MDMA Meeting Participants Continue to Protest GPO Practices

Originally Published MDDI June 2002

NEWS & ANALYSIS

Erik Swain

Small medical device firms increasingly believe that group purchasing organizations (GPOs) are hostile to their interests, judging from the tenor of the Medical Device Manufacturers Association (MDMA; Washington, DC) meeting, held May 22–23, 2002, in Washington.

A panel at the meeting was adamant in calling for reform, and even participants from GPOs and related organizations emphasized their attempts to better accommodate small device manufacturers.

GPOs are designed to save hospitals and other health organizations money by combining their purchasing power to buy medical products in bulk at great discounts. The problem, device manufacturers charge, is that some of the larger GPOs are creating barriers to entry for small device makers. They achieve this by implementing such policies as collecting administrative fees and drawing up sole-source contracts for products made by larger device companies, which effectively shut out of the network competing devices from small manufacturers. Sometimes, panel members said, GPOs even impose penalties on organizations that buy "off-contract" products, creating more pressure for device makers to agree to whatever it takes to secure a GPO contract.

Exacerbating the problem, speakers said, is that the GPO industry has become so consolidated that two GPOs, Novation (Irving, TX) and Premier Inc. (San Diego), control about 65% of the hospital purchasing networks. Therefore some device manufacturers have come to believe that their products cannot get significant distribution unless they concede to the demands of these two behemoths.

"The consolidation has created competitive problems," said attorney Jonathan R. Yarnowsky, a partner at Patton Boggs (Washington, DC) and a member of MDMA's public policy practice group. "It has created a monopsony, which is a buyer's monopoly, and creates a real bottleneck before the ultimate consumer. The huge fees are a barrier to entry, and the onerous clauses in some contracts make them anti-competitive." There is also a "tying" problem, in which several products are offered by the GPO as a "bundle," and the hospital must buy all the products in the bundle or pay penalties. "If you can't get in the bundle, and the buyer can't get around the bundle," Yarnowsky said, "[the GOP is in] violation of antitrust law."

A hearing before the Antitrust, Business Rights, and Competition Subcommittee of the U.S. Senate Judiciary Committee in late April shed some light on these issues, and prompted the subcommittee to demand that GPOs devise a code of conduct for their industry within 90 days. One story the senators heard was that of Masimo Corp. (Irvine, CA), which claimed that GPOs shut its pulse oximeter out of more than 80% of hospitals despite 20 independent studies that showed it performed better and was priced lower than its competitor. The reason, said Joe E. Kiani, Masimo's founder and CEO, was that the GPOs had a single-source contract with its competitor—who was willing to pay the extra fees to get the deal.

"In free-market situations, we won 61 deals and did not lose one hospital we sought," Kiani said. "But we lost 48 deals, all from sole-sourced GPOs."

But, some panelists reminded attendees, not all purchasing organizations are unfriendly to small manufacturers or engaging in practices that could be deemed anticompetitive.

Todd Ebert, executive vice president of AmeriNet, a smaller GPO based in St. Louis, said his firm resists sole-source contracts where they can, because "there is not one size that fits everyone. Every facility is in a unique and different situation," Ebert said. "Our goal is to promote what we have on contract, but not to impose penalties for not using them."

He also pointed out that AmeriNet's contracts have a "better technology clause," which asserts the company's right to add a better competitive technology to the contract should one become available. "And we have exercised it," he said.

There are ways for hospitals to achieve discounts without belonging to a GPO. Bob Bissell, principal of CoalesCo Ltd. (Ponte Vedra Beach, FL), explained how his firm sets up regional cooperatives in which the member hospitals decide what they want to purchase. No vendor administrative fees, no bundles, and no sole-source contracts are involved; CoalesCo only makes money when its members achieve savings.

"This is a local decision-making process driven by [the hospitals'] own clinicians and physicians," Bissell said. "But at the same time, they are big enough to attract the interest of vendors."

Copyright ©2002 Medical Device & Diagnostic Industry