Group purchasing orgs review ethics standards

New code of conduct being developed

Following Congressional scrutiny of their business practices, hospital group purchasing organizations (GPOs) are moving to adopt new standards governing how they collect fees, contract with vendors, and manage potential conflicts of interest.

GPOs are groups of member hospitals that cooperate to negotiate large contracts with vendors to buy supplies, medications, and medical devices. Some GPOs are for-profit entities, while others are made up of, and owned by, not-for-profit member hospitals.

The industry experienced phenomenal growth in the mid-to-late 1990s, and ethical guidance didn’t always keep pace with evolving business practices, say experts. The new effort at standardizing practices and developing guidelines also may provide guidance for other health care entities facing similar growing pains.

"There are a number of elements in the code of conduct that are highly, if not directly, transferable to hospitals, in particular their purchasing and materials-related functions, just less broadly," notes Rick Norling, chairman and CEO of San Diego-based Premier Inc., a health system alliance that operates one of the nation’s two largest GPOs. "But the first step is to build learning and understanding because you never have guidelines and prescriptives that cover every situation."

Following rapid mergers and consolidation in the health care vendor market in the 1990s, health systems responded by banding together to gain enough buying power to negotiate better prices for products they all needed to purchase, Norling explains.

Premier, for example, is an alliance of more than 200 independent hospitals and health care systems that completely own and operate the company. The alliance has many functions, one of which is group purchasing.

As the industry expanded, a number of business practices emerged that potentially compromised GPOs’ ability to independently advocate on behalf of their member hospitals.

GPOs make money by collecting administrative fees for the contracts they negotiate — usually a percentage of the contract’s total "buy." Larger administrative fees have the potential to induce the organization to contract with a vendor that might not offer the best deal or the best products for the member hospitals.

Overall, there has been no set limit on GPO administrative fees, though the U.S. Department of Health and Human Services monitors contracts for health care products that involve administrative fees greater than 3% of the total contract amount.

In addition, some GPOs formed outside relationships with vendors aside from the product contracts negotiated — separate licensing agreements for products and equity investments in vendor companies. And some board members or executives also had investment relationships with vendors.

To drive competition for best prices, GPOs engaged in contracting strategies such as bundling different products into single contracts, and the use of sole-source contracting, which award large, multihospital contracts to a single vendor.

Such relationships led some medical device manufacturers to charge that the climate had virtually shut them out of the business market.

Last year, the antitrust subcommittee of the Senate Judiciary Committee held hearings on the issue and urged the industry’s trade association the Health Industry Group Purchasing Association (HIGPA) to develop a code of conduct for its members to follow.

Balancing innovation and cost savings

The association complied with eight-page "Code of Conduct Principles" that covered how GPOs should set up conflict-of-interest policies and compliance plans, establish procedures for handling member relations, product evaluation and vendor grievances, and disclose payments and other benefits received from participating vendors.

HIGPA will monitor the compliance of its member organizations with the new code of conduct, says HIGPA’s director Robert Betz.

"The code requires the organization to have a compliance officer who will make annual reports to HIGPA detailing compliance," he explains.

And this first year, the association will distribute a compliance survey to its members and publish the results. Although the Congressional hearings prompted the release of the code, HIGPA had already been in the process of examining several of the issues involved and in working with its members to develop guidelines, he adds.

"We have had a working group looking at these issues for some time and have sponsored several key studies of the impact that GPOs have on the functioning of their member hospitals," he says.

The key ethical issue for GPOs is how maximize cost savings for member hospitals, while at the same time allowing and encouraging investment in new technologies that will improve patient care and outcomes, Betz says.

To foster competition among vendors, GPOs utilize tools such as sole-source contracting, commitment-level requirements (stipulating that member hospitals will commit to a certain purchase level), contract lengths, and multiproduct line discount arrangements.

Without guidance, some of these arrangements could unfairly tip the balance in favor of larger vendors, limiting member hospitals’ exposure to and access to smaller vendors who may have better products or technology.

The code establishes common goals each contractual arrangement should meet. The code requires the GPO to consider all of the following factors in each arrangement:

  • the market share of participating vendors;
  • size of the GPO;
  • number of vendors available to provide the relevant product or service;
  • the ability of the participating vendor to meet the needs of the GPO’s members;
  • the occurrence of innovation in the relevant product or service category.

Each of these factors must be evaluated in light of its impact on the GPO’s ability to meet the twin goals of promoting the quality of patient care and achieving price savings and cost reductions for member hospitals.

Individual hospitals, whether they participate in a GPO or not, still have the responsibility to make purchasing decisions and do not abdicate this process to anyone, Norling reports.

But GPOs are able to aggregate the potential volume of hospitals in a series of product categories and they negotiate contracts through which hospitals can purchase products at a significant discount.

"They are not required to purchase products this way, they simply can purchase this way," Norling explains. "The contracts are also not for every product and are not all single-source."

Typically, GPO contracts only address 60%-65% of all the supplies needed by a hospital. The remaining 35%-40% of purchases are done by hospitals individually. Usually, GPO contracts represent bulk purchases of items many hospitals use, while hospitals will individually contract for the remaining amount.

At Premier, clinical advisory boards comprised of representatives from the member hospitals review all proposed contracts for products and services and vote on which vendors to contract with, Norling says.

In return for getting a better deal through a GPO contract, member hospitals are required to commit to a buy at a certain level under a contract. This is what is known as a "commitment level."

At Premier, no contract requires a commitment level of 100% — that a hospital buy all of its supply of a particular product or service through that contract. Contracts should, and do, leave room for alternative purchasing arrangements.

Not all committed contracts are "sole-source" (product supplied by a single vendor) either, Norling adds.

"With committed contracts, the hospitals commit in advance, but they are aware it will get them substantially better pricing and terms," Norling says. "There are always exceptions, and it is never a 100% commitment."

The fees GPOs receive have also come under scrutiny by the government and public.

Typically, GPOs make money on administrative fees paid by the vendors for negotiating the contract. The fees are usually a percentage of the total commitment buy under a particular contract.

Because Premier is owned by not-for-profit health systems, its goal is to take in only enough administrative fees to cover the costs of negotiating and administering the contracts, Norling says.

Funds that are collected beyond what it costs to break even are redistributed to member hospitals.

"The ultimate point here is that we are in the business of maximizing the GPO as a business entity — either you are trying to maximize the profitability of the GPO or you are trying to maximize the value to your customers. In our case, we believe the latter to be our duty."

In addition to the new HIGPA code, Premier also commissioned an industrywide study of ethical issues by business ethics expert Kirk O. Hanson, executive director of the Markkula Center for Applied Ethics at Santa Clara (CA) University.

"Group purchasing was sort of a sleeper industry for a long time," explains Norling. "We were not really front and center in the minds of a lot of folks, And last year in particular, a number of questions were raised about the industry."

Hanson was commissioned to study the industry and recommend ethical best practices for possible adoption by Premier.

Hanson’s report, presented to the company in October of last year, addressed some of the same issues as HIGPA’s Code of Conduct, but went further in some of its recommendations.

For example, whereas the HIGPA code stipulates that all GPO employees in a position to influence contracting decisions should be barred from having equity interest in participating vendors and accepting gifts, entertainment, favors, honoraria, etc., from the vendors; the Hanson report would expand the prohibition to all management employees of a GPO, not just those in positions to influence contract decisions.

The Hanson report also goes further to recommend that contracts for physician preference products and services be multisource and that contracts for these products be written without commitment levels.

The report also recommends that administrative fees be capped at no more than 3% of the contract’s total buy.

"We reached the conclusion that we wanted to drive value for our not-for-profit hospitals and trimming our group purchasing costs is more important," adds Norling. "Our average administrative fee is 2.1% on medical products contracts, and that more than covers the fully loaded costs of operating a group purchasing organization."

Preset administration fees

In addition, following Hanson’s recommendations, Premier also will move to preset administrative fees for certain contracts that will just be part of the offered terms and conditions of a contract for that type of good or service.

"We are unique, we believe, in harmonizing our administrative fees, so that, in any contract, where you might have a product set in which you are going to go out and talk to multiple vendors about, we have a set administrative fee. We don’t want any possible implication that the GPO would choose a vendor for a contract based on the amount of fees paid compared to the ultimate value to the customer."

The HIGPA code is intended to be the minimum ethical standards of practice for the industry as a whole, and the association encourages its members to adopt more specific guidelines that cover their individual business models, says Betz.

"The HIGPA code could not address such issues as commitment levels or administrative fees without running afoul of federal antitrust laws," he notes.

The association approves of Premier’s efforts to study ethical practices and develop recommendations and hopes others will do the same, he adds.

In developing the code of conduct principles, HIGPA also established a process by which the code will be periodically reviewed and updated as new realities in the GPO industry require closer scrutiny.

For more information

  • Copies of the Health Industry Group Purchasing Association (HIGPA) Code of Conduct Principles are available on the association’s web site at www.higpa.org/pressroom/pressrm_index.asp.
  • Copies of the Hanson report, Best Ethical Practices for the Group Purchasing Industry, can be obtained on the Premier Inc. web site at www.premierinc.com. Click on the link for "Newsroom" then "Resource Center." There are a list of documents on ethical business practices to choose from.

Sources

  • Robert Betz, Health Industry Group Purchasing Association, 1100 Wilson Blvd., Suite 1200, Arlington, VA 22209.
  • Rick Norling, Premier Inc., 12225 Camino Real, San Diego, CA 92130.