Hearing of the Subcommittee on Antitrust Competition Policy and Consumer Rights of the Senate Committee
September 14, 2004 Tuesday
SECTION: CAPITOL HILL HEARING
LENGTH: 8590 words
HEADLINE: HEARING OF THE SUBCOMMITTEE ON ANTITRUST COMPETITION POLICY AND CONSUMER RIGHTS OF THE SENATE COMMITTEE ON THE JUDICIARY SUBJECT: HOSPITAL GROUP PURCHASING: HOW TO MAINTAIN INNOVATIVE AND COST SAVINGS
CHAIRED BY:
WITNESSES:
DOCTOR ROBERT BETZ, PRESIDENT AND CEO, HEALTH INDUSTRY GROUP PURCHASING ASSOCIATION;
JOE E. KIANI, PRESIDENT AND CEP, MASIMO CORPORATION, IRVINE, CA;
DAVID BALTO, ROBINS, KAPLAN, MILLER & CIRESI LLP
LOCATION: 226 DIRKSEN SENATE OFFICE BUILDING, WASHINGTON, D.C.
TIME: 2:00 P.M.
BODY:
SEN. MIKE DeWINE (R-OH): 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 towards the future. Since our first hearing in April of 2002, I'm 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 an ownership interest in a vendor in place of an administrative fee appear to have been ended.
The GPOs took these steps in response to subcommittee requests 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 to 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 GPO 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.
Now, 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 in 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'll be honest, it's often difficult to assess-to really determine or 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 producers 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 from the GPO industry, there is a risk that there may be backsliding. 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's fair to say that we are at the crossroads. And sitting here today, I see at least three paths we could choose. I've made no decision, frankly, 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 committee. 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. 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. It would move the oversight role-if we follow 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 on which the entire GPO industry is built.
Now, 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 some 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 that it is disciplined in a way that has real consequences.
Now, I've set out these three paths as what I see now, but I'm not no 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.
Now, 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's 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-also allow for new technology and vigorous competition in health care products is the goal of our hearing today, and has 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. I think it's 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.
Senator Kohl.
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SEN. 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 the 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 the partner at Robins, Kaplan, Miller & 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, an attorney adviser to the chairman.
Dr. Betz, we will start with you. Let me advise you all that we have a vote that is scheduled to begin any moment, so we will break the testimony at some point, Dr. Betz. We're going to follow the five-minute rule and we're going to follow that very religiously today, which means that you're going to get a four minute warning when the light goes on, that means you've got a minute.
Dr. Betz, thank you.
BREAK IN TEXT
SEN. DeWINE: We're 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 10 minutes. Thanks Senate time -- (laughter.) Stay close.
(Vote Recess.)
SEN. 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.
Mr. Kiani, you're next.
MR. JOE KIANI: Thank you.
SEN. DeWINE: You're on, we can hear you.
BREAK IN TEXT
SEN. DeWINE: Why don't we do it in questions.
MR. KIANI: Thank you.
SEN. DeWINE: Mr. Balto.
BREAK IN TEXT
SEN. DeWINE: Senator Kohl.
BREAK IN TEXT
SEN. 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've 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'm pleased to report that all the members-GPO members of HIGPA are in compliance with our code. And we've brought those certification documents on a regular basis to the subcommittee staff.
SEN. DeWINE: What would be the real world consequences to a GPO if it were kicked out?
MR. BETZ: If they were kicked out?
SEN. DeWINE: Yeah. How would it affect its business?
MR. BETZ: Well, first of all I'd pray for them each and every day, Mr. Chairman. I believe that the reality of the situation is that they are going to place 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? And if you're 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're a GPO exec, quite frankly I think the competitive nature of the process is such that they're going to try to be more ethical than the other, to take additional steps to try to impress the hospitals, the providers that they serve, and also the manufacturers.
They must-again, briefly, sir. The GPOs must certify compliance to the code to be a member of HIGPA. The association's bylaws reflect the 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.
SEN. DeWINE: Mr. Kiani, your testimony makes really a compelling case for why we should all want competition in the marketplace, and I guess we all want that, so that the best and most cost effective medical devices are used in patient care. But, you know, as I told you, I've 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, and they talk about money. That's 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 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?
MR. KIANI: Sure. Chairman DeWine - - -
SEN. DeWINE: Are they just not aware of the technology out there or what's the problem?
MR. KIANI: Well, Chairman, DeWine, first of all I really wish maybe one or some of those hospitals were at these Senate hearings so they could, for themselves, see what the real issues are, and also I understand the legislation you're seeking --
SEN. DeWINE: What's 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're seeking is to get rid of GPOs. All we want to do, 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're seeking that your legislative oversight would create hopefully, should reduce their costs. Nothing that we're asking for should increase the costs.
SEN. DeWINE: And I appreciate what you're saying, but my point's a little different, and that is that they don't seem to have this concern about new technology not getting through, that they're missing. Maybe it's you don't know what you're missing if you're missing it I guess, I don't know. What's the deal here? Why wouldn't they-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 new technology out there? Aren't they aware of this technology or what?
MR. KIANI: Chairman DeWine, I think for the most part they are not aware of this technology, the new technologies. For example, two years ago when I testified I pointed that the Novation contract actually imposed on the hospitals to not even look at a competing technology that competes with the incumbent vendor that's on the contract for what they call the opportunity program. So 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've been put on contract.
But there's hundreds of hospitals that-excuse me, hundreds of companies that have not been lucky enough to testify that they're still having difficulties even letting --
SEN. DeWINE: That are as good as you? Got good stuff out there that aren't getting through is what your point is.
MR. KIANI: Yes, sir.
SEN. DeWINE: They're 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's a booklet that has been handed to you that cites about 20 of those situations that deal with thousands of contracts.
SEN. DeWINE: Also several times during your written testimony you noted 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 that 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're not the issues of patient health, about human beings health that Mr. Kiani and other people have testified before you. So as a first matter you may be-Congress may be more reluctant to permit self-regulation in this instance than in other instances.
Second, self-regulation. You know, you do in settings where you do want self-regulation to occur, allowing competing forms of self- regulation can be positive. But 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, a highway of competition in the market and somebody says it's 45 miles an hour and somebody says it's 55 miles an hour, but everybody knows there's no cop looking at how fast the cars are going. And so long as there's no enforcement mechanism, this self-regulation isn't going to work.
MR. KIANI: Could I add one thing to that, Mr. Chairman?
SEN. DeWINE: Sure.
MR. KIANI: I have heard Mr. Betz say that if these GPOs don't comply with the code of conduct that they will be taken away their membership card. And also if we want to have competition we can all put our stuff on the website. Bottom line is, I think you have the fourth or fifth largest GPO in this industry does not belong to HIGPA, and that's HealthTrust. And one of the examples I was going to show you was actually HealthTrust who, because they didn't have the oversight nor a member of HIGPA-in fact, if I could show you.
SEN. DeWINE: Sure, go ahead.
MR. KIANI: The president, the CEO of HealthTrust wrote me this letter saying, as our president says, you're 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 of this legislation. Now, the legislation this gentleman is talking about is the California legislation that was trying to deal with this GPO issue. And, first of all, I thought we were all on the side of the patients, that's why we're all here today.
But secondly, this GPO who doesn't belong to HIGPA represents several hundred hospitals and 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.
SEN. 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're in the business to make those decisions. But here's my concern: I'm wondering if it's possible that in the short run-short run GPOs are saving money, but in the long run they may actually drive up costs.
Here's 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's conceivable that GPOs might unintentionally strengthen the market power of the large manufacturer. And if this is the case, in the long run the large manufacturer will be able to raise its prices. It's happened other places, in other industries.
MR. BETZ: Yes, sir. Mr. Chairman --
SEN. DeWINE: Why isn't that true here?
MR. BETZ: Well, you have to-again I think have to appreciate, in answer to your question, who's driving the train here.
SEN. DeWINE: Okay. Who's driving the train?
MR. BETZ: Group purchasing organizations don't make decision 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 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 product. 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 the 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's not in the beginning that groups have their biggest impact, it is the long-term effect if 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.
SEN. 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's 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's unique about this industry that makes you conclude the threat of antitrust litigation is not sufficient so therefore we have to regulate?
MR. BALTO: First of all, let me just 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? And you know, as a free marketer that was the last thing I ever wanted to say. But I think there are certain instances where it's clear that the free market isn't working, the supposed free market isn't working, and it's appropriate for regulation to step in.
And I'm struck by the contrast between this industry and other health care industries, such as pharmaceutical, 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, you know, ultimately, by enforcing the anti-kickback statutes, HHS Inspector General's Office, I think, you know, helps to make the market more competitive.
SEN. DeWINE: Well, let me ask you this: Do you think it's reasonable to expect HHS to write up regulations that are generally applicable? Wouldn't there be a tendency to draft regulations either highly specific, which could hamstring industry, or so vague they're of no real use at all?
MR. BALTO: An excellent question, and I think that's 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.
SEN. DeWINE: Mr. Kiani, you want to take a shot at that question?
MR. KIANI: Well, I'm certainly not an expert in this area, but I think your question was, do we think HHS will write something that's good enough and doesn't create either too much burden or not enough. And all I can tell you is that the code of conduct for the last two 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 is looking at this. And I would hope that together, we could give HHS some guidance to what works, ultimately.
MR. BALTO: Senator DeWine, if I can just --
SEN. DeWINE: Sure, Mr. Balto.
MR. BALTO: If I can just amplify. Look, 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's nothing necessarily bad, but 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 which actually, at the end-and bundling-which actually, at the end of the day, may be anti-competitive.
I'm 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 fraudulently and harmful to competition, we might see buyers who like those things initially, but now that those practices are eliminated we see a more competitive marketplace.
MR. KIANI: Mr. Chairman, you earlier asked about what would happen to innovation, I believe, from Mr. Betz. And I think the analogy that I've been thinking a lot about, if group purchasing was buying word processors for industry, we'd all be using IBM typewriters at $100 each. I think Ms. Weatherman (sp), representing the NBCA (ph), stated very well that they don't look at investing in these sectors any more because of the lack of competition. And we hope your oversight that you'll look to create will help GPOs be better in serving the hospitals and getting the most innovative products for the best prices.
SEN. DeWINE: Well, listen, I want to thank the three of you, it's 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.
MR. BETZ: Thank you, Mr. Chairman.