[Senate Hearing 108-821]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 108-821

 HOSPITAL GROUP PURCHASING: HOW TO MAINTAIN INNOVATION AND COST SAVINGS

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

                                HEARING

                               before the

                       SUBCOMMITTEE ON ANTITRUST,
                 COMPETITION POLICY AND CONSUMER RIGHTS

                                 of the

                       COMMITTEE ON THE JUDICIARY
                          UNITED STATES SENATE

                      ONE HUNDRED EIGHTH CONGRESS

                             SECOND SESSION

                               __________

                           SEPTEMBER 14, 2004

                               __________

                          Serial No. J-108-95

                               __________

         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
Chambliss, Hon. Saxby, a U.S. Senator from the State of Georgia, 
  prepared statement.............................................   100
DeWine, Hon. Mike, a U.S. Senator from the State of Ohio.........     1
    prepared statement...........................................   102
Kohl, Hon. Herbert, a U.S. Senator from the State of Wisconsin...     4
    prepared statement...........................................   126
Leahy, Hon. Patrick J., a U.S. Senator from the State of Vermont, 
  prepared statement.............................................   140

                               WITNESSES

Balto, David A., Robins, Kaplan, Miller and Ciresi LLP, 
  Washington, D.C................................................     8
Betz, Robert, President and Chief Executive Officer, Health 
  Industry Group Purchasing Association, Arlington, Virginia.....     5
Kiani, Joe E., Chairman and Chief Executive Officer, Masimo 
  Corporation, Irvine, California................................     7

                         QUESTIONS AND ANSWERS

Responses of David A. Balto to questions submitted by Senators 
  DeWine, Kohl, and Leahy........................................    18
Responses of Robert Betz to questions submitted by Senators 
  DeWine, Kohl, Graham, and Leahy................................    30
Responses of Joe E. Kiani to questions submitted by Senators 
  DeWine, Kohl, and Leahy........................................    41

                       SUBMISSIONS FOR THE RECORD

Almon, Ted, President, Chairman Executive Officer, Clafin 
  Company, Warwick, Rhode Island, letter.........................    49
Balto, David A., Robins, Kaplan, Miller and Ciresi LLP, 
  Washington, D.C., prepared statement...........................    51
Betz, Robert, President and Chief Executive Officer, Health 
  Industry Group Purchasing Association, Arlington, Virginia, 
  prepared statement and attachments.............................    65
Blumenthal, Richard, Connecticut Attorney General, Hartford, 
  Connecticut, statement.........................................    97
Foundation for Healthcare Integrity, Lynn James Everard, Roswell, 
  Georgia, letter and attachment.................................   105
Kiani, Joe E., Chairman and Chief Executive Officer, Masimo 
  Corporation, Irvine, California, prepared statement............   119
Medical Device Manufacturers Association, Mark B. Leahey, Esq., 
  Executive Director, Washington, D.C., statement................   128
Service Employees International Union, Washington, D.C., letter..   142
Saucier, Nancy L.G., Director, Medical Industry Group, letter....   147
Shaw, Thomas J., President & Chief Executive Officer, Retractable 
  Technologies, Inc., statement..................................   149
Standard Textile Co., Inc., Gary Heiman, President, Chief 
  Executive Officer, Cincinnati, Ohio, letter....................   157
Wallis, Mark H., Chairman and Chief Executive Officer, Invatec, 
  Palm Tree Group, Stafford Texas, prepared statement............   160

 
 HOSPITAL GROUP PURCHASING: HOW TO MAINTAIN INNOVATION AND COST SAVINGS

                              ----------                              


                      TUESDAY, SEPTEMBER 14, 2004

                              United States Senate,
Subcommittee on Antitrust, Competition Policy and Consumer 
                 Rights, of the Committee on the Judiciary,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 2:04 p.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 afternoon. We welcome you to the 
Antitrust Subcommittee hearing on hospital group purchasing 
organizations.
    Senator Kohl and I have devoted substantial energy and time 
to exploring the allegations of questionable ethics and 
business practices in this industry. We have commissioned two 
General Accounting Office studies on this issue and this is our 
third hearing on the hospital group purchasing organizations, 
often referred to as GPOs.
    The purpose of the hearing this afternoon is to look toward 
the future. Since our first hearing in April of 2002, I am 
pleased to say that many of the questionable practices in the 
industry have been voluntarily eradicated by the GPOs 
themselves. In particular, business practices such as GPOs 
owning stakes in their vendors or GPOs accepting ownership 
interest in the vendor in place of an administrative fee appear 
to have been ended.
    The GPOs took these steps in response to the Subcommittee 
request for them to implement voluntary codes of conduct, and 
they deserve our thanks and applause for so doing. GPOs also 
have taken important voluntary steps to address certain 
controversial contracting practices that are of concern to both 
Senator Kohl and myself.
    For example, GPO practices like the bundling of clinical 
preference products with commodity products, extremely high 
commitment levels, or sole-source contracting are often the 
focal point of debate within the medical community. Small 
manufacturers complain that these practices prevent fair market 
access to new, potentially innovative products, and as a result 
prevent improved patient care.
    Larger incumbent manufacturers and GPOs often argue in 
response that these practices generate significant cost savings 
for high-quality products without harming patient care at all. 
One GPO, for example, recently has pointed to an instance where 
it entered into a long-term, sole-source contract for surgical 
sutures and was able to save $55 million for its hospitals.
    My sense is that both sides make some good points. In fact, 
these are business practices with the potential to save 
significant money in certain circumstances, but unfortunately 
they sometimes make it harder for legitimately innovative 
products to reach the market. Under these circumstances, it 
seems that the best result is one that maintains maximum 
flexibility in the market, and in some ways we may already have 
achieved that.
    All the major GPOs have adopted codes that address these 
issues, but they vary in their details and how they are 
applied. As a result, it appears that we are seeing fewer long-
term contracts, less bundling of clinical preference items, and 
less sole-sourcing, but that those contracting practices are 
still available in certain circumstances.
    Unfortunately, however, the Subcommittee still hears 
complaints principally from small medical device manufacturers 
with arguably cutting-edge products, and they complain that 
they are unable to negotiate a contract with GPOs. Frankly, I 
will be honest. It is often difficult to really determine or to 
assess the credibility of certain complaints from medical 
device manufacturers, and also the GPOs' responses to such 
complaints.
    On one hand, I certainly don't believe that every small 
medical device manufacturer that fails to win a contract with a 
GPO has a legitimate complaint. We all know that competition 
for contracts produces winners and losers, and sometimes sore 
losers as well. On the other hand, these complaints have been 
continuous and steady, and appear to have at least a degree of 
credibility. This makes me wonder if the GPOs indeed are all 
living up to their pledge to decrease or stop some of these 
controversial business practices.
    So that brings us to where we are today, to explore where 
we should go from here. I know that Senator Kohl and I share a 
concern that if the Antitrust Subcommittee turns its oversight 
spotlight away from the GPO industry, there is a risk that 
there may be back-sliding. That means we need to decide if we 
can trust that the current reforms are sufficient, or if not, 
what pathway we can take to ensure that the current reforms are 
actively implemented and, in fact, long-lasting.
    I think it is fair to say that we are at the crossroads, 
and sitting here today, I see at least three paths we could 
choose. I have made no decision, frankly, on which path is 
best, nor do I think we are necessarily limited to these three 
paths. But sitting here today, I think that these three paths 
are evident.
    One path is to do no more, at least for now. We have 
studied the issue, held numerous meetings within the industry, 
commissioned studies and held three hearings in this 
Subcommittee. The GPOs, hospitals and manufacturers know all of 
our concerns and have acted on them to one degree or the other. 
Some would argue that we have done our job, and perhaps more 
importantly the GPOs have done their job by adopting the 
voluntary codes. Under that view, no more action would be 
needed.
    Another path would be to formally transfer our oversight of 
the industry somewhere else. The primary example thus far of 
this approach is embodied in the staff discussion draft that 
has been circulated within the industry and provided to today's 
witnesses. If we followed this path, It would move the 
oversight role to the Department of Health and Human Services, 
which, as an executive agency, is arguably better equipped to 
oversee the activities in the GPO industry. The Department of 
Health and Human Services already has a degree of expertise in 
this area and it currently oversees the anti-kickback exemption 
upon which the entire GPO industry is built.
    Another path would be for the GPO industry to build upon 
their work of setting up individual codes of conduct to create 
what I call a ``voluntary plus'' approach. Currently, existing 
voluntary codes are enforced by each company on its own, an 
approach which has both strengths and, of course, some 
weaknesses.
    On the one hand, because it is voluntary and self-enforced, 
it provides maximum flexibility and does not hamstring the 
industry. But on the other hand, for those very same reasons, 
there is no absolute assurance that it will continue to be 
implemented in the future or that it always will be implemented 
actively. Most troubling is the fact that there is really no 
mechanism to discipline GPOs that don't follow their own code.
    I welcome any proposals from the GPOs that would create 
this sort of ``voluntary plus'' approach, proposals that build 
upon the current voluntary codes, but add teeth, so that the 
Subcommittee can be assured that the reforms are made permanent 
and that if a GPO chooses to disregard its own code of conduct, 
it is disciplined in a way that has real consequences.
    I have set out these three paths as what I see now, but I 
am not wedded to just these three paths. If there is a fourth 
pathway or a fifth out there that are products of this hearing, 
I look forward to considering them, also. We hope today to hear 
our witnesses comment not only on the strengths and weaknesses 
of the discussion draft, but on all these ideas and any others 
that may arise.
    Before I turn to our ranking member, Senator Kohl, I would 
like to add that throughout our oversight of the GPO industry, 
I have tried to stay in close contact with the hospitals in my 
home State of Ohio to find out how they view GPOs. Of course, 
GPOs work as purchasing agents on behalf of these very 
hospitals. So it is really the hospitals that get the ultimate 
benefits of GPO activities.
    I think it is fair to say that nearly all the hospitals 
that I have spoken to in Ohio are confident that their GPOs are 
saving them significant amounts of money. In this age of 
escalating health care costs, that is a very important outcome 
and one that we want to maintain. So I certainly believe that 
GPOs can provide significant benefits for hospitals. Ensuring 
that in the future GPOs both save money, but also allow for new 
technology and vigorous competition in health care products, is 
the goal of our hearing today, and been frankly the goal of 
this Subcommittee's work.
    One final point. The Subcommittee first started 
investigating this issue in the fall of 2001 under the 
chairmanship of Senator Kohl. He has continued to work 
tirelessly on this very important issue, and I think it is fair 
to say that without his work, the Subcommittee would not be 
holding this hearing today and the industry would not have 
progressed to where we are now without his very good efforts. 
So I thank him for that, and I turn now to him for his 
comments.
    [The prepared statement of Senator DeWine appears as a 
submission for the record.]
    Senator Kohl.

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

    Senator Kohl. Mr. Chairman, I thank you for your continued 
efforts on this important issue and for holding this hearing 
today. The subject matter of this hearing centers on perhaps 
the most important work of our Subcommittee in the last few 
years, namely ensuring that physicians, patients and health 
care workers have access to the best and the safest medical 
devices, devices that literally make the difference in many 
cases between life and death.
    With the cooperation of the industry, we have accomplished 
much over the past 2 years to reform the hospital purchasing 
system to make it better serve the interests of competition, of 
innovation and patients. The changes we have seen are real. We 
should all be proud that more patients are getting access to 
the best medical devices more often. So we must now find a way 
to ensure that these gains are maintained.
    A review of the reforms shows how far we have come. Most 
significantly, six of the largest hospital groups, known as 
GPOs, agreed to fundamental reform by adopting codes of conduct 
governing their business activities and ethical 
responsibilities. These codes forbid anti-competitive business 
practices and ban conflicts of interest that interfere with the 
GPOs' mission of buying the best products at the lowest prices.
    We commend the GPOs that worked cooperatively with us in 
the process. The actions of Premier and the other GPOs that 
followed its lead especially deserve praise. Premier acted 
first to clearly and unequivocally ban each of the most 
troublesome practices, and many of its competitors followed 
suit and the marketplace soon began to open.
    We are pleased that we have made a real difference, but we 
also realize that two primary tasks remain. First, how can we 
be certain that these considerable gains will remain when the 
spotlight of a Senate hearing room fades away? The GPO codes of 
conduct are entirely voluntary and at present not backed with 
any sanctions or enforcement mechanisms. So we need to be sure 
that these reforms will not be reversed. Second, how can the 
industry continue to improve in those areas that still need 
work?
    To answer these questions, we have drafted a legislative 
proposal which will assure that our reforms are truly 
permanent. This draft was only prepared after extensive 
discussions with the GPO industry over the last eight weeks, 
discussions at which we repeatedly solicited their suggestions.
    Our draft legislation gives the Department of Health and 
Human Services the authority to forbid GPO business practices 
which are anti-competitive or unethical. The purpose of this 
legislation is simply to create a regulatory framework so that 
improper business practices never return to this important 
industry. However, our proposal remains just that, a proposal. 
So we are anxious to hear the suggestions and views of today's 
panel regarding our ideas.
    We are also happy to consider with an open mind any non-
legislative proposal that the GPO industry or others may 
suggest. However, it is essential that any such measure have 
teeth. In other words, any industry plan must include a real 
and a meaningful sanction if any GPO violates ethical 
principles or the rules of free competition. In an industry as 
important to health and safety as the purchasing of medical 
equipment for critically ill patients, half measures which do 
not assure that the best medical devices are available for 
patients are not acceptable.
    We thank our witnesses for coming here today to testify and 
we look forward to hearing their views.
    [The prepared statement of Senator Kohl appears as a 
submission for the record.]
    Thank you, Mr. Chairman.
    Chairman DeWine. Senator Kohl, thank you very much.
    Let me introduce our witnesses. Dr. Robert Betz is the 
President and CEO of the Health Industry Group Purchasing 
Association and has spent more than 20 years representing 
health care organizations. Additionally, Dr. Betz has worked 
for the American Hospital Association and the Louisiana 
Hospital Association.
    Mr. Joe Kiani is the CEO and Chairman of the Board of 
Masimo Corporation, a provider of signal processing and sensor 
technology to the medical device industry. Additionally, he 
serves on the board of the Medical Device Manufacturers 
Association. He has testified before our Subcommittee in the 
past and we certainly welcome him back.
    Mr. David Balto is a partner at Robins, Kaplan, Miller and 
Ciresi, specializing in antitrust litigation. Prior to joining 
that firm, he served as policy director of the Bureau of 
Competition at the Federal Trade Commission, and as attorney-
advisor to the chairman.
    Dr. Betz, we will start with you, and let me advise you all 
that we have a vote that is scheduled to begin at any moment. 
So I will break the testimony at some point. We are going to 
follow the five-minute rule, and we are going to follow that 
very religiously today, which means that you are going to get a 
four-minute warning when the light goes on. That means you have 
got a minute.
    Dr. Betz, thank you.

    STATEMENT OF ROBERT BETZ, PRESIDENT AND CHIEF EXECUTIVE 
    OFFICER, HEALTH INDUSTRY GROUP PURCHASING ASSOCIATION, 
                      ARLINGTON, VIRGINIA

    Mr. Betz. I am Dr. Robert Betz, President and CEO of the 
Health Industry Group Purchasing Association. HIGPA represents 
over 150 health care supply organizations, including every 
major group purchasing organization in the United States, with 
the exception of two; also, many of the vendors with whom they 
do business. I appreciate the opportunity to submit testimony 
on behalf of the members of HIGPA.
    We return to the Subcommittee again today, Mr. Chairman, 
not because hospitals and other health care providers are 
unhappy with the current system of group purchasing. We are 
here today because some manufacturers aren't able to capture 
the sales they desire and/or think they should have. We believe 
we are here today because a small yet vocal group of medical 
device manufacturers would like to have Congress intervene in 
the marketplace in favor of small suppliers at the expense of 
health care providers and the patients they serve everyday.
    I want to make three points, if I may, please. Number one, 
HIGPA, on behalf of the health care providers and patients that 
they serve, oppose the proposed legislation circulated to us by 
the Subcommittee staff. It is unnecessary, we believe. 
Furthermore, we believe this proposed legislation will lead to 
higher costs for health care in this country.
    Number two, 2 years ago HIGPA developed a code of conduct, 
in collaboration with this Subcommittee, which focused on 
several areas, including the following: promoting competition 
and innovation, eliminating the potential for conflicts of 
interest, ensuring open communications between members and 
vendors, establishing guidelines for the use of contracting 
tools, and providing transparency by requiring full disclosure 
to members of all vendor payments.
    Despite what the Subcommittee may be hearing from a vocal 
group of small manufacturers, HIGPA's code of conduct is 
working. Our industry continues to engage in vigorous 
examination of ways to improve and strengthen our certification 
and compliance process. We continue to do this because we 
believe strongly that the private sector compliance programs 
are the most efficient and effective way to advance best 
practices in hospital supply purchasing and ultimately 
strengthens our health care system.
    Number three, at the request of some members of this 
Subcommittee, the Federal Trade Commission and the Department 
of Justice conducted a comprehensive examination of this 
industry. The agencies concluded in their July 2004, joint 
report on health care competition and policy that indeed they 
do have ample tools to assure competition in the GPO industry.
    Additionally, the report states that it would be 
counterproductive to amend Health Care Statement 7, the policy 
statement that governs group purchasing organizations. 
Moreover, as you know, the FTC has historically demonstrated a 
preference for self-regulation in industries that offer self-
compliance systems.
    It is for these reasons HIGPA believes continued self-
regulation is the viable compliance mechanism for the health 
care group purchasing industry. As always, you have our 
commitment. We offer to engage in productive dialogue with the 
Subcommittee to explore non-legislative approaches for assuring 
that the changes that have been made remain in place. 
Furthermore, our industry will remain vigilant in adapting its 
practices as the market continues to evolve.
    The final point of the testimony I make today, Mr. Chairman 
and members of the Subcommittee, I make on behalf of all the 
health care providers in the United States. Make no mistake, if 
Congress weakens the ability of GPOs to negotiate the best 
deals for their provider members, as is proposed in the draft 
legislation, patients will not be better served. Rather, the 
cost of health care in this country will increase.
    What will happen is manufacturers that would like to see 
GPOs severely weakened will surely realize greater financial 
profits. I urge the members of this Subcommittee not to weaken 
a crucial mechanism that helps providers reduce their 
purchasing costs, which allows them to commit more financial 
resources to patient care.
    Mr. Chairman and members of the Subcommittee, thank you.
    [The prepared statement of Mr. Betz appears as a submission 
for the record.]
    Chairman DeWine. We are going to take a short break at this 
point. We have a vote that just started, so we should be back 
here, we hope, in about ten minutes. That is Senate time. Stay 
close.
    [The Subcommittee was adjourned from 2:24 p.m. to 2:45 
p.m.]
    Chairman DeWine. The hearing will come to order. Thank you 
very much for your patience.
    I have a statement for the record from Senator Leahy and 
Senator Chambliss which, without objection, we will make a part 
of the record at this moment.
    Mr. Kiani, you are next.

 STATEMENT OF JOE KIANI, CHAIRMAN AND CHIEF EXECUTIVE OFFICER, 
             MASIMO CORPORATION, IRVINE, CALIFORNIA

    Mr. Kiani. Thank you. Chairman DeWine, Senator Kohl, thank 
you so much for inviting me here to testify. I know that you 
and the other members of this Subcommittee want the best care 
for the patients in the U.S., especially children and infants. 
Your work over the last two-and-a-half years has yielded a lot 
of progress. Just alone with our piece of it, you should be 
happy to know that countless babies have vision that would have 
otherwise been impaired; their eyes have been saved. Because of 
competition, for the over 100 hospitals that we have converted 
since then, on average, each one of them has saved $100,000 a 
year.
    Senator Kohl, after the last hearing that I was involved 
with, you remember I had the honor to meet with you. And at 
that meeting--and I know you felt the same way because we all 
want a free market--you asked me if legislation was needed. My 
response was I hope not; let's see if the code of conduct 
works. Well, 2 years later, I am here for you showing you 
examples, which hopefully I will be able to do, that show that 
these codes of conduct for the most part have not worked. Many 
GPOs continue to engage in anti-competitive practices such as 
bundling and sole-sourcing which get in the way of the best 
products getting into the patients' hands and the most 
competitive prices.
    Today, I am convinced that the codes won't work, and I 
really believe we need oversight legislation. The discussion 
draft legislation that your staff has put together, I believe, 
is a great start. I believe that legislation bringing oversight 
should improve patient care, should reduce cost of care, and 
bring a robust competition to this industry.
    I would like to give you an update of what has happened 
since my last testimony and since the codes of conduct. Two 
ground-breaking studies were published, the first one at the 
end of 2002 in the Critical Care Medicine Journal that showed 
that Masimo Technology, the one that you guys with your 
oversight were able to put on a lot of contacts, can help 
reduce medical errors.
    At the beginning of 2003, another ground-breaking study 
came out that showed, after 5 years at Cedars Sinai Hospital in 
Los Angeles, the rate of eye damage, known as retinopathy of 
prematurity, dropped from the national average of 12 percent to 
nearly zero percent. And this was because of Masimo's 
technology and a very sound protocol.
    The other good news is that Premier did put us on contract 
and did stop their bundling with Tyco. As a result, over 1,600 
hospitals and just about practically every children's hospital 
in this country being under Premier got access to Masimo's 
technology. And within 2 years, our reach of our technology 
getting to those patients has increased ten-fold.
    You remember last time I was in front of you, we had not 
been able to convert one single Premier hospital to use our 
technology beyond the 10-percent limit that was imposed by Tyco 
and Premier. Today, 40 hospitals have converted hospital-wide 
to our technology.
    The bad news is that there is talk at Premier about 
creating another means to drive sole-source to the dominant 
vendors, and the story of the two other GPOs I want to share 
with you today is even more disheartening. If I could show you 
something here, I have blown this up. This is actually an 
excerpt from a letter that was sent to Novation member 
hospitals. As you notice--I don't know if you can read that 
from there, but it says ``The undersigned Novation member 
reconfirms as of `x' 2003 a date that must be no later than 
October 31, 2003, that it intends to continue at its current 
commitment level of either 95 or 75 percent.''
    The next slide I want to put up for you even tells you the 
story better. This letter was sent to the member hospitals, 
despite the fact that we were added to the Novation contract 
just a day or 2 days before the last Senate hearing, and Tyco's 
patents were about to expire on the sensors that cost the 
hospitals in the U.S. about $300 million a year two weeks 
before the deadline for them to recommit.
    Another example that I want to just share with you is that 
MedAssets, who is now the third largest GPO, has an active 
bundling program. Even though we were put on contract, they 
have a bundling program that they bundle over 100 products 
together.
    I know I am running out of time and, if you like, I could 
either finish or take your questions afterwards.
    Chairman DeWine. Why don't we do it in questions? That 
would be good.
    Mr. Kiani. Thank you.
    [The prepared statement of Mr. Kiani appears as a 
submission for the record.]
    Chairman DeWine. Mr. Balto.

STATEMENT OF DAVID A. BALTO, ROBINS, KAPLAN, MILLER AND CIRESI 
                     LLP, WASHINGTON, D.C.

    Mr. Balto. Thank you, Chairman DeWine and Ranking Member 
Kohl. It is my privilege to speak before you today. I represent 
no one in the medical device industry, but I am here as a 
former antitrust enforcer who worked over a decade at the FTC 
in the Antitrust Division. In those roles, I helped to direct 
the FTC's non-merger enforcement efforts and acted frequently 
with Congress and other regulators on dealing with issues such 
as self-regulation.
    There are three issues before the Subcommittee today. 
First, is there a need for regulation? Second, is self-
regulation sufficient? And, third, would the proposed 
legislation be a sound approach?
    I commend you and your Subcommittee staff for the hard work 
you have done in this area, but this Committee cannot be the 
regulator of the medical device industry. It is time to go and 
take that responsibility and give it to a responsible 
governmental entity, and the Inspector General's Office of 
Health and Human Services is the appropriate entity.
    What you are dealing with is a serious gap in dealing with 
competitive issues in this industry. It is a gap because the 
Antitrust Division and the Department of Justice haven't acted. 
They have failed to amend their guidelines.
    Let me just say as an aside, as somebody who was involved 
in the amendment of those health care guidelines in 1994 and 
1996, the problems that Congress posed to us then were far less 
significant than the problems that Mr. Kiani and the other 
manufacturers are posing to you today. I was rather surprised 
that they said they couldn't address every problem and that was 
the reason for not issuing guidelines.
    But even individual enforcement actions or individual 
litigation can only solve mere small episodes of anti-
competitive problems. The Committee appropriately asked for 
self-regulation. I laud the self-regulatory efforts, but they 
will fail. They will fail for four reasons. They lack clear and 
unambiguous rules. There is no enforcement mechanism. There are 
no penalties for non-compliance and there is no procedural due 
process and transparency. Simply, this process lacks teeth.
    Moreover, I am surprised that at the end of the last 
hearing you said there was more to do, Chairman DeWine, and 
these GPOs did not further amend or further strengthen their 
codes of conduct.
    Now, one might suggest, well, the way to do this is to get 
all the competitors in a room together and have them come up 
with a stronger code of conduct. That would be the worst 
answer. It would be the worst answer because this is an 
environment in which collective action would lead to bad 
results.
    Frequently, competitors act under the guise of self-
regulation and engage in self-help. If you have a problem with 
the way the College Football Association deals with the Bowl 
Championship Series, you are going to have quite a problem if 
you get all of these folks together, well-meaning as they might 
be, to go and try and set things straight. Now, my testimony 
presents for you examples where Congress has said, self-
regulation, nice try, good efforts, it is not enough, it is 
time to regulate. I think you can base what you do next on 
those models of self-regulation.
    Let me answer two last questions. First, is the Health and 
Human Services' Inspector General's Office the right place to 
go? I think that is absolutely true. Although I don't represent 
medical device companies, I represent pharmaceutical 
manufacturers, and on a regular basis those clients call me up 
and they say we would like to do x, y, or z; tell me, does the 
HHS Inspector General's Office permit this. There is a body of 
not only regulations, but also staff opinion letters and other 
advice. The inspector general's office has a broad range of 
tools to go and advise the industry. So I think it is the right 
regulator to go and begin to address these problems.
    Second, the Committee must consider seriously whether these 
actions will lead to higher costs and higher prices. I know 
there are people who will complain that they think this will 
lead to higher costs for hospitals. Let me just say that from 
over a decade as an antitrust enforcer involved in anti-
competitive investigations through the years, my experience has 
taught me that the elimination of impediments to competition 
will bring the greatest long-term benefits. When these side 
payments or other types of anti-competitive practices are 
eliminated, you will see competition flourish and innovation 
and lower prices come about.
    The GPOs' efforts at establishing voluntary codes of 
conduct fall far short of effective self-regulation. Their 
current system is insufficient to assure that anti-competitive 
activity is prohibited and consumers are protected. The time 
for effective self-regulation, I would submit, has passed. 
Congress should act to regulate anti-competitive activity to 
protect the consumer's right to a competitive marketplace.
    Thank you.
    [The prepared statement of Mr. Balto appears as a 
submission for the record.]
    Chairman DeWine. Senator Kohl.
    Senator Kohl. Thank you, Chairman DeWine.
    Dr. Betz, we recognize that your industry has undertaken 
major efforts to reform through your voluntary codes of conduct 
and we certainly do commend you. We also appreciate and 
understand that you might oppose any government regulation of 
GPOs. However, we are reminded by multiple Federal and State 
investigations, as recently reported in the New York Times, 
that there is still much work to be done in the industry.
    Since the industry codes of conduct are voluntary and have 
no mandatory enforcement mechanism, how can we be sure that 
GPOs will continue to comply with their codes of conduct, 
especially if the oversight of this Subcommittee ends?
    Mr. Betz. Senator Kohl, the compliance program that was put 
together by the Health Industry Group Purchasing Association 
for all of our industry members, have a couple of features I 
would like to call to your attention in answer to your 
question.
    First of all, some of the permanent steps that were taken 
are that our bylaws were amended to include the requirement 
that all GPOs must adopt our code of conduct into their 
business model in order to be a member of the association, and 
then to continue to be in compliance to remain a member.
    At the beginning of each year, as a second point, our 
American-based GPOs certify compliance with the code of 
conduct. HIGPA's ongoing compliance programs offer a solid 
example of the industry's good-faith efforts to address 
industry business practices now and in the future.
    Our code of conduct also offers a web page that offers 
information about HIGPA's code of conduct principles for the 
world to see. The association's GPO compliance officers, that 
all GPOs are required under our code of conduct to have in 
place, and quite frankly something that is new--it is a new 
web-based vendor exchange program that was put in place.
    We are tasked everyday with the difficult job of learning 
about new medical products and the direction of the health care 
provider members. In accordance with the association's code of 
conduct, we created this web-based exchange to enable health 
care manufacturers, whether currently contracting with a GPO or 
not, the ability to promote their new and innovative products 
directly to GPO members through HIGPA.
    Upon accessing the submission forms, manufacturers are 
asked to provide information for the representative that is 
doing the marketing of this particular device or new 
technology, the product name, the detailed description, with 
the ability to upload any marketing or research materials that 
they want. As part of its commitment to the Subcommittee, the 
GPO industry reached out to small medical device manufacturers, 
to the community, to their trade association, to find ways to 
collaborate and facilitate communication among all players in 
the health care supply chain.
    Finally, sir, in answer to your question, to be in 
compliance with HIGPA's code of conduct, each GPO must 
designate a compliance officer, and this compliance officer is 
known to anyone in the process--the hospitals, the manufacturer 
representatives, to this Committee, to the regulators. Anyone 
who has questions regarding the specifics of our compliance 
program can contact these compliance officers through our 
website. It is through these steps that we make our efforts and 
our successes and our ongoing commitment a part of a permanent 
process.
    Senator Kohl. Mr. Betz, what is the remedy today if a GPO 
violates the code of conduct?
    Mr. Betz. Sir, as I said, it is mandatory that they have to 
be in compliance. We have the only mandatory compliance program 
in the whole entire health care supply chain. Manufacturers 
don't have it, distributors don't have it.
    Senator Kohl. What is the remedy, that they go out of 
business?
    Mr. Betz. Sir, not being in compliance with the HIGPA code 
of conduct puts a burden, I would submit, on that group 
purchasing organization or that entity when they are in a 
contracting process with a manufacturer. That is one aspect of 
it. I think it also puts a burden, quite frankly, from the 
hospital perspective. Hospitals are constantly being approached 
by group purchasing organizations. It is not just one hospital 
that has one group purchasing organization. Many studies have 
shown that hospitals belong to more than one group purchasing 
organization and it is a constant, competitive marketplace. We 
believe that the hospitals are interested in who is in 
compliance with the code of conduct as well.
    Senator Kohl. But isn't it true that even if you should 
expel them, which we could argue may or may not happen, a GPO 
could continue to do business?
    Mr. Betz. Yes, sir, they indeed could.
    Senator Kohl. So in the absence of some legislation and 
oversight, continuing oversight by HHS, if you simply have a 
voluntary kind of a program, isn't it true that it would not be 
unreasonable for us to be quite worried, given the past history 
and our hearings and where we are today, that in the absence of 
something concrete such as legislation that there isn't a 
chance--call it large or small--to come back in a year, or two, 
three, four or five, and we will pretty much back where we were 
before we commenced all this activity in this Subcommittee?
    Mr. Betz. I think that I would disagree with part of the 
basis of your observation, if I could, Senator. I think that 
there are current remedies that do exist in the Federal Trade 
Commission and the Department of Justice. Also, plaintiffs have 
the ability to get together and bring action singly or 
collectively in this area. Our codes of compliance also assure 
that the antitrust laws and the anti-kickback laws are being 
adhered to. If they violate our HIGPA code of conduct, they are 
subject to prosecution under current laws that exist.
    One other point, too, is that we are very impressed that 
the Department of Justice and the Federal Trade Commission, 
again at the request of this Subcommittee, have looked at this 
area and told you the same thing they have told us. They think 
they have adequate enforcement capabilities as they currently 
exist.
    So we think that that, married with the codes of conduct 
and the progress that the industry has made and on our ongoing 
commitment--Senator, everything you have asked of our 
association, everything you have asked of our industry, we have 
delivered. You asked us for a voluntary code. We delivered. You 
asked for 90 days. We have delivered.
    We have gone beyond even that with the web-based exchange 
and with some other things that we currently have in the works. 
We have also committed to you that this is a living document, 
that this is a living process. We take it seriously and we 
think the system has been improved by it.
    Senator Kohl. I thank you, Senator DeWine.
    Chairman DeWine. Well, let me just clarify a little bit in 
regard to your codes of conduct. Has any member been kicked out 
or disciplined for non-compliance?
    Mr. Betz. Sir, we have had one instance of one organization 
in Florida that we were getting ready to kick out and it was 
just that they didn't think we were serious about it. We had a 
conversation with the executive. They found out that we were 
serious about it. They took it to their board of directors and 
the board of directors told them to get in line. They did not 
want to be outside the industry code of conduct, so they did 
come back in. And I am pleased to report that all the GPO 
members of HIGPA are in compliance with our code. We have 
brought those certification documents on a regular basis to the 
Subcommittee staff.
    Chairman DeWine. What would be the real-world consequences 
to a GPO if it were kicked out?
    Mr. Betz. If they were kicked out?
    Chairman DeWine. Yes. How would it affect its business?
    Mr. Betz. Well, first of all, I would pray for them each 
and every day, Mr. Chairman. I believe that the reality of the 
situation is that they are going to face pressures in the 
marketplace, pressures from vendors. I mean, if you were a 
manufacturer, if I could, Mr. Chairman, who do you want to do 
business with? Who do you want to do business with on a long-
term basis? Do you want somebody that is open, in compliance 
with the industry code of conduct?
    If you are a hospital, what do you want; what do you want 
of your GPO? Do you want to know that they have the highest 
ethical practices that they possibly can? And if you are a GPO 
exec, quite frankly, I think the competitive nature of the 
process is such that they are going to try to be more ethical 
than the others and take additional steps to try to impress the 
hospitals, the providers that they serve, and also the 
manufacturers.
    Again, briefly, sir, the GPOs must certify compliance to 
the code to be a member of HIGPA. The association's bylaws 
reflect their membership requirement. The names of those in 
compliance are made public on a routine basis. And, finally, it 
allows hospitals and vendors to know which groups are operating 
within the best practices of the industry.
    Chairman DeWine. Mr. Kiani, your testimony makes really a 
compelling case for why we should all want competition in the 
marketplace. We all want that, so that the best and most cost-
effective medical devices are used in patient care.
    As I have told you, I have spoken to a lot of hospitals 
back in Ohio and they all tell me how important it is for them 
to keep the GPOs working for them and negotiating their 
contracts. They talk about money; that is the thing I hear. 
Certainly, these hospitals are very aware of the need to 
provide the best possible care. Surely, these doctors and 
nurses believe that they are using the best equipment and 
devices for their patients.
    If GPOs were really, in fact, cutting off access to new and 
improved technology, why wouldn't these hospitals be demanding 
this technology? Why wouldn't they be complaining about that, 
or why wouldn't they just leave the GPO? Why don't I hear that 
from them? Are they just not aware of the technology out there, 
or what is the problem?
    Mr. Kiani. Well, Chairman DeWine, first of all, I really 
wish maybe some of those hospitals were at these Senate 
hearings so they could for themselves see what the real issues 
are, and also understand the legislation you are seeking--
    Chairman DeWine. What does that mean?
    Mr. Kiani. What I mean by that is that, unfortunately, I 
think they are misinformed, Chairman DeWine. I think they may 
believe that what we are seeking is to get rid of GPOs. All we 
want to do, and I think all your oversight is attempting to do 
is to make sure actually the GPOs are really working for the 
hospitals and not the dominant vendors.
    So in our example that I gave you, Chairman DeWine, the 
competition that we are seeking and that your legislative 
oversight would create, hopefully, should reduce their costs. 
Nothing that we are asking for should increase the costs.
    Chairman DeWine. I appreciate what you are saying, but my 
point is a little different, and that is that they don't seem 
to have this concern about new technology not getting through 
that they are missing. Maybe you don't know what you are 
missing if you are missing it, I guess. I don't know. What is 
the deal here?
    These are smart people, these are good people, these are 
people who care about their patients. They want the best for 
their patients. Why aren't they seeing what you see about the 
technology out there? Aren't they aware of this technology or 
what?
    Mr. Kiani. Well, Chairman DeWine, I think for the most part 
they are not aware of the new technologies. For example, 2 
years ago when I testified, I pointed out that the Novation 
contract actually imposed on the hospitals to not even look at 
a competing technology that competes with the incumbent vendor 
that is on the contract for what they call the opportunity 
program. The hospital wasn't even supposed to look at another 
technology. So I do believe it is what they don't know about 
that unfortunately makes them say what they say.
    Now, we have been blessed mostly because of testifying in 
front of this Committee, and as a result we have been put on 
contract. But there are hundreds of companies that have not 
been lucky enough to testify and they are still having 
difficulties even letting their products--
    Chairman DeWine. That are as good as you that have got good 
stuff out there that are not getting through, is what your 
point is. They are not breaking through?
    Mr. Kiani. That is correct, Senator. And as a member of the 
board of MDMA, I am aware of some of those. I know there is a 
booklet that has been handed to you that cites about 20 of 
those situations that deal with thousands of contracts.
    Chairman DeWine. Mr. Balto, several times during your 
written testimony you noted that the codes of conduct are not 
consistent throughout the industry. Some would say that that is 
an advantage. By allowing flexibility in the market, we assure 
that the market is more open than it otherwise would be.
    For example, Mr. Kiani is selling his product to Premier 
hospitals even though he hasn't been successful with Novation 
hospitals. Isn't flexibility in that case a good thing?
    Mr. Balto. Well, sometimes flexibility can be positive. 
Let's step back a second and just think about the issue of 
self-regulation. The examples that I cite in my testimony are 
about issues such as privacy or telemarketing. They are not the 
issues of patients' health, about human beings' health that Mr. 
Kiani and other people have testified about before you. So as a 
first matter, Congress may be more reluctant to permit self-
regulation in this instance than in other instances.
    Second, in settings where you do want self-regulation to 
occur, allowing competing forms of self-regulation can be 
positive, and ultimately if it leads to a good enough threshold 
of compliance so that people are protected. But right now what 
we have is a highway of competition in the market, and somebody 
says it is 45 miles an hour and somebody says it is 65 miles an 
hour, but everybody knows there is no cop looking at how fast 
the cars are going. So long as there is no enforcement 
mechanism, this self-regulation isn't going to work.
    Mr. Kiani. Could I add one thing to that, Mr. Chairman?
    Chairman DeWine. Sure.
    Mr. Kiani. I have heard Mr. Betz say that if the GPOs don't 
comply with their code of conduct that they will take away 
their membership card. Also, if we want to have competition, we 
can all put ourselves on the website. The bottom line is I 
think either the fourth or the fifth largest GPO in this 
industry does not belong to HIGPA, and that is HealthTrust.
    One of the examples I was going to show you was actually 
HealthTrust, who, because they didn't have the oversight nor 
are they a member of HIGPA--in fact, if I could show you--
    Chairman DeWine. Sure, go ahead.
    Mr. Kiani. The president, the CEO of HealthTrust wrote me 
this letter saying, ``As our President says, you are either for 
us or against us in our fight against terrorism. You decide 
which side of the fight you are on. I will know by your support 
for this legislation.'' Now, the legislation this gentleman is 
talking about is the California legislation that was trying to 
deal with this GPO issue.
    First of all, I thought we were all on the side of the 
patients. That is why we are all here today. But, secondly, 
this GPO who doesn't belong to HIGPA represents several hundred 
hospitals. Actually, we used to have a token contract with them 
before we initially testified, but as a result of our testimony 
they became irate and a few months later they took away our 
contract and gave a sole-source contract to Tyco.
    Chairman DeWine. Dr. Betz, when I talk to hospitals back in 
Ohio, as I said, they almost universally tell me that GPOs do, 
in fact, save money, and I have no reason to doubt them. They 
are in business to make those decisions. But here is my 
concern: I am wondering if it is possible that in the short run 
GPOs are saving money, but in the long run they may actually 
drive up costs.
    Here is what I mean. If GPOs tend to contract with the 
large medical supply manufacturers and therefore lock out 
smaller innovative firms, then maybe these small firms will not 
ever enter the market. So in the long run, maybe it is 
conceivable that GPOs might unintentionally strengthen the 
market power of the large manufacturers.
    If this is the case, in the long run the large manufacturer 
will be able to raise its prices. It has happened in other 
places and other industries.
    Mr. Betz. Yes, sir.
    Chairman DeWine. Why isn't that true here?
    Mr. Betz. Well, you again, I think, have to appreciate, in 
answer to your question, who is driving the train here?
    Chairman DeWine. Okay. Who is driving the train?
    Mr. Betz. Group purchasing organizations don't make 
decisions on clinical products that are being used. The 
providers, the doctors and the hospitals and the surgical 
nurses and others, make those decisions. But we believe in a 
phrase that was coined some time ago--that group purchasing 
organizations provide a sentinel effect. If you can imagine an 
economic band that would exist that is the result of group 
purchasing organizations' efforts to hold down costs for, say, 
a class of products, therein starts the processing.
    I guess groups would like you to believe, or hospitals 
would like you to believe or others would like you to believe 
that they get the absolute best price in the marketplace. Quite 
frankly, my 34 years of experience in health care tells me, in 
the competitive realm that exists, in the ever-evolving area of 
health care procurement and supply, what happens is that 
someone will come in with a great price on a new product and 
then the sentinel effect begins. There is a holding down of 
that price because of the contract that exists, and with that 
therein it becomes a negotiating point from which others go out 
and try to drive down the marketplace for that individual 
product.
    In the short run, is it possible when a new product comes 
on the market--I think the economic literature might point you 
in the direction that it is not in the beginning that groups 
have their biggest impact; it is the long-term effect as that 
sentinel effect continues to put pressure on the system as it 
goes down, because as individuals go and get better prices, 
then the sentinel line begins to drop.
    Chairman DeWine. Mr. Balto, I was intrigued by one point in 
your written testimony. I believe you said that the threat of 
antitrust litigation is not sufficient to curb anti-competitive 
conduct in the GPO industry because it is too time-consuming 
and too cost-prohibitive for small start-up companies. 
Additionally, you say that antitrust litigation only addresses 
the specific conduct in question.
    Couldn't you say the same for lots of other industries as 
well? What is unique about this industry that makes you 
conclude that the threat of antitrust litigation is not 
sufficient, so therefore we have to regulate?
    Mr. Balto. First of all, let me sort of say at the outset I 
had 10 years in the agency, having people come before us, 
including Congressional staff, saying should we regulate this? 
As a free marketer, that was the last thing I ever wanted to 
say. But I think there are certain instances where it is clear 
that the free market isn't working, the supposed free market 
isn't working, and it is appropriate for regulation to step in.
    I am struck by the contrast between this industry and other 
health care industries such as pharmaceuticals, where the HHS 
IG office plays an active role in enforcing the anti-kickback 
and other statutes and preventing some of these kinds of 
payments. Certainly, the people who received the illegal 
payments in the TAP Pharmaceutical case were unhappy when those 
practices ceased, those entities that received those kinds of 
payments. But ultimately, by enforcing the anti-kickback 
statutes, the HHS Inspector General's office, I think, helps to 
make the market more competitive.
    Chairman DeWine. Well, let me ask you this. Do you think it 
is reasonable to expect HHS to write up regulations that are 
generally applicable? Wouldn't there be a tendency to draft 
regulations that are either highly specific, which could 
hamstring the industry, or are so vague that they are really of 
no use at all?
    Mr. Balto. That is an excellent question and I think that 
is something that HHS needs to address. Hopefully, with the 
active and supportive consultation of the antitrust enforcement 
agencies, Congress can go and provide further guidance in this 
area. But what you need is an active enforcement mechanism. HHS 
is serving that role in other health care contexts. I think 
they could serve that role in this health care context.
    Chairman DeWine. Mr. Kiani, do you want to take a shot at 
that question?
    Mr. Kiani. Well, I am certainly not an expert in this area, 
but I think your question was do we think HHS will write 
something that is good enough and doesn't create either too 
much burden or not enough. All I can tell you is that the code 
of conduct for the last 2 years has not worked and I would hate 
to see your oversight being taken away because you are dealing 
with a lot of other important issues and nobody else looking at 
this. I would hope that, together, we can give HHS some 
guidance to what works ultimately.
    Mr. Balto. Chairman DeWine, if I can just amplify.
    Chairman DeWine. Sure, Mr. Balto.
    Mr. Balto. I understand the concern that the hospitals are 
expressing to you. First of all, there isn't a soul in this 
room that thinks that group purchasing in and of itself is bad. 
No, there is nothing necessarily bad. Throughout every place in 
the economy, you see forms of group purchasing that help reduce 
costs and bring benefits to consumers.
    However, there are different practices in this marketplace 
which may be superficially attractive to the buyers, such as 
the administrative fees and bundling, which actually at the end 
of the day may be anti-competitive. I am sure if we looked at 
the pharmaceutical settings in which the anti-kickback laws 
have been more aggressively enforced to drive out some kinds of 
practices that were clearly fraudulent and harmful to 
competition, we might see buyers who liked those things 
initially. But now that those practices are eliminated, we see 
a more competitive marketplace.
    Mr. Kiani. Chairman DeWine, you earlier asked about what 
would happen to innovation, I believe, from Mr. Betz, and I 
think the analogy that I have been thinking a lot about is if 
group purchasing was buying word processors for industry, we 
would all be using IBM typewriters at $100 each.
    I think Ms. Weatherman, representing the NVCA, stated very 
well that they don't look at investing in these sectors anymore 
because of the lack of competition. We hope your oversight that 
you will look to create will help GPOs be better in serving the 
hospitals and getting the most innovative products at the best 
prices.
    Chairman DeWine. Well, I want to thank the three of you. It 
has been very helpful. We appreciate it very much. Senator Kohl 
and I will continue to work together on this issue, and this 
Subcommittee will continue to stay interested in this and we 
will continue to monitor the situation.
    Thank you very much.
    [Whereupon, at 3:24 p.m., the Subcommittee was adjourned.]
    [Questions and answers and submissions for the record 
follow.]
    [Additional material is being retained in the Committee 
files.]

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