[Senate Hearing 109-522]
[From the U.S. Government Publishing Office]
S. Hrg. 109-522
HOSPITAL GROUP PURCHASING:
ARE THE INDUSTRY'S REFORMS SUFFICIENT TO ENSURE COMPETITION?
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HEARING
before the
SUBCOMMITTEE ON ANTITRUST,
COMPETITION POLICY AND CONSUMER RIGHTS
of the
COMMITTEE ON THE JUDICIARY
UNITED STATES SENATE
ONE HUNDRED NINTH CONGRESS
SECOND SESSION
__________
MARCH 15, 2006
__________
Serial No. J-109-65
__________
Printed for the use of the Committee on the Judiciary
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COMMITTEE ON THE JUDICIARY
ARLEN SPECTER, Pennsylvania, Chairman
ORRIN G. HATCH, Utah PATRICK J. LEAHY, Vermont
CHARLES E. GRASSLEY, Iowa 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
JOHN CORNYN, Texas CHARLES E. SCHUMER, New York
SAM BROWNBACK, Kansas RICHARD J. DURBIN, Illinois
TOM COBURN, Oklahoma
Michael O'Neill, Chief Counsel and Staff Director
Bruce A. Cohen, Democratic Chief Counsel and Staff Director
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Subcommittee on Antitrust, Competition Policy and Consumer Rights
MIKE DeWINE, Ohio, Chairman
ARLEN SPECTER, Pennsylvania HERBERT KOHL, Wisconsin
ORRIN G. HATCH, Utah PATRICK J. LEAHY, Vermont
CHARLES E. GRASSLEY, Iowa JOSEPH R. BIDEN, Jr., Delaware
LINDSEY O. GRAHAM, South Carolina RUSSELL D. FEINGOLD, Wisconsin
SAM BROWNBACK, Kansas CHARLES E. SCHUMER, New York
Peter Levitas, Majority Chief Counsel and Staff Director
Jeffrey Miller, Democratic Chief Counsel
C O N T E N T S
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STATEMENTS OF COMMITTEE MEMBERS
Page
Brownback, Hon. Sam, a U.S. Senator from the State of Kansas,
prepared statement............................................. 49
DeWine, Hon. Mike, a U.S. Senator from the State of Ohio......... 1
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............................................. 71
Schumer, Hon. Charles E., a U.S. Senator from the State of New
York........................................................... 17
WITNESSES
Bednar, Richard J., Coordinator, Healthcare Group Purchasing
Industry Initiative, Washington, D.C........................... 5
Leahey, Mark B., Executive Director, Medical Device Manufacturers
Association, Washington, D.C................................... 7
Sethi, S. Prakash, Professor of Management, Baruch College, The
City University of New York, New York, New York................ 8
Ubbing, Mina, President and Chief Executive Officer, Fairfield
Medical Center Lancaster, Ohio................................. 10
QUESTIONS AND ANSWERS
Responses of S. Prakash Sethi to questions submitted by Senators
DeWine, Sessions, and Kohl..................................... 21
SUBMISSIONS FOR THE RECORD
Bednar, Richard J., Coordinator, Healthcare Group Purchasing
Industry Initiative, Washington, D.C., prepared statement...... 33
Blumenthal, Richard, Attorney General, State of Connecticut,
Hartord, Connecticut, prepared statement....................... 45
Everard, Lynn James, Healthcare Strategist, prepared statement... 50
Hospital group purchasing organizations, joint statement......... 52
Kennedy, Daniel E., President and Chief Executive Officer, Riddle
Memorial Hospital, Media, Pennsylvania, letter................. 59
Leahey, Mark B., Executive Director, Medical Device Manufacturers
Association, Washington, D.C., prepared statement.............. 61
LoBiondo, Al, Chairman, Health Industry Group Purchasing
Association, Chicago, Illinois, letter......................... 72
Novation, Mark McKenna, President and Chief Executive Officer,
Irving, Texas, letter.......................................... 75
OhioHealth, David P. Blom, President and Chief Executive Officer,
Columbus, Ohio, letter......................................... 80
Premier Purchasing Partners, Susan D. DeVore, President,
Washington, D.C., letter....................................... 81
Retractable Technologies, Inc., Thomas J. Shaw, President & CEO,
Little Elm, Texas, prepared statement and attachments.......... 84
Sethi, S. Prakash, Professor of Management, Baruch College, The
City University of New York, New York, New York, prepared
statement and attachments...................................... 92
Ubbing, Mina, President and Chief Executive Officer, Fairfield
Medical Center Lancaster, Ohio, prepared statement and
attachment..................................................... 110
HOSPITAL GROUP PURCHASING: ARE THE INDUSTRY'S REFORMS SUFFICIENT TO
ENSURE COMPETITION?
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WEDNESDAY, MARCH 15, 2006
U.S. Senate,
Subcommittee on Antitrust, Competition Policy and Consumer
Rights, of the Committee on the Judiciary,
Washington, DC.
The Subcommittee met, pursuant to notice, at 2:07 p.m., in
room SD-226, Dirksen Senate Office Building, Hon. Mike DeWine,
Chairman of the Subcommittee, presiding.
Present: Senators DeWine, Kohl and Schumer.
OPENING STATEMENT OF HON. MIKE DEWINE, A U.S. SENATOR FROM THE
STATE OF OHIO
Chairman DeWine. Good afternoon. We welcome all of you to
the Antitrust Subcommittee hearing on hospital group purchasing
organizations. This is the fourth hearing in the last few years
that the Subcommittee has held on these organizations, known as
GPOs.
I think it is fair to say that this is the most extensive
investigation this Subcommittee has done, and I think to some
of our friends in the industry it has felt much too extensive.
But we have focused so much time and energy on it because of
the importance of this industry to the health of our economy
and, of course, to the health of our citizens.
The purpose of this hearing this afternoon is to evaluate
where we stand today. Is this industry competitive or is
legislation required to inject competition into the industry?
As we have discussed before, GPOs are simply organizations that
manage purchasing of medical equipment and supplies for most of
our Nation's hospitals. Their ability to combine the purchasing
power of the hospitals makes them an important part of the
health care market.
Today, we will be evaluating current industry practices, as
well as considering a number of legislative proposals for other
ways that the industry could operate. I think a brief review of
this Subcommittee's activity in this area will help to explain
the various proposals.
We held our first hearing on GPOs in April 2002. We did it
because of complaints of ethical violations in the industry and
also a more general complaint that the GPO system sometimes
decreased the flexibility of hospital purchasing and made it
difficult for doctors and nurses to get the best medical
equipment. We found, unfortunately, that both of these
allegations had some merit.
During the course of our ongoing investigation, we also
assessed a number of contracting practices, such as sole-source
contracts, discounts based on high commitment levels, and
bundling of clinical preference products with commodity
products. All of these practices have positive aspects, but
also may cause competitive difficulties.
Our analysis of the industry has been complicated further
by the so-called safe harbor that underlies this industry. GPOs
have an unusual business model. They are funded not by their
member hospitals, but rather by their suppliers. In other
words, GPOs agree to purchase equipment and supplies from
certain companies and as part of those contracts, the suppliers
pay an administrative fee based on the size of the contract
which is used to fund the existence of the GPOs.
Under normal circumstances, this would be considered a
kick-back, and so the GPOs require an exemption from the anti-
kickback laws. We have been told this safe harbor is what
allows the GPO industry to exist in its current form. However,
this relationship between the GPOs and the manufacturers have
led many to distrust the purchasing decisions that GPOs make
because, in effect, they benefit from larger contracts which
are easier to sign with larger suppliers.
Despite the complexity of these issues, our efforts have
paid off. Senator Kohl and I worked with the industry to
resolve the ethical violations we uncovered. We also made some
progress in assessing the various contracting practices and
worked with individual GPOs as they agreed to adopt voluntary
codes of conduct. And the good news is that the voluntary codes
of conduct helped matters somewhat.
Smaller manufacturers seem to have greater access to the
market, and the industry generally is more aware of the
potential problems and has been taking steps to avoid
additional problems. Under these circumstances, the
Subcommittee has turned its focus to ensuring the permanence of
the industry's reforms, and Senator Kohl and I introduced
Senate bill 2880 last term as an effort to do that.
Senate bill 2880 would have given oversight of this
industry to the Department of Health and Human Services,
charging it with drafting rules for this industry to ensure
that each GPO conformed with principles of competition, ethical
standards and the goal of maintaining access to products
necessary for proper patient care. If a GPO failed to follow
these rules, it could lose its exemption from the safe harbor
under that proposed legislation.
The GPO industry objected to this approach, and to address
its concerns we agreed to hold off on introducing this
legislation and allow them the opportunity to develop a method
for ensuring their changes would be implemented effectively in
a permanent way. The industry response is the so-called, quote,
``Hospital Group Purchasing Industry Initiative,'' end of
quote. This measure has been in place since July 2005, and it
won't surprise our witnesses to hear some like it and some
don't.
So today we are holding this hearing to consider whether
the initiative has been effective at promoting competition in
the industry, and we will consider what future steps, if any,
are necessary to ensure that the reforms will be permanent and
actively enforced. To this end, we will look not only at the
effect of the initiative, but also at S. 2880, as well as two
other proposals.
One of these proposals, which we are tentatively calling
the individual code proposal, would empower Health and Human
Services to codify and enforce the individual voluntary codes
of conduct created by each specific GPO and set minimum
standards for the codes. Another option is simply to repeal the
safe harbor.
Now, before I turn to Senator Kohl, I would like to add
that throughout this ongoing process I have kept in close
contact with hospitals in my home State of Ohio, and I think it
is fair to say that nearly all the hospitals in Ohio that I
have spoken with are confident that their GPOs are saving them
money. In this era of skyrocketing health care costs, this is
obviously a very critical consideration and one that this
Subcommittee understands very well.
Our goal has been and will continue to be to promote
vigorous competition which will ensure that GPOs both save
money and allow new and improved technologies to get to the
market to help medical professionals better care for all of us.
We must strike the right balance and we are committed to doing
just that.
Let me now turn to Senator Kohl, who has taken a very
active role in this issue.
Senator Kohl.
STATEMENT OF HON. HERBERT KOHL, A U.S. SENATOR FROM THE STATE
OF WISCONSIN
Senator Kohl. Thanks very much, Mr. Chairman. Today, as you
pointed out, we will consider what steps remain to be taken to
ensure that competition prevails in hospital purchasing so that
the abuses our Subcommittee uncovered in the last several years
never return. We will need to carefully consider the industry's
latest efforts at self-regulation. We will also examine
possible legislative alternatives that we have drafted should
the industry's efforts fall short.
The last year has witnessed important developments for all
of us who care about competition in hospital purchasing. At the
behest of our Subcommittee, the industry has created a new
organization to set standards and monitor the purchasing
activities of hospital group purchasing organizations. The
purpose of this new industry initiative is to ensure that GPOs
do not engage in anticompetitive or unethical practices that
freeze out new and innovative medical device manufacturers from
the hospital market.
The founders of this new industry initiative, the Nation's
largest and most influential GPOs, are to be commended for
voluntarily forming this organization. The goals of this
organization and the goals of the work of this Subcommittee
over the last 4 years are central to American health care,
namely ensuring that physicians, patients and health care
workers have access to the best and the safest medical devices,
devices that can literally make the difference between life and
death.
The final question that remains for us to consider is
whether the organization is strong enough to do the job. The
founders of the industry initiative now argue that the creation
of this organization means that we need to do nothing more,
that we can rely entirely on the initiative to guarantee an
open and honest marketplace. They argue that any further
legislation is not necessary.
In order to assess this claim, at least two vital questions
must be answered. First, is this organization really up to
monitoring what is taking place in this enormous multi-billion-
dollar industry? And, second, does this voluntary industry
initiative contain sufficient sanctions to prevent wrongdoing
and to penalize those GPOs that violate its founding
principles?
Any industry plan must include real and meaningful
sanctions 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 simply not
acceptable.
We have legislative tools available should we conclude that
the industry initiative falls short. In the last Congress,
Senator DeWine and I introduced the Medical Device Competition
Act. This legislation will give the Department of Health and
Human Services the authority to forbid GPO business practices
which are anticompetitive or unethical.
Other commentators have suggested an alternative approach,
namely to forbid GPOs from receiving payments from hospital
suppliers. Advocates of this approach argue that such a
prohibition would remove an inherent conflict of interest in
the present system. No longer would hospital vendors pay the
very organizations that are supposed to negotiate with these
vendors to get the best deal for their hospitals. We will
therefore need to pay close attention to the testimony of our
witnesses today as we evaluate whether we need to take any
further steps.
Before closing, I must express my disappointment that no
representatives of the GPO industry accepted our invitation to
testify here today. GPOs' willingness to provide us with candid
answers is a factor we will evaluate in determining whether
self-regulation will suffice. We do thank the witnesses who are
testifying for coming here today to testify, and we look
forward to hearing their views.
Thank you, Mr. Chairman.
Chairman DeWine. Thank you, Senator Kohl.
Let me just say that I am also sorry that we don't have any
of the GPOs here today. After this hearing, I would like to
announce that we will send them each a letter from the
Subcommittee asking for their input about each of the proposals
that we will be discussing today. We look forward to their
input. I think their input is very, very important. We will
invite them to give us that input and their point of view on
that.
I have Senator Leahy's statement which I would ask at this
point unanimous consent to make a part of the record, and it
will be made a part of the record at this point.
We will now turn to our panel. Richard Bednar is senior
counsel in the law firm of Crowell and Moring and he currently
serves as the coordinator of the Healthcare Group Purchasing
Industry Initiative. He is also the coordinator of the Defense
Industry Initiative on Business Ethics and Conduct, and has
served on the U.S. Sentencing Commission.
Mark Leahey is executive director for the Medical Device
Manufacturers Association, the national trade association that
represents over 200 manufacturers of medical devices,
diagnostic products and health care information systems.
Prakash Sethi is University Distinguished Professor of
Management and President of the International Center for
Corporate Accountability at Baruch College, at the City
University of New York.
Mina Ubbing is the President and CEO of Fairfield Medical
Center, in Lancaster, in my home State of Ohio. She has been
with the Fairfield Medical Center since 1979, serving in a
number of roles, from internal auditor and accounting manager
to currently serving as its CEO.
We welcome all of you, and let me turn now to our first
witness, Mr. Bednar.
STATEMENT OF RICHARD J. BEDNAR, COORDINATOR, HEALTHCARE GROUP
PURCHASING INDUSTRY INITIATIVE, WASHINGTON, D.C.
Mr. Bednar. Thank you, Mr. Chairman and Senator Kohl. Mr.
Chairman, I think you have adequately summarized my current
position with the law firm and with the industry associations
that I work with as a coordinator.
I have been the coordinator of the Healthcare Group
Purchasing Industry Initiative for 3 months, but I must add
quickly that I have had well over 30 years of experience in
working with other organizations in helping to develop
organizational compliance and ethics programs. And I am very
pleased to be with you today and to give you assurance that the
Healthcare Group Purchasing Industry Initiative is off to a
strong success.
The initiative was launched in May of 2005 by the CEOs of
nine leading GPOs. The initiative is a permanent, all-
voluntary, self-governing organization committed to the highest
level of ethical conduct and providing the best and safest
products to patients, doctors and health care workers at
competitive prices. For brevity, I will refer to this
initiative simply as the GPO initiative or the initiative.
The GPO initiative has three main purposes. First, it is
intended to nurture and promote an ethical culture of
compliance within every organization in the GPO industry.
Second, the initiative promotes self-governance as the means by
which each GPO's top-level commitment to abide by ethical
standards is controlled. Third, the initiative enforces a
requirement that each member of the organization share best
practices in dealing with ethics and business conduct issues.
This sharing of practices is done both informally by regular
communication among the compliance officers as issues arise and
by participating in an annual best practices forum.
To achieve these purposes, each GPO has pledged, first, to
follow six core ethical principles; second, to report annually
on adherence to these principles by responding to a public
accountability questionnaire; and, third, to participate with
other GPO representatives and interested parties in an annual
best practices forum. The initiative is governed by a steering
committee of the nine founding GPOs, who are, in effect, our
board of directors.
Each signatory is required to follow six principles: first,
to have and adhere to a written code of business conduct which
establishes high ethical values and sound business practices;
second, to conduct learning within the organization as to
personal responsibilities under the code.
Third, each signatory is committed to work toward the goals
of high-quality health care and cost-effectiveness. Fourth,
each signatory is committed to work toward an open and
competitive purchasing process, free of conflicts of interest
and undue influence. Each signatory is responsible to each
other to share best practices in implementing the principles,
and each signatory, importantly, is accountable to the public.
The public accountability process requires that each member
organization annually respond to a detailed questionnaire,
which responses are displayed publicly on our website. And I
must add that we have done that with the responses to the first
annual questionnaire which were posted on our website for all
to see a bare 2 months ago, and in that bare 2 months we have
had over 26,000 visits to that website, to those postings,
indicating a very strong public interest in what the GPO
companies are about.
On January 11, 2006, the GPO initiative held its second
steering Committee meeting. All nine of the founding GPO CEOs
were there. I was there to witness it and I was there to see
their enthusiasm and the energy that they manifested for this
initiative. Then on January 12th and 13th, the initiative held
its first best practices forum, about which I have described in
greater detail for the record.
In the future, Congress can expect sustained, extensive
transparency from the GPO initiative, and significant open
debate about its practices. This self-governance process will
work. The CEOs believe in ethical leadership as the best way to
introduce ethical business conduct within their organizations.
The CEOs do not believe in out-sourcing this responsibility.
Already, participation in the initiative--
Chairman DeWine. Mr. Bednar, could you close? We have a
vote at three o'clock and we are going to lose this entire
hearing, so everybody has 5 minutes.
Mr. Bednar. Thank you, Mr. Chairman. We do believe that the
voluntary effort will serve the goals that have been
articulated by this Committee and that no legislation is
required. I look forward to your questions.
[The prepared statement of Mr. Bednar appears as a
submission for the record.]
Chairman DeWine. We appreciate it. Thank you very much,
sir. Thank you. I thought you were getting close.
Mr. Leahey.
STATEMENT OF MARK B. LEAHEY, EXECUTIVE DIRECTOR, MEDICAL DEVICE
MANUFACTURERS ASSOCIATION, WASHINGTON, D.C.
Mr. Leahey. Mr. Chairman, Senator Kohl, on behalf of the
hundreds of innovative medical technology manufacturers MDMA
represents, I want to thank you for your continued efforts to
ensure that patients and caregivers have access to the best
technologies at the best price. This industry is founded on
physicians and engineers working together to enhance the
quality of care. Unfortunately, patients and caregivers don't
always have access to these products.
When this Subcommittee held its first hearing in October
2002, witnesses testified about troubling GPO practices,
including but not limited to exclusive contracts, excessive
fees and corporate conflicts of interest. At that time, we
heard the GPOs say we can reform ourselves. Yet, today we find
ourselves back in this hearing room for the fourth time in as
many years.
And while I would like to testify that the GPOs have
corrected their exclusionary practices, this is simply not the
case. GPOs continue to bundle unrelated products and companies,
execute long-term sole-source contracts, award no-bid
contracts, collect excessive fees, and police the markets for
the dominant suppliers in a way that excludes innovative, cost-
effective technologies. And as a result, patients, caregivers
and the American taxpayer are all suffering.
Now, despite the steadfast efforts of this Subcommittee,
significant problems remain. Just last year, the Health and
Human Services Inspector General looked at this very issue and
the results were staggering. The IG found that six GPOs
collected $2.3 billion in administrative fees from the vendors,
and their operating expenses were a whopping $725 million.
These GPOs, I remind you, manufacture no product, nor do
they distribute any product. You may ask where the rest of the
money goes. Well, the GPOs would have you believe they return
that back to their member hospitals. But the IG found
otherwise. The IG found that GPOs siphoned off nearly $500
million for their own purposes, including for-profit business
ventures. The IG also found that the hospitals receiving these
funds--the majority of them did not reflect these admin fees in
their cost reports to Medicare.
GAO reports and court evidence also challenge the premise
that the GPOs are focused on getting the best products at the
best price. And why would they, given the current fee
structure? The more a hospital pays, the more money the GPO
makes.
In addition to the fact that the current fee structure
creates a disincentive to lower costs, it also provides select
dominant suppliers the opportunity to buy exclusivity. In a
recent antitrust case, it was shown that the president of a
supply company met with a GPO executive in May of 2003 and this
vendor executive stated that his company did $345 million in
business with the GPO in the previous year and they paid the
GPO $31 million in administrative fees. Now, that is nearly 9
percent, well above what the GPOs would have you believe they
collect. And as an attorney said in the court case, when you
tip the doorman that well, he is sure to keep folks out of the
building. And unfortunately this is happening with the GPOs.
Documents in this case also showed that suppliers pay fees
above and beyond the administrative fee. In fact, in a
particular product category the dominant supplier paid the GPO
15.5 percent in fees for an exclusive contract for a sole
source contract. However, if the markets were opened up and
they needed to compete, the vendor was only willing to pay the
GPO 4 percent in fees. This scenario is precisely why the GPOs
are tempted to enter into exclusive contracts with dominant
suppliers. They are prisoners to the fees. And, remember, the
$31 million payment was from one vendor to one GPO for 1 year.
Imagine what the impact is nationally to health care costs.
Now, GPOs claim that they can fix this problem among
themselves, when evidence suggests otherwise. So long as the
GPOs are allowed to sell restricted access to dominant
suppliers by collecting payments from the largest vendors,
patients, hospitals and taxpayers all lose out.
The GPOs will also claim that they need more time.
Unfortunately, patients, caregivers and the American taxpayer
don't have more time. But thankfully, Mr. Chairman, Senator
Kohl, there is a solution. If you repeal the GPO safe harbor
that Congress created nearly 20 years ago under much different
circumstances, you will restore competition back in the
marketplace and ensure that the GPOs are working for the best
interests of their member hospitals and not the dominant
suppliers who fund their activities. And if you do so, this
will ensure that patients, caregivers and the American taxpayer
suffer no longer and the future is much brighter for the health
care system.
Thank you very much and I look forward to answering any
questions you may have.
[The prepared statement of Mr. Leahey appears as a
submission for the record.]
Chairman DeWine. Mr. Leahey, thank you very much.
Professor, you are next.
STATEMENT OF S. PRAKASH SETHI, PROFESSOR OF MANAGEMENT, BARUCH
COLLEGE, THE CITY UNIVERSITY OF NEW YORK, NEW YORK, NEW YORK
Mr. Sethi. Thank you, sir. For the record, I don't
represent any industry or any interest group. I am here on my
own behalf. I had to pay my own fare to come here.
Chairman DeWine. Senator Kohl wouldn't pay for you?
Mr. Sethi. No. I asked them, actually. They said they had
no budget, and it embarrassed my university when I asked them
for the money to come here.
Anyway, I speak here only in my capacity as a university
professor and president of the International Center for
Corporate Accountability. This is a research organization based
in the university and we do primarily work in the area of codes
of conduct, how they are created, how they are managed, and
essentially how they are implemented. I have spent a large part
of my 30-year academic career on this work.
Before I talk about the GPO initiative, let me briefly
offer you an overview of industry codes and discuss briefly the
methodology we use at the ICCA for evaluating the substance,
viability and efficacy of these codes.
Based on our research and field work in monitoring code
compliance, we have identified eight conditions that must be
met for an industry-made code to demonstrate measurable and
credible compliance. Let me briefly summarize those eight
points.
One, the code must be substantive in addressing broad areas
of public concern pertaining to the industry's conduct. Two,
code standards must be specific in addressing issues embodied
in those principles. Three, the industry must create an
independent governance structure that is not controlled by the
executives of the member companies. And, four, there must be an
independent external monitoring and compliance verification
system, which is absolutely necessary to engender public trust
and credibility in the industry's claims for performance.
Before addressing the GPO initiative, it is necessary to
examine briefly the current GPO business model. Mr. Leahey
mentioned something about that and so I do not need to repeat
it. Based on our own analysis, it is evident that the current
GPO model has built-in structure flaws and its financial
incentives are so perverse that the GPO initiative cannot
possibly remedy the situation.
We cannot talk seriously about a meaningful GPO initiative
until Congress realigns the financial incentives so that the
hospitals and not the vendors are once again the GPOs' only
clients. As long as vendors continue to pay fees to the GPOs,
any attempt to create, implement and enforce a voluntary code
is doomed to failure. It would not improve the situation, but
actually it would worsen it.
Let me now discuss the findings of our study of the GPO
initiative. Over the last 6 months, my colleagues and I at ICCA
have reviewed virtually all of the public records on the GPO
issue and have evaluated the GPO initiative against the
principles referenced above. This is the customary process and
a necessary pre-condition for drawing objective and unbiased
conclusions.
In my professional opinion, the six principles of the GPO
initiative fail to measure up even at the very minimal level to
any of the eight criteria we indicated. There is a total lack
of independence in the initiative's governance structure, which
is entirely controlled by the top executives of the member
companies. Although the initiative includes a coordinator, the
coordinator has no real authority.
The principles are essentially a statement of intent. All
measures of substance are left entirely to the member
companies. Industry members also set their own criteria with
regard to compliance, performance evaluation, implementation
assurance and public disclosure. Reduced to its bare
essentials, the final product of this process becomes nothing
more than a compilation of the reports provided by the member
companies based on their own self-evaluation.
The governance structure of the GPO initiative does not
provide any mechanism for independent external monitoring and
verification of member companies' self-reported performance.
Instead, it expects the public to accept this self-reported
performance at face value. Such an assertion would be a dubious
proposition under the best of circumstances. It would be
untenable, given the industry's current record.
In summary, the GPO initiative is encumbered with a lack of
specificity, non-existent performance standards and an
internally controlled and self-serving governance structure,
and an absence of genuine independent external monitoring.
Furthermore, so long as GPOs continue to be funded by the
vendors, meaningful and lasting reforms will not be possible
because of the inherent conflict of interest that exists.
However, once this conflict is eliminated and all parties--
namely hospitals, the GPOs and the suppliers--are actively
committed to the principles and implementation conditions
listed above, an industry code may prove a worthwhile exercise.
Thank you very much.
[The prepared statement of Mr. Sethi appears as a
submission for the record.]
Chairman DeWine. Professor, thank you very much.
Ms. Ubbing, thanks for joining us.
STATEMENT OF MINA UBBING, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, FAIRFIELD MEDICAL CENTER, LANCASTER, OHIO
Ms. Ubbing. Thank you. I would like to thank Chairman
DeWine and Ranking Member Kohl for inviting me to testify
today. It is a special pleasure to be here before a fellow
Ohioan, Chairman DeWine. I have some brief comments and would
ask that my full written statements be put into the record.
Chairman DeWine. They will be made a part of the record.
Thank you.
Ms. Ubbing. Thank you.
I am pleased to speak about the way in which the health
care supply chain operates, having spent 27 years in the field
of health care finance. In 2001, I was appointed president and
CEO of Fairfield Medical Center, and before that served as
Fairfield's CFO. We are a 222-bed hospital, not-for-profit, in
a community, and we have become a major referral center serving
the health care needs of southeastern Ohio.
I bring to this hearing my perspective not only as FMC's
CEO, but also as Chair of a four-hospital Ohio Valley hospital
consortium. I am also on the board of the Ohio Hospital
Association, and in that sense I believe I speak for all 170 of
that association's member hospitals and health systems.
As the members of this Subcommittee are undoubtedly aware,
America's health care systems are under tremendous pressure to
deliver health care at affordable prices and to do so without
undermining the financial well-being of our delivery systems.
In addition to providing top-flight health professionals, we
must maintain an inventory of state-of-the-art technology, as
well as goods and services, enabling us to provide the highest
quality of care to every surgical patient, emergency room
visitor, expectant mother and every individual seeking medical
testing.
At Fairfield Medical Center, we purchase tens of thousands
of goods and services, and have relationships with more than
1,600 vendors. While ours is a strong and well-respected
hospital, we are relatively small and our power in the enormous
health care purchasing marketplace is modest. That is why we
have long been a member of health care group purchasing
organization, or GPO.
For 22 years, FMC has been a proud member of Amerinet and
we have reaped great benefits from that relationship by
leveraging Amerinet's market expertise and power. The hard-
dollar savings to FMC directly attributable to participating in
Amerinet are roughly $1.1 million per year. These savings do
not reflect the many other values that we get from being part
of Amerinet, including education, assistance in negotiating for
non-Amerinet products, and benchmarking FMC's performance
against our peers.
Without the contracting services we get from our GPO, FMC
would need to add at least five new professional purchasing
staff at annual cost of some $400,000. Without the nationwide
knowledge of products and prices our GPO maintains, we would be
at a great disadvantage in negotiating our own contracts, which
would further erode our pricing power.
Yet, not all our purchasing is through our GPO. To the
contrary, only 63 percent of FMC's purchasing occurs through
Amerinet. Of the top 500 items we purchase, only half come from
GPO contracts. We buy the remainder directly from vendors. GPOs
do not make purchasing decisions for hospitals. Rather, such
decisions are driven by a variety of factors, including
clinician preferences, our own comfort level with certain
products and services, and the knowledge that our purchase is
cost-effective, not just low-cost. Ultimately, if we are
required to have it or if our clinical staff demands it, we try
to purchase it at the best possible price. It is as simple as
that.
One example of an item that our clinical staff required but
we did not purchase through our GPO is a technology produced by
a small Dublin, Ohio company that makes a gamma detection
device used for cancer surgery. When we couldn't buy this item
through our GPO, we went directly to the manufacturer and
established a vendor relationship.
Sometimes, items can't be accessed through our GPO because
the manufacturer will not sell to a GPO. This is often the case
in items that are patented. It may be a legitimate new
innovation and we will have to buy directly from the vendor.
That said, whenever we consider buying a new item, we rely
on a wide array of resources to guide our decision, including
input from clinicians, outside experts, manufacturers,
consulting firms and our GPO. Fairfield Medical Center has a
value analysis Committee to review all new technologies,
whether they come to us at the request of a physician, through
a trade show, or direct appeal from a vendor. Each prospective
purchase is subjected to a 16-point value inspection to measure
clinical benefit and cost-effectiveness.
The technological needs of our hospital are constantly
changing. We can count on health care consumers to demand
access to the best new technologies, just as our clinicians
demand use of the same. We must be able to respond to these
demands and that is why we have a system in place at FMC to
identify and evaluate new medical technologies and to acquire
them when doing so is the right clinical and financial decision
for our hospital.
GPOs do provide immense value to FMC and other health care
systems, even though they hardly control our purchasing
decisions. The GPO model of charging administrative fees to
suppliers and providing cost savings and other important
benefits to FMC and its other members is critical for any
health care system in today's economically challenging
environment. This is particularly the case for small and rural
systems like ours which have the least market power and the
most to lose from margin pressures.
Over the nearly three decades I have been a hospital
administrator, I have seen many unintended consequences of
well-intentioned but misguided efforts to better control
business practices in the health care sector. Where GPOs are
concerned, I believe that any restrictive legislation would
have a dangerous or ripple effect on America's hospitals--
adverse consequences that would be felt more severely by small
and rural systems such as ours.
I ask you to join me in recognizing the value GPOs bring to
the hospital marketplace, and that, while important, these
entities do not control the purchasing marketplace, but rather
help to make it more robust, competitive and cost-effective in
an informed environment.
[The prepared statement of Ms. Ubbing appears as a
submission for the record.]
Chairman DeWine. Thank you very much.
Senator Kohl.
Senator Kohl. Thanks a lot, Mr. Chairman.
Mr. Bednar, as the industry initiative coordinator, you
know that we have said many times that for self-regulation to
work it must contain meaningful sanctions for non-compliance,
or in other words it must have real teeth. As I understand the
industry initiative, the only sanction available if a GPO fails
to live up to its obligations is the possibility of suspension
by the steering committee of the industry initiative.
The steering committee, as you know, is made up of the CEOs
of the GPO members of the initiative. So is the possibility of
suspension really an adequate sanction to ensure compliance
with the principles of the initiative? What would it really
matter if a GPO was suspended from a private, voluntary
organization such as this one? A hospital could still use the
services of that GPO to buy products. So what difference would
it make?
Mr. Bednar. Thank you, Senator Kohl. I think that is a good
question to ask, and the answer is that there will be enormous
peer pressure for conformance. This industry initiative is in
perfect harmony with some of the best thinking about how
organizations should govern themselves, and I refer
specifically to the organizational sentencing guidelines,
chapter 8. I refer to the rules of the New York Stock Exchange.
I refer to the regulations of a number of Federal agencies that
are involved in acquisition. All of those believe in the
principle of self-governance as the best approach to assuring
compliance and the development of an ethical culture.
Insofar as the sanctions are concerned, this initiative is
not designed to tee up penalties for misconduct. It is designed
to encourage ethical conduct. It is designed with the best
interests of the industry involved, the health care industry.
I have witnessed the commitment and the sincerity of the
CEOs who have formed the initiative and I believe that the
initiative will soon grow. We have already attracted four
additional GPOs even in the short period of time that I have
been the coordinator. I think as the industry sees and
perceives and understands the value that this initiative adds
to the health care supply chain that others will try to emulate
it, or will certainly emulate it.
Specifically, if a GPO does not comply with the ethical
expectations to which it is committed, I think there will be
enormous pressure on that particular organization to fall into
line. That pressure will come not only from the other members
of the GPO, but from me as well, as the person responsible for
reviewing the responses. Also, I think it is important that all
of the activities of the GPO are displayed for the public to
see on a website. Transparency itself is a strong enforcement
mechanism.
Senator Kohl. Dr. Sethi, in your view, is the sanction or
the suspension of the industry initiative sufficient to ensure
that GPOs comply with the principles, or is it really much too
little?
Mr. Sethi. With all due respect, I don't think this
initiative amounts to much, if anything. If you look at the six
principles, it simply says thou shall be good, thou shall not
lie. But they were supposed to do all those things in the first
place. The fact that we are here and the initiative is here is
because we wanted to, and they expected us to seek
improvements.
But there is nothing in these principles or governance
mechanism that provides any assurance that changes will take
place. They are reporting what they want to report, not what we
want to hear. There is no external monitoring mechanisms. Are
they actually reporting what they are supposed to be reporting?
In an industry setting, best practices is an oxymoron
because all they are doing is supporting each other so that
nobody gets out of line. Where is an idea that there is a
better practice and then we ask the industry whether or not it
is complying with it? We have no specifics of what ethical
standards they are talking about, we have no specifics about
what type of report they would make, and we have no specifics
about how do we know whether or not that report is accurate. I
rest my case.
Senator Kohl. I will ask one more question and then we will
turn it back to the Chairman.
Mr. Bednar, a key part of your job will be to address GPOs'
compliance with the charter of the initiative. You will depend
on information submitted to the initiative by the GPOs in
response to a questionnaire to make the assessment. How will
you verify that the information provided by the GPOs is
accurate? Will there be any independent audit of the GPOs or
will you rely entirely on the information that the GPOs supply
to you?
Mr. Bednar. Thank you, Senator Kohl. My role as the
coordinator for this initiative is comparable to the role I
have held with the defense industry initiative; that is to say
I am the coordinator of that initiative as well. By experience,
it is very easy to tell the sincerity and the commitment of the
responses to the annual questionnaire.
First of all, there is an instruction that the company has
to be very detailed in preparing its responses. Second of all,
the questions themselves are very penetrating. Third, the
responses require documentation and reference to organizational
supporting documents, policies and practices. Fourth, the
responses are displayed publicly for all to see on our website
and for all to judge on our website.
Finally, we have now planned in future best practices
forums to invite in outsiders to participate with us in the
annual best practices forums so that there will be additional
witnessing of the sincerity and the commitment of this
organization.
Senator Kohl. Well, we will come back to it, Mr. Chairman.
Chairman DeWine. Thank you, Senator Kohl.
Ms. Ubbing, I was interested in your testimony about the
fact that you purchase items outside the GPOs. Could you give
us an estimate of what percentage of your purchases are outside
the GPOs?
Ms. Ubbing. Yes. All of our purchases outside the GPOs
amount to about 37 percent of purchases; 63 percent are within
the GPO.
Chairman DeWine. And what would those generally be? Can you
give us a--
Ms. Ubbing. Outside the GPO?
Chairman DeWine. Sure.
Ms. Ubbing. It could be anything from sutures to
technology. It could be information technology, as opposed to
clinical devices. It could be a medication. It could be any
type of purchase.
Chairman DeWine. And why do you purchase outside the GPOs,
then, in each one of those cases? I mean, in general, why?
Ms. Ubbing. OK. Quite often, that is driven by clinical
preference of our practitioners who are using the devices.
Particularly with physicians, if they have been trained to use
one type of a device and the GPO contract calls for another, it
is their time and it is our risk as well as theirs for them to
have to go into a procedure with equipment that they are not
comfortable with.
Another reason is availability of connectivity. Take IV
pumps. If all our IV tubing has come from one company and the
contract with the IV pumps is from another, the conversion and
the cost to our organization would be huge to have to change
things that aren't broken to replace something that we want to
update.
Chairman DeWine. Would you say that Fairfield Medical
Center is typical in that sense? Do you think most hospitals
would be about one-third outside?
Ms. Ubbing. I would think so, sir. I am not absolutely
positive of that. I do not have data to support that, but
certainly I know other hospitals go outside. And particularly
your children's hospitals and some of those hospitals would
have to go outside simply because the products are not in the
contracts.
Chairman DeWine. Mr. Leahey, why wouldn't Ms. Ubbing's
testimony refute your argument? The hospitals are exercising
judgment. They can go out and find other innovative products.
Mr. Leahey. Again, I think if you look at the market power
of the GPOs, $80 billion or whatever it is they bring through,
they are the gatekeeper. And while there may be a small
percentage--
Chairman DeWine. Her testimony is they are not the
gatekeeper for her. She would say that, look, when we see a
product and our doctors say we want a product, she goes out and
buys the product, if their internally is need for the product.
Mr. Leahey. With Amerinet, I have one of their contracts in
front of me here and they do allow a supplier to sell directly
to the hospital, but it is interesting that Amerinet requires a
waiver in order for this to happen. You would think that if it
was really in the best interests of the hospital, the vendor
should sell directly to them without needing a waiver from
Amerinet.
And again when you look at the market-leading GPOs--
Novation, Premier and others--they have tremendous influence in
the marketplace and they do not always permit other products to
get to the market.
Chairman DeWine. Well, I am still trying to understand. Of
course, this is not the first panel we have heard from and we
have heard from other panels who have told us that--other
witnesses have told us that innovation has been stifled and we
have had some pretty strong testimony in this area. So this is
the background, but as far as just the testimony we are hearing
today, Ms. Ubbing is telling us that at least in her hospital
she has been able to exercise the ability to go outside the
contract. She doesn't seem to be too stifled by it.
Mr. Leahey. Well, again I could give you dozens, as I have
for the staff as well--dozens of companies who are still
excluded from the marketplace. One, in particular, here that I
think is very important--this is a syringe; I don't know if you
see it. It has a needle at the top. When you press the plunger,
the needle goes in; there are no needle sticks. It saves
caregivers lives here. They are offering this at 10 cents a
syringe to Premier hospitals. The competitive product is about
28 cents. This is still getting locked out of the market.
And when you talk and you read about some of the company's
call sheets, they say that Premier didn't let their hospitals
know about this. And why would they, when the GPO model
incentivizes them to do otherwise? They make more money the
higher the price of the product. It is not in their best
interest currently to allow for the better product at a cheaper
price to enter the market.
So I think, you know, there are real problems here that we
need to address. And, you know, some of the issues about the
cost of bringing new staff in--5 new staff, $400,000--we are
not saying the GPO model needs to go away. Any efficiencies
that currently exist in the market will still exist and the
providers and suppliers will still enjoy those. We are simply
saying modify the revenue stream, realign the incentives of the
GPOs so that they get the best products at the best price for
their hospitals and aren't worried about policing the market
for their dominant suppliers.
Ms. Ubbing. May I comment?
Chairman DeWine. Sure.
Ms. Ubbing. With respect to an item like Mr. Leahey has
shown, in our organization we actually had a vendor fare to
look at the different devices that would protect our health
care workers from needle sticks. As a result of that, the GPO
was not the gatekeeper of what vendors came forward for us. We
make those decisions. We are not bound by a contract with the
GPOs not to look elsewhere.
Chairman DeWine. Could one make the argument that if a
hospital was not as aggressive as your hospital that it would
be certainly easier to go with whatever the GPO had?
Ms. Ubbing. I don't think so. We have got too many cost
constraints and too many problems to do that. In fact, when we
work with our GPOs, quite often we ask them to go look at
different product brands on our behalf and we name the product
brands.
Chairman DeWine. Ms. Ubbing, let me ask you another
question. I don't really quite understand the economics of this
and maybe you can help me with it. You have stated that if you
were to repeal the safe harbor and hospitals had to pay for
GPOs directly, costs would go up. I don't quite understand
that. Do you want to explain that to me?
Ms. Ubbing. Certainly.
Chairman DeWine. I mean, it seems to me that a cost is a
cost is a cost. I mean, somebody is going to pay for it.
Ms. Ubbing. And I think that exactly comes into play, but I
think the reality is if the GPOs incur expenses, incur other
activity opportunities that are no longer paid for by the
vendors, those costs are going to invariably get back to the
hospital. Consequently, those may or may not be allowable costs
for us on our cost report. Therefore, you are going to lose
reimbursement from your Medicare and Medicaid payers.
Ultimately, we will lose in terms of items and services that we
are allowed to get through our GPOs, particularly on the
services side.
Chairman DeWine. So what you are telling me is that this is
a Federal reimbursement issue, actually.
Ms. Ubbing. It has the potential to be. Our Federal
reimbursement is capped, as you know, by the Medicare DRG
system, prospective payment system. And at the same time,
vendors are not capped from what they charge us. Certainly, we
can enter into a GPO contract that for a period of time we will
retain a price. But anything that is new or anything that is
innovative that we want to go to, drug-eluding stents being a
classic example of this, the Medicare provisions did not
initially allow--when drug-eluding stents were finally
approved, did not allow an increase in our reimbursement for
the use of those, and the difference in price was significant.
Chairman DeWine. Mr. Leahey.
Mr. Leahey. Mr. Chairman, if I may, again I think it is--
Chairman DeWine. Let me just say we have two other
witnesses here. Anytime you two want to jump in, don't be
bashful. You know, this is kind of like ``Hardball.'' The only
way you are going to get in is just jump right in. Or
``Crossfire'' maybe is a better thing, so you just jump in.
Mr. Leahey. This absolutely is a cost issue and a Medicare
reimbursement issue. Again, I think as the HHS IG pointed out,
when you have many hospitals not reflecting this in their cost
reports, there is an issue here. And I think it is fantasy to
think that somehow these GPO fees are free money. No supplier
is going to absorb these costs.
Chairman DeWine. Well, somebody is paying for it.
Mr. Leahey. Absolutely, and there is a margin that needs to
be made. So if the companies have to pay the GPO on the top,
they have to pass the costs on to ultimately the customer or
the hospital, or more importantly Medicare, who pays 46 cents
on every dollar.
Chairman DeWine. Ms. Ubbing, this controversy just keeps
going on and on and on, and the critics of this system keep
beating you all over the head with it. I mean, sometimes you
just want to take an issue off the table. It seems to me that
just paying out for a service is sort of the American way,
isn't it? I mean, paying directly for a service is sort of what
we do everyday. If I want to buy something, I pay for it. This
kind of back-door payment is not really the way we usually do
things in this country, is it?
Ms. Ubbing. I think I would draw an analogy for you of
this: If I have the opportunity as a hospital to buy at a Sam's
Club or someplace where the items have been bought in bulk and
I can take advantage of the same pricing that a larger hospital
or a larger system could also get because of the volume
involved there, that is great. If I have to go out one-on-one
and negotiate a price, and the price is going to be different--
I know this from ongoing activities--from hospital to the next,
that is putting a lot of burden on me and is not lowering the
cost of health care.
Chairman DeWine. Sam's Club does have a membership fee, I
think.
Senator Schumer.
STATEMENT OF HON. CHARLES E. SCHUMER, A U.S. SENATOR FROM THE
STATE OF NEW YORK
Senator Schumer. Thank you, and I am sitting here and I am
burning up. Here we have industry people who are making record
profits. We have most of our hospitals in New York losing
money. They try to get together and form an organization that
will save them money and give them some bargaining power and
they end up looking like the bad guys. This is ridiculous.
Why would hospitals want to pay more money? They don't. I
know hospital executives throughout New York. Most of them are
non-profit and they have to lay off people everyday and they
have to cut back services everyday. One of the few things they
can do, as Ms. Ubbing said, is band together so they might have
some bargaining power because they don't have the ability like
a company to hire 20 salesmen and go knock on doors and sell
their product. And we want to not let them do that?
There may have been abuses in these GPOs, but I will tell
you something. I sure as heck don't want to see them
eliminated, paralyzed, handcuffed so that some businesses can
make even more money. This is getting to the point of absurdity
here, to the point of absurdity.
We have the same thing with hospital reimbursement rates.
In New York, we have got 25 percent of our hospitals close to
bankrupt because the insurance companies have the bargaining
power, because there are 30 different hospitals and only 4 or 5
different providers and we are not getting the health care we
need.
The idea that hospitals, Mr. Leahey, would want to pay more
for an item, unless something is crooked, makes no sense. And
the idea that ten of them can bargain with you instead of one-
on-one bargaining with you is a good idea, not a bad idea, and
it will bring your price down on your thing from 10 cents to 8
cents. You may not want that, but I want that, Medicare wants
that, Medicaid wants that, the Government wants that and the
consumer wants that.
So I mean I didn't come in here intending to make such a
fuss, but as I sit here--it is not my way, of course.
[Laughter.]
Senator Schumer. But as I sit here, you know, sometimes
governments take an excess, which there was, and then they
throw out the baby with the bath water. And for the next 10
years we are underwater, suffering, and that is what I fear is
happening here.
I have looked into this a little bit. I have seen that the
GPOs are really now making an effort to self-police and bring
down costs, and it is in their interests. I just spoke with the
head of a--not on this issue, but with the head of a major New
York hospital 2 hours ago, a huge system, and he is a decent
person. I have known him for 25 years. He is agonizing about
what to cut. He is agonizing about who to lay off, after they
have had such pride in all this. He is not going to play a game
and pay 28 cents for an item that he can get for 10 cents.
And the theory of GPOs makes sense and we ought to make
sure that the actuality makes sense, and I think most of the
time it does. The purchasing initiative that they have, I
think, a large number of hospitals are participating in, and
again it is just common sense. A company that makes syringes
will have its only mission to sell as many syringes as it can
at the best price it can. That is your job. But a hospital
can't equal that energy for every product in every area and do
as good a job. So the idea of people coming together and saying
let's find one expert to buy syringes for all the hospitals in
Ohio or New York or somewhere else and bring the price down is
what makes sense.
You know, we didn't do that in the Medicare bill. We didn't
allow Medicare to bargain with the pharmaceutical industry.
Guess who was happy? The pharmaceutical industry. Guess who
lost out? A lady I just spoke to in Buffalo who can't afford a
cancer drug. Her $2,000 is up. She will never get past the
donut hole because she won't pay $5,000. She is in agony, she
is in pain.
Chairman DeWine. Senator, let me--
Senator Schumer. I am sorry.
Chairman DeWine. I have an advantage over you. I can see
the screen and I know a vote just started. That is the only
advantage I have.
Senator Schumer. I am sorry. But, anyway, I just hope we
don't take this too far. That is all.
Chairman DeWine. Well, we are not going to take it too far,
and let me just say neither Senator Kohl--I don't speak for
Senator Kohl, but neither Senator Kohl nor I have any
intention--no one is talking about doing away with these at
all. You know, the question is how it is fine-tuned and how we
move from here.
Senator Kohl.
Senator Kohl. Right. We are not talking about trying to do
away with GPOs. They are a good thing and we want to ensure
that they operate in a most effective and fair way. I mean,
that is the point.
Some of our concern, Senator Schumer, is that the GPO sets
up its organization and then hires a person whom they pay and
whom they can fire to be the administrative executive of that
organization. You know, we are here to look at things and look
at the surface and look behind the surface, and finally as a
result of all the work we have done we would like to set up
something that polices itself, but really gets the job done
effectively.
Senator Schumer. Well, I am for that.
Senator Kohl. And you don't disagree with that.
Senator Schumer. I agree with that.
Senator Kohl. None of us disagrees with that.
My own personal concern is not that you are not a fine
person. That is not the issue. They hire you, they can fire
you, and you are going to be a part-time administrator. To us,
having put in all this work and all this time and all this
effort--we don't know anything about you as a person; you may
be great. But in my own mind, I am concerned about this
initiative coming to us and saying you can now, Congress, go
away because we are setting up this organization and we are
going to hire the executor and we are going to police him and
then we will fire him for any reason we want. That, to me,
doesn't sound like the kind of oversight that we have been
trying to organize and get settled.
But I have said my piece and perhaps you want to talk.
Mr. Bednar. Well, with all due respect, Senator--
Chairman DeWine. OK. Now, we are going to give you 30
seconds and we are going to give Mr. Leahey 30 seconds.
Senator Schumer. The Chairman just asked him to say
something a few minutes ago. Now, he is.
Chairman DeWine. No, no, no. Here is the problem. We have a
vote now and this is going to end, so we are going to be out of
time.
Mr. Bednar. We believe the initiative has picked up exactly
in the way that this Committee had advised the industry to pick
up. And I am only a small player in this; I am just the
coordinator, the executive director, if you will. The real
energy and the real commitment comes from these nine CEOs who
formed this initiative and they are the ones who are
responsible for setting the tone from the top in a way that I
think will eventually prove to be very, very successful. Give
us time to prove that to you.
Chairman DeWine. Mr. Leahey.
Mr. Leahey. Thank you, Mr. Chairman. Well, this is the
fourth hearing in as many years, and again we understand there
is a potential value in the GPO model. We are not against
hospitals aggregating their volume. And again our members are
not the J&Js, the Medtronics, the Guidants. They are the little
guys who are innovating products at a better price.
Aggregating volume absolutely makes sense. We are not
against that. The problem we have here is the funding
mechanism. The hospitals aren't looking to contract for more
expensive products either. The problem is the GPOs, who are the
middlemen--there is the perverse incentive in place. They are
the ones who are receiving more money the higher the price of
the product is. So I don't think this is a hospital issue.
So long as the GPOs are funded by the vendors whose
products they are charged with independently evaluating on a
cost-plus model, this is not going to provide the Medicare
system savings. I think that is exactly why the Department of
Justice has an ongoing criminal investigation into these issues
about Medicare fraud.
Chairman DeWine. We are going to submit to all of you some
written questions. One of the written questions will be for
your comment about all the four proposals. I wish we had the
opportunity to do this in open session and listen to your
comments. We would appreciate you all getting back to us in
writing.
Also, this Subcommittee has received letters on this issue
from a variety of interested members of industry, including
eight from Ohio--the Ohio Hospital Association, Mercy
Children's Hospital, Lima Memorial Hospital, Akron General
Health System, MedCentral Health System, Upper Valley Medical
Center, Ohio Children's Hospital Association, Catholic Health
Care--and several other letters as well. We will put all of
these in the record.
Any additional comments? My colleague from New York.
Senator Schumer. I will be very quick. I heard you read a
list of hospitals in Ohio. I have hospitals in New York. I
mean, they are not dumb. They sort of know what they are doing
and they know they have to lower costs. So I would need a lot
of evidence to show that the GPO, which is sort of set up and
run by the hospitals, isn't doing what is good for the
hospitals. Now, if that is the case, we ought to change it, no
question about it.
But it seems to me the hospitals, which are sweating every
minute over every nickel, at least in New York, would have a
pretty good idea if they are getting rooked. And they wouldn't
be so much for these organizations if they are as bad as some
people are saying.
Chairman DeWine. Well, I would just point out to my
colleague that because of what this Subcommittee has done, we
have made some substantial changes. And I don't think there are
too many people in the room who don't think we have made some
substantial changes.
Senator Schumer. Mr. Chairman, I agree with that.
Chairman DeWine. We have come a long way.
Senator Schumer. I just think what seems to be happening
now with all the new awareness, the self-policing--they are
much tougher on it--seems to be working. And I just sort of
smell out there that at least there are some people who would
want to make the GPOs unworkable, not on this Committee,
obviously, but some people who would think they would do a
better job without the GPOs bargaining with each hospital.
Well, we want to thank all the members of the panel who
have come in. We appreciate it very much. We know you have
taken your time and in some cases your money to get here, and
we appreciate all of you being here. Thank you very much. It
has been very helpful.
[Whereupon, at 3:10 p.m., the Subcommittee was adjourned.]
[Questions and answers and submissions for the record
follow.]
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