[Congressional Record Volume 150, Number 122 (Friday, October 1, 2004)]
[Senate]
[Pages S10263-S10265]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. KOHL (for himself and Mr. DeWine):
  S. 2880. A bill to amend title XI of the Social Security Act to 
ensure full and free competition in the medical device and hospital 
supply industries; to the Committee on Finance.
  Mr. KOHL. Mr. President, I rise today with Senator DeWine to 
introduce the Medical Device Competition Act of 2004. The legislation 
that we are introducing today is the product of perhaps the most 
important work of our Subcommittee in the last few years--ensuring that 
physicians, patients, and health care workers have access to the best 
and safest medical devices, devices that can literally make the 
difference between life and death.
  For nearly three years, the Antitrust Subcommittee has undertaken a 
thorough investigation of the hospital purchasing industry. This 
industry accounting for more than an estimated $50 billion in commerce 
is responsible for purchasing nearly everything that a hospital buys to 
treat sick or injured patients, everything from simple band-aids to 
high tech x-ray machines, from pacemakers to surgical devices. Much of 
this purchasing is done under contracts negotiated by what are known as 
``group purchasing organizations'', ``GPOs'', large organizations that 
aggregate the buying power of hundreds, and sometimes thousands, of 
hospitals in order to gain bargaining power and volume discounts from 
hospital suppliers.
  Without question, the goal of gaining volume discounts through 
aggregating buying power that led to the creation of GPOs is laudable. 
Unfortunately, our inquiry revealed that a system created to aggregate 
demand and hold down cost had sometimes mutated into a tool for 
entrenching market power of dominant suppliers, locking out 
competitors, and suppressing innovation. All too often conflicts of 
interest and questionable GPO business practices denied physicians and 
their patients choice of needed medical devices and robbed hospitals of 
the benefit of competition.
  Moreover, the power and importance of GPOs to our health care system 
increased as the GPO industry has undergone enormous consolidation in 
the last decade. As originally envisioned, GPOs were generally local or 
regional buying cooperatives each of whom accounting for a very small 
proportion of the market. Today, this situation is transformed. The two 
largest GPOs negotiate purchasing contracts for more than an estimated 
60 percent of the Nation's not for profit hospital beds. The size and 
national scope of these large GPOs have turned them into the 
gatekeepers who can decide which medical devices doctors will use and 
which medical device companies will be able to sell their lifesaving 
goods..
  Our investigation uncovered abuses and questionable practices that 
interfered with the GPOs' mission of buying the best products at the 
best prices. At the time our investigation began in 2001, it was all 
too common a practice for GPOs to contract with only one supplier of a 
medical device for lengthy terms. Industry observers also raised 
concerns over contracts which bundled commodities like hospital gowns 
with medical devices like pacemakers and surgical equipment, creating 
nearly insurmountable barriers for smaller manufacturers with 
specialized product lines to compete, regardless of the quality or 
effectiveness of their product. Some GPOs accepted high payments--so-
called ``administrative fees''--well in excess of 3 percent from 
manufacturers. Worst of all, supposedly neutral contracting decisions 
were at times infected by equity interests held by GPOs or their 
executives in medical device companies.
  We can be proud of the work of our subcommittee--and, indeed, many in 
the GPO industry--in responding to this situation. At our behest, six 
of the largest hospital buying groups 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. The GPOs that 
agreed to these new codes should be commended for their willingness to 
engage in real reform. Thanks to these GPOs' good work and willingness 
to engage in reform, many of the most egregious practices began to 
disappear from the marketplace and barriers to patients getting access 
to the best medical devices more have begun to come down.
  Yet these reforms--as real and important as they are--have inherent 
limitations. They are completely voluntary and can be modified or even 
withdrawn by the GPOs at will. They have no enforcement mechanism nor 
any manner to objectively verify that they are being adhered to. We 
have no assurance that the reforms will not be abridged or abrogated 
should our subcommittee's oversight come to an end. We must now, 
therefore, find a way to ensure that these gains cannot be reversed.
  Despite their enormous influence, GPOs have until now operated with 
little, if any, governmental oversight. Quite the contrary, these GPOs 
have operated under special government protection--a Congressionally 
granted exemption from anti-kickback law. This exemption--commonly 
known as the ``safe harbor'' for GPOs--allows GPOs to accept payments 
from hospital suppliers even though these purchases are reimbursed by 
the Medicare program. Acceptance of these payments from suppliers would 
be illegal absent this special exemption. The fact the hospital 
purchasing has this specially, Congressionally granted immunity from 
kickback mandates that government have the ability to oversee the 
manner GPOs are behaving under the protection of this exemption--
oversight currently not required by law.

  We are therefore today introducing legislation which will ensure that 
the Department of Health and Human Services will have the authority to 
oversee the functioning of the safe harbor and prevent anti-competitive 
or unethical GPO business practices. This is moderate and measured 
legislation which is not prescriptive in almost all respects. With only 
one exception, it does not outlaw any GPO practices or business 
arrangements. Instead, the bill grants oversight authority over 
hospital purchasing to HHS, and directs the HHS to draft regulations to 
prevent improper GPO conduct--that is, unethical conduct, anti-
competitive practices, or practices which preclude products necessary 
for patient care or worker safety from reaching physicians and 
patients. HHS is further directed to consult with the Federal Trade 
Commission and the Attorney General in

[[Page S10264]]

developing these guidelines. Rather than micro-managing specific 
business practices, the discretion is left to the health policy experts 
at HHS, after consulting with the antitrust agencies--and only with the 
input of industry representatives through the notice and comment 
process--to develop the appropriate standards.
  We recognize that different GPOs have different business models, and 
the goal of this approach is to permit GPOs to maintain these models as 
long as they do not violate basic precepts of good business conduct. As 
long as a GPO does not violate these standards, it continues to receive 
the immunity from anti-kickback law granted by the safe harbor. 
However, the penalty for GPOs that violate these standards is to be 
ineligible to participate in the safe harbor--that is, being unable to 
accept payments from hospital suppliers. This sanction should prevent 
GPOs from reverting to unethical or anti-competitive conduct, and give 
HHS the regulatory tools to supervise the industry so that it serves 
the interests of hospitals and patients.
  The one area in which our legislation is prescriptive addresses a 
principle to which most parties on all sides of the GPO debate--
hospitals, manufacturers, and most GPOs themselves--have already 
agreed. This is the provision that bans GPOs from accepting payments 
from vendors which exceed three percent of price of the good or service 
sold. The intent of this provision is to forbid excessive vendor fees 
which can bias a GPO contracting decision. The decision on which 
product is placed on a GPO contract should never turn on the amount of 
money paid by the manufacturer to the GPO; rather, a GPO's only goal 
should be to contract for the highest quality product at the lowest 
possible price. Most GPO's codes of conduct already ban vendor fees 
higher than 3 percent; however, during our investigation we learned 
that one of the nation's two largest GPOs had accepted fees above 20 
percent. Indeed, data submitted to the Subcommittee showed that during 
2002 over 20 percent of that GPO's revenues was derived from contracts 
with vendor fees higher than 3 percent, a proportion that had increased 
from the previous year. The safe harbor should not shield such 
practices, conduct which has the strong potential to bias the whole 
system.
  In sum, we believe that our bill is a modest yet effective 
legislative approach to ensuring that the gains we have achieved over 
the past two years are not reversed, and that the safe harbor is 
administered in a way to promote innovation, competition, and cost 
savings. This legislation will give the authority that HHS needs to be 
an effective watchdog over hospital purchasing practices. Once this 
legislation is passed we can be confident that the reforms to the 
hospital purchasing industry that we have achieved over the last two 
years will remain in place, and that there will never be a return to 
practices that imperiled patient health and health worker safety, and 
blocked competition and innovation in this vital industry.
  The bottom line is that our bill will encourage medical innovation, 
ensure doctors get the broadest choice of medical devices, and ensure 
that patients will receive the best possible devices available. These 
are goals we should all support. I urge my colleagues to join me in 
supporting this legislation.
  I ask unanimous consent that the text of this bill be printed in the 
Record.
  There being no objection, the bill was ordered to be printed in the 
Record, as follows:

                                S. 2880

       Be it enacted by the Senate and House of Representatives of 
     the United States of America in Congress assembled,

     SECTION 1. SHORT TITLE.

       This Act may be cited as the ``Medical Device Competition 
     Act of 2004''.

     SEC. 2. FINDINGS.

       Congress finds the following:
       (1) Given the increasing costs of health care in the United 
     States, there is a compelling public interest in ensuring 
     that there is full and free competition in the medical device 
     and hospital supply industries so that the best and safest 
     products are available to physicians and patients at a 
     competitive price.
       (2) By aggregating purchases, hospital group purchasing can 
     reduce the cost of acquiring medical equipment and hospital 
     supplies so long as such purchasing is done in a manner 
     consistent with antitrust law and free competition.
       (3) Some practices engaged in by certain hospital group 
     purchasing organizations have had the effect of reducing 
     competition in the medical device and hospital supply 
     industries by denying some suppliers and device makers access 
     to the hospital marketplace.
       (4) There is a compelling public interest in having the 
     Secretary of Health and Human Services, in consultation with 
     the Attorney General and Federal Trade Commission, engage in 
     oversight and supervision of the current Federal health care 
     program anti-kickback exemption (also known as the safe 
     harbor) provided to group purchasing organizations under 
     subparagraphs (C) and (E) of section 1128B(b)(3) of the 
     Social Security Act (42 U.S.C. 1320a-7b(b)(3)). This 
     oversight and supervision should ensure that the safe harbor 
     does not shield conduct that harms competition in the 
     hospital supply and medical device industries.

     SEC. 3. ENSURING FULL AND FREE COMPETITION.

       (a) In General.--Section 1128B(b)(3)(C) of the Social 
     Security Act (42 U.S.C. 1320a-7b(b)(3)(C)) is amended--
       (1) in clause (i), by striking ``, and'' at the end and 
     inserting a semicolon; and
       (2) by adding at the end the following new clauses:
       ``(iii) the contracting, business, and ethical practices of 
     the person are not inconsistent with regulations promulgated 
     by the Secretary pursuant to subsection (g)(1);
       ``(iv) the person has been certified by the Secretary under 
     subsection (g)(2) to be in compliance with the regulations 
     promulgated pursuant to subsection (g)(1); and
       ``(v) the amount to be paid the person does not exceed a 
     total of 3 percent of the purchase price of the goods or 
     services provided by that vendor;''.
       (b) Regulations.--Section 1128B of the Social Security Act 
     (42 U.S.C. 1320a-7b) is amended by adding at the end the 
     following new subsection:
       ``(g)(1)(A) The Secretary, in consultation with the 
     Attorney General and the Federal Trade Commission, shall, not 
     later than 1 year after the date of enactment of the Medical 
     Device Competition Act of 2004, issue proposed regulations, 
     and shall, not later than 2 years after such date of 
     enactment, promulgate final regulations, specifying 
     contracting, business, and ethical practices of persons 
     described in paragraph (4) that are contrary to antitrust law 
     and competitive principles, to ethical standards, or to the 
     goal of ensuring that products necessary for proper patient 
     care or worker safety are readily available to physicians, 
     health care workers, and patients.
       ``(B) In issuing and promulgating regulations under 
     subparagraph (A), the Secretary shall take into account--
       ``(i) the compelling public policy goals of--
       ``(I) encouraging competition and innovation in the 
     hospital supply and medical device markets; and
       ``(II) reducing the cost of health care as a result of 
     aggregating buying power;
       ``(ii) the potentially detrimental impact of certain 
     anticompetitive contracting practices; and
       ``(iii) the need to avoid conflicts of interests and other 
     unethical practices by persons described in paragraph (4).
       ``(2) The Secretary, in consultation with the Attorney 
     General and the Federal Trade Commission, shall establish 
     procedures for annually certifying that persons described in 
     paragraph (4) are in compliance with the final regulations 
     promulgated pursuant to paragraph (1).
       ``(3) The Secretary, in consultation with the Attorney 
     General and Federal Trade Commission, shall, not less than 6 
     months after the date of enactment of the Medical Device 
     Competition Act of 2004, issue proposed regulations, and 
     shall, not later than 1 year after such date of enactment, 
     promulgate final regulations, to clarify its regulations 
     promulgated pursuant to section 14(a) of the Medicare and 
     Medicaid Patient and Program Protection Act of 1987 to 
     specify that the definition of `remuneration' under this 
     section with respect to persons described in paragraph (4)--
       ``(A) includes only those reasonable costs associated with 
     the procurement of products and the administration of valid 
     contracts; and
       ``(B) does not include marketing costs, any extraneous 
     fees, or any other payment intended to unduly or improperly 
     influence the award of a contract based on factors other than 
     the cost, quality, safety, or efficacy of the product.
       ``(4) A person described in this paragraph is a person 
     authorized to act as a purchasing agent for a group of 
     individuals or entities who are furnishing services 
     reimbursable under a Federal health care program.''.
       (c) Definition of Purchasing Agent.--Section 1128B of the 
     Social Security Act (42 U.S.C. 1320a-7b), as amended by 
     subsection (b), is amended by adding at the end the following 
     new subsection:
       ``(h) For purposes of this section, the term `purchasing 
     agent' means any individual, organization, or other entity 
     that negotiates and implements contracts to purchase hospital 
     supplies or medical equipment, devices, products, or goods or 
     services of any kind for any group of individuals or entities 
     who are furnishing services reimbursable under a Federal 
     health care program, including organizations commonly known 
     as `group purchasing organizations'.''.
       (d) Effective Date.--Clause (v) of section 1128B(b)(3)(C) 
     of the Social Security Act (42

[[Page S10265]]

     U.S.C. 1320a-7b(b)(3)(C)), as added by subsection (a), shall 
     take effect 1 year after the date of enactment of this Act.

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