GPOs Should be Reformed Says MDMA-Funded Report
Hal J. Singer, an expert on antitrust issues and Senior Vice President of strategic economic assessment firm Criterion Economics, wrote a report (pdf) to study the budgetary impact of eliminating the GPOs’ Safe Harbor Exemption from the Anti-Kickback Statute of the Social Security Act. The report was funded by the Medical Device Manufacturers Association (MDMA) and unveiled during last week’s MDMA 12th annual meeting. In most instances section 1128B. [42 U.S.C. 1320a-7b] of the Act makes it a felony to “knowingly and willfully offer or pay any remuneration (including any kickback, bribe, or rebate) directly or indirectly, overtly or covertly, in cash or in kind to any person to induce such person to refer an individual to a person for the furnishing or arranging for the furnishing of any item or service for which payment may be made in whole or in part under a Federal health care program.”
However in 1986 Congress amended the act with an exemption for GPOs (42 C.F.R. 1001.952 - pdf). Then in 1991 the Department of Health and Human Services (HHS) specified safe harbors provisions stating that GPOs are to have written agreements with their customers either setting fees at three percent or less of the purchase price, or specifying the amount or maximum amount that each vendor will pay (see 56 Federal Register 35952, these rules have been clarified since then in FR 94-16873). Another exemption to the kickback rule is emerging for gainsharing, though it is de facto rather than de jure so far.
Some GPOs have found ways to go beyond the three percent limit on vendor fees through a variety of fees or by getting stock in supplier companies. Singer’s report draws on well-known economic principles related to agency problems and states there is a conflict of interest and moral hazard because of misaligned GPOs incentives. A General Accounting Office report (pdf) published in 2003 found that the typical contract administrative fee paid by private label manufacturers (i.e. for product resold under the GPO’s brand) at the time was 5 percent. Singer concludes that:
“Under highly conservative assumptions, the elimination of GPOs’ safe harbor exemption from the Medicare anti-kickback statute would not increase government expenditures on health care. [T]he rule change would likely decrease government expenditures. [M]ember hospitals would capture a higher percentage of the fees now paid by medical suppliers to GPOs.”
In October 2004 Senators Mike DeWine (R-OH) and Herb Kohl (D-WI), chairman and ranking member, respectively, of the U.S. Senate Judiciary Subcommittee on Antitrust, Competition Policy and Consumer Rights tried to introduce the Medical Device Competition Act to address this issue. The bill was opposed by the Health Industry Group Purchasing Association (HIGPA) at the time, deeming it “unproductive” and claiming self-regulation was sufficient. The New York Times ran a series of articles on GPOs between 2002 and 2004 which raised attention from the public and legislators about how they work and whether they fulfill their purpose.
In March 2006 Mark B. Leahey, Executive Director of the MDMA gave anti safe harbor testimony (pdf) before the Subcommittee on Antitrust, Competition, and Business and Consumer Rights of the U.S. Senate Judiciary Committee. He stated that codes of conducts set up by GPOs such as the Healthcare Group Purchasing Industry Initiative didn’t amount to serious reforms and lacked enforcement mechanisms and penalties. He argued the GPO safe harbor didn’t work anymore now that just seven organizations account for 85 percent of the market, with 60 percent of it concentrated on the two biggest ones. Leahey urged Congress to “terminate the financial dependence that GPOs have on the vendor fees.” During this latest round of hearings Senator Kohl expressed disappointment that no representative of the GPO industry accepted the committee’s invitation to testify. The MDMA has lobbied in this direction for years and clearly wants to keep pressing the issue.
June 20, 2006 Related topics: Legal & legislative, Group purchasing & GPOs, Cost savings