. Heiman. Senator DeWine, I have a somewhat different 
perspective. When I became President of our company, we were 
approximately a $70 million company and we were competing 
against giants like Baxter, Johnson & Johnson, and Kimberly-
Clark, and I believe that the smallest of these three was 
Baxter International, with sales of about $5 billion. I don't 
think any of these groups have ever been known for their kind 
and compassionate marketing and sales tactics.
    But at the end of the day, this really seems to me to be a 
story of everyday America. Some people won, some people didn't 
win, and those that didn't win just aren't happy about it. And 
what I have always told my people is that if you didn't win, 
don't come to me and start complaining and griping. Start 
figuring out how you need to win.
    So we started out as a small company. We worked hard. We 
built better mousetraps and we earned the opportunity. We 
listened to our customers. We improved and we gained access 
over time and achieved POs. I think in doing that, we have 
created a win-win relationship that really is good for 
everybody in the industry. So that has been my perspective as a 
small supplier, small manufacturer who has been able to grow in 
this industry.
    Mr. Hilal. Mr. Chairman, if I may just add one comment.
    Chairman DeWine. Sure.
    Mr. Hilal. I truly believe that the person that has to win 
is the patient. Eventually, we are all in this very special 
business in order to help patients get better medicine, more 
available medicine, more affordable medicine. It is not enough 
for one of us to have a good year, to make $1 million, to buy a 
bigger home. There is an obligation that comes with this 
industry. We are in it for a special reason. We are caretakers, 
whether we are making a product or operating on a patient, and 
my feeling is that we tend to forget that sometimes in a 
competitive situation. But the fact is, we still have to look 
for those results that give the best product at the best price.
    Chairman DeWine. Senator Kohl?
    Senator Kohl. Ms. Weatherman, you testified before our 
Subcommittee when we first looked at the GPO issue a year ago. 
So today, what is your assessment of impact of the GPO's new 
codes of conduct and the ability of new and innovative medical 
device manufacturers to gain access to the marketplace?
    Ms. Weatherman. I think if you look at venture capital 
investing over this time period over the last 12 months, it has 
declined in the medical device arena. In 2001 and 2002, the 
investment rate per quarter was roughly half-a-billion per 
quarter, and so far this year, the average has been closer to 
half of that.
    It is a multi-factorial equation as to why the investment 
has dropped, but my point is, having an additional sort of 
whimsical barrier that the judgment that key people within GPOs 
can make in the decision making process to allow a new 
technology to get on contract, to not get on contract, is 
another barrier and another factor that increases the risk for 
VCs to want to invest in technology before it has gotten to 
market. So it is a factor. How powerful a factor versus other 
factors, it is hard to measure. But my overall point is, it is 
a factor that is not conducive, in our experience and the 
experience of the companies we have invested in, to furthering 
innovation.
    Senator Kohl. What more, in your opinion, do we need to do 
to encourage people in your industry to believe that this 
sector is open to new, innovative competitors?
    Ms. Weatherman. It seems to me either the exemption to the 
antitrust should be rescinded for GPOs or that the code of 
conduct is actually put into law or a form where we can very 
clearly see that it is going to be adhered to across the entire 
universe of GPOs, not sort of depending on the interpretation 
of different significant players, which I think, as you have 
heard the testimony, there is a difference in interpretation 
between the two leaders.
    I think an even playing field would be far better. Having 
the intermediary aspect of deciding what is innovative 
technology and what is not would be extremely positive, for 
that not to be the purview of the GPOs or, for that matter, the 
large manufacturers. Let the customers decide which products 
they want to purchase and have the full basket available to 
them.
    Senator Kohl. Mr. Everard, do you want to make a comment?
    Mr. Everard. Sure. I would agree with that completely. I 
think one of the elements that we are missing is that the GPO 
product councils do not have--the individuals on those product 
councils, where there may be 25 individuals, none of those 
individuals has a fiduciary responsibility to all 1,500 or 
2,000 hospitals or whatever it is. And for them to make those 
decisions, in my mind, seems to, in some ways, usurp the 
authority of the clinical caregivers in those individual 
hospitals. So if we could take that out, it would be very 
helpful.
    The other thing that I would like to say at this point is 
that as we discuss GPOs and the safe harbor, we have really got 
only two choices. That is, we either eliminate the safe harbor 
and return this industry to a level playing field where 
everybody gets the same opportunity to compete for business, 
one small or medium-size account at a time, where we don't 
completely change the landscape of competition, or if we want 
to keep the safe harbor, then we are going to have to implement 
some very, very significant oversight and there are going to 
have to be rules for participation and penalties for breaking 
those rules. That is the only way that we will be able to keep 
all of this fair and above board, and that is the only way that 
patients, caregivers, and taxpayers are going to feel 
comfortable with the system that has been created.
    Senator Kohl. Mr. Brown?
    Mr. Brown. Yes, sir. I would like to say--to address this 
issue of product councils. I think if you look at this on one 
hand, it looks like a fair way to assess which company should 
be allowed to participate in the GPO contract. But in 
actuality, what the product councils generally reflect is the 
standard market share that is existing today out in the 
marketplace. And so as a result of that, the little guy is 
still generally excluded from fair access. So, somehow, that 
has to be addressed, as well.
    I would like to address a comment made by Mr. Norling and 
that is the new technology assessment program does help small 
companies, and my company is a good example of that. And while 
we are very encouraged by this and that we have been selected 
by Premier to participate in their program, I would also, on 
the other side of the ledger, like to say that this only 
reflects a small percentage of our product line. It only 
reflects those products that the GPO has considered extremely 
new and innovative. While I have a complete large sector of 
products to be able to market to GPOs, I am still locked out 
from that viewpoint.
    Mr. Norling. Senator, if I may respond to that--the product 
council process, I think, is an interesting one because you 
can't bring representatives of 1,500 hospitals together to do 
that. And if you are asking each hospital to effectively put 
that sort of process in place, we contract for 300,000 
different products. So I think of the mass of attempting to 
deal with that.
    How is this effectively and fairly done is the question 
that is raised here, and I don't want to get into a debate 
here, but that is why we have chosen to go outside to, in our 
case, ECRI to do the technology assessment of products. They 
offer clear standards in terms of what they do and how they do 
it.
    So our product councils are given clinical results from our 
databases in terms of where they exist, and where we have good 
insights. They are given reviews from a number of outside 
consulting firms, including ECRI. That, in turn, is brought to 
these councils.
    Now, frankly, these folks are a great representation of the 
1,500 hospitals and clinicians trying to make a difference for 
patient care. I am not saying that they perfectly represent 
every interest, and very frankly, that is why the idea that 
choice does exist is a very important element. But at some 
point, you need a resource to effectively screen this 
incredibly high volume, bring objective data to the process, 
and then a representative group to make a decision.
    Now, if that decision were enforced by Premier arbitrarily 
on hospitals, on clinicians, I think it would be a good point. 
But that is indeed not the case, and I think I have submitted 
that.
    You have to have a mechanism to do the best job you can to 
get fair representation of the patient and the clinicians into 
the process. I am very open to ideas of what might be better, 
but I assure you, having individual hospitals putting processes 
in place to assess 300,000 line items is not the answer.
    Senator Kohl. Mr. McKenna, Novation recently informed the 
Subcommittee that several plainly anti-competitive contract 
terms had now been removed from all of its contracts. These 
contract terms forbid Novation hospitals from even evaluating 
competitive products or forbid a Novation hospital from 
purchasing any products that competed with products sold in the 
bundled Opportunity Spectrum Program. While we are glad that 
Novation has finally seen fit to eliminate these contract 
terms, we were astounded that such plainly anti-competitive 
provisions were found in Novation's contracts in the first 
place.
    Mr. McKenna, should the fact that these contract terms were 
contained in Novation contracts for many years cause us concern 
that Novation might well revert to these and other similar 
anti-competitive practices should the spotlight of our 
oversight ever be lessened?
    Mr. McKenna. No, Senator Kohl, to the contrary. Broadly, 
and then specifically, let me address your concern.
    We have gone through and taken each of the operating 
principles. We have put a management-level person responsible 
for each principle and we have gone through and trained every 
employee that has anything to do with contracting. So we have 
made a commitment, which is a long-term commitment, to make 
systemic changes to our organization culture to, on a daily 
basis, make this a part of everyone's work.
    In regard to the former language that has now been removed, 
at the time we put those contracts in place, the driver really 
came from the for-profit side and we were attempting to make 
sure we stayed level with them relative to value. And so we 
packaged our stand-alone contracts that were--they were put in 
place one at a time and then we offered additional value if the 
customer on their own elected to participate in those 
contracts.
    So just a perspective as to how we got to where we are. But 
I think a testament to the principles that we have all agreed 
to, we have now taken the steps to eliminate those issues and 
have communicated that to both the supplier community and 
certainly to our membership.
    Senator Kohl. Mr. Norling, will you commit to review 
Premier's contracts for language that could be considered or 
construed as anti-competitive and report back to this Committee 
that you have indeed done that review?
    Mr. Norling. I will absolutely commit to that. I am not 
aware of any language that can be construed as anti-
competitive, but we will make a systematic review of our 
contract terms and conditions.
    I will indicate, Senator, that typically that is a 
negotiating point company-by-company, offering-by-offering. So 
the terms and conditions, apply to not one contract, but a 
whole series of them. But I will look at our standard and I 
will make sure that, with regard to our practices, that 
guidelines are in place to assure there are no anti-competitive 
elements to it.
    Senator Kohl. Any other comments from the panel? Yes, sir, 
Mr. Hilal?
    Mr. Hilal. Senator, if I may, more important than us 
recognizing that the drawbridge is down, it is important that 
hospitals themselves know, because what lingers behind any of 
these practices is an impression that stays around for years, a 
misperception of what hospitals can and cannot do, 
unfortunately fueled by the large or dominant suppliers.
    It behooves us when we change these things to strongly urge 
the GPOs to communicate to their members that things have 
changed. Unless and until they do that, things do not change in 
the field. Thank you.
    Senator Kohl. Mr. Chairman?
    Chairman DeWine. Mr. Everard, if the GPOs fail to win 
savings the way you say they do, why don't the hospitals just 
leave the GPOs?
    Mr. Everard. That is a very good question.
    Chairman DeWine. They understand the business, don't they?
    Mr. Everard. That is one of the problems that we have. The 
arguments of the GPOs is that if they went away, immediately, 
hospitals would face higher prices. I believe that that 
argument is--the logic of that argument is really based more 
upon education than economics. What I mean by that is that the 
current pricing structures of GPOs become known the day that 
they hit the street. They become almost common knowledge. It 
would be very difficult and a very brazen move on the part of 
any major manufacturer to raise prices unilaterally, knowing 
that the prices are already out there, without having a good 
reason to do it.
    In general, hospitals have not devoted much effort to 
managing their supply chains. They have chosen in many cases to 
outsource that decision making process to GPOs. As a result, 
they are now, years later, left defenseless. Within those 
hospitals, there simply is not a supply chain expert who would 
be able to properly assess the value of the GPO.
    The other part of this is that in most GPO relationships, 
hospitals receive a substantial rebate check at the end of the 
year. The rebate is ostensibly money that is left over from GPO 
operations expenses that is now returned back to the 
shareholder hospitals. The CEOs of hospitals count on those 
checks. Some of them are quite large, $1 million. They are 
wondering what they would do without that $1 million if that 
relationship and the rebate check went away. So they are almost 
held hostage by the need to get the rebate.
    What many of them don't understand is that a number of 
hospitals, smaller hospitals, small IDNs, have gotten together 
and gone out and achieved price savings on their own that take 
their pricing and make it 13 percent or more below the prices 
that are being paid by hospitals who are members of the GPO. So 
there are models out there that have worked. Hospitals are able 
to move away. But the hospitals generally don't understand that 
that option is available to them and they are taught to fear 
going out on their own. Any time a hospital goes out and fails 
because it didn't do it the right way, the GPOs publicize that 
to all the other hospitals to make sure that everybody is 
afraid of making that move.
    So one of the issues that we face in this industry is that 
the hospitals simply don't have the knowledge or understanding 
of real supply chain, and let me give you an example. Mr. 
Norling referred to a term called ``strategic sourcing.'' The 
way that GPOs use strategic sourcing is completely different 
than the way that it is used in manufacturer outside of health 
care.
    One of the things I find fascinating is the dichotomy 
between the way that large manufacturers, and small ones, for 
that matter, in health care go about buying their products from 
their raw materials suppliers and then the way that they turn 
around and sell them to hospitals. It is a completely different 
method and completely different model and I would like to know 
why that is and I would like to encourage hospitals to adopt 
that model for themselves.
    Chairman DeWine. I want to thank the panel very much. We 
have actually, as you can see, survived without a roll call, 
which they keep telling us is going to occur at any moment. We 
have survived. I thank you very much for your testimony.
    The biggest thing I take away from this hearing is that 
people in different parts of the industry see a different 
world. That was brought out very well by the testimony. GPOs 
feel as though they are very open to new products. Mr. Heiman, 
as a supplier, certainly supports that view in very eloquent 
testimony today. But two other suppliers supported by Mr. 
Everard and Ms. Weatherman say that the process is too 
uncertain, it is too burdensome. Simply put, they are locked 
out. They are outside the castle.
    You know, this is a big industry. We can't expect complete 
agreement and uniformity within an industry, but these 
differences are, I must say, very stark. It suggests to me that 
this Subcommittee has more work to do. We must continue our 
oversight, and so I intend to continue this oversight. We will 
continue to look at this industry. We will continue to have 
oversight, and we will, I expect, have a hearing in the future 
again.
    I would think it is fair to say that our work in this area 
is not complete, but we appreciate you all coming in. You have 
given some very valuable testimony and the hearing is 
adjourned. Thank you very much.
    [Whereupon, at 12:35 p.m., the Subcommittee was adjourned.]
    [Questions and answers and submissions for the record 
follow.]

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