War of words heats up in GPO controversy

October 07, 2010
by Brendon Nafziger, DOTmed News Associate Editor
A new report released by a medical device trade group arguing that current rules for group purchasing organizations cost hospitals billions of dollars worth of lost savings was slammed by GPOs as "propaganda" and a "slap in the face."

The harsh words come in the latest round of dueling studies surrounding GPOs, the organizations that help negotiate prices from medical suppliers for nearly all of America's hospitals.

The Medical Device Manufacturers Association report released Wednesday claims that overturning GPOs' exemption from anti-kickback statutes, which let them collect administrative fees from vendors, could save the health care system up to $37.5 billion every year.

But GPOs responded by questioning the validity of what they see as an industry-funded study contradicted by some earlier research, including a report issued last week by the Government Accountability Office.

"The device industry attacks GPOs because we are working for hospitals," Curtis Rooney, president of Health Industry Group Purchasing Association, said in prepared remarks. "The relationship between GPOs and manufacturers should be adversarial in this context, and the attacks tell us that we are effective in driving manufacturer prices down and providing significant cost-savings to hospitals, patients and payers alike."

At the core of the MDMA study is what the device group sees as anti-competitive practice brought about by GPOs given a more than 20-year-old anti-kickback exemption to collect fees equal to a percentage of the auction proceeds from vendors.

"This exemption has allowed GPOs to retain an equity interest with those [with] whom they negotiate [for] lower prices. So long as GPOs are allowed to negotiate this way, they have a conflict of interest," Hal J. Singer, who co-authored the report with Robert E. Litan, told reporters at a press conference. Both men are economists with consulting firm Navigant Economics.

The authors say fee-collecting further helps jack up prices because suppliers will bid less aggressively as they must spend some money on fees, and also the high cost of participating in the auction could drive out other suppliers.

"The resulting lack of competition might raise net costs for hospitals and
government," the report said, "despite the purported savings in transaction costs and consolidation of purchasing power made possible by GPOs."

The anti-kickback exemption comes from a 1986 statute that lets GPOs receive fees from suppliers for items reimbursable by federal health care programs, the report said. The groups got the exemption by convincing Congress the greater bargaining leverage provided by GPOs in securing contracts would ultimately save the government money, according to the report.

The researchers based their estimates on potential cost-savings outside of GPOs by using data from from MEMdata, a service that works with hospitals trying to buy capital equipment. The researchers compared prices in so-called aftermarket auctions, in which GPO-contract vendors bid with contract prices against other vendors.

"We looked at price of medical supplies after GPOs have ostensibly secured best price," Singer said. "If original GPO auctions are done efficiently, [there's] no price room."

But in the report the researchers said that on average, through the 8,100 auctions studied, the winning bid was 10 to 14 percent cheaper than the original GPO price over the 10 years of data they had available. The average GPO price was $81,436, but the average winning bid was $73,990, according to the authors.

"Indeed, in [more than] half of all auctions in the transactions database, incumbent device makers on the GPO contract were induced to lower their own prices for the same product to the same hospital, and did so by approximately 7 percent on average," the report said.

GPOs call data 'discredited'
But the GPOs feel they have been vindicated by most non-industry studies. HIGPA said the data in the MDMA study have long been "discredited" by reams of earlier reports, including an Eight Circuit Court finding from August that upheld a verdict favoring C.R. Bard's contract with the GPO Novation. The court said it found hospitals pay, on average, 16 percent less for supplies through GPOs.

Plus, a much-touted report published by the GAO last week found that hospitals increasingly rely on GPOs as the primary means to help keep the costs of medical products and services balanced. In addition, the GAO found that most device vendors found voluntarily adopted rules by the GPOs helped keep administrative fees low and transparent. Three out of five vendors interviewed for the report said they are now paying lower administrative fees and that fees are more consistent and predictable, according to the report.

"Because medical device manufacturers did not like what the U.S. Government Accountability Office found in its most recent analysis of the group purchasing industry, MDMA has chosen to disregard or manipulate the GAO report for its own purposes," Rooney said.

But Bob Yancy, the CEO of MEMdata, from which the raw data from the MDMA study came, was quick to say the report should not be interpreted as an attack on GPOs. For decades, GPOs helped control supply prices and "drove price efficiency in our health care system," he noted.

"This study and our release of it is not meant as an affront to GPOs," he told reporters during a press call. "We need to consider changes - we need to consider properly incentivizing its participants."

HIGPA did not respond for comment by press time.

Heather Mayer contributed to this report