Health Care Professionals Question Financial Ties Between Medical Supply Purchasing Groups, Manufacturers

Two large national purchasing groups -- private groups that serve as "middlemen" for about half the nation's not-for-profit hospitals -- negotiated contracts last year for about $34 billion in medical supplies, but many health care professionals question whether quality care is being "compromised" by financial ties that the groups have to medical supply companies, the New York Times reports. The two groups, Premier and Novation, each use the "market power" of their more than 1,500 member hospitals to "find the best medical products at the lowest prices." However, the Times reports that the groups have "extensive and highly unusual" financial ties with medical supply companies. Medical supply companies -- not hospitals -- finance the purchasing groups, and as a result, the groups "take money from the very companies they are supposed to evaluate objectively." Each year, medical supply companies pay Premier and Novation hundreds of millions of dollars in fees that represent a percentage of hospital purchases. The Times reports that as a result, the more money that hospitals spend on medical supplies, the more Premier and Novation receive from medical supply companies. According to critics, the conflict of interest in these relationships "can mean that the buying groups do not always choose the products that are best" for patients and hospitals or the taxpayers and insurers that cover their costs. Premier and Novation have said that their contract decisions "are untainted by supplier payments," but the Times reports that they have released no public record of the amount that each supplier pays them, or the terms of individual contracts.

Purchasing groups, which "became popular" more than 20 years ago, allow hospitals to "seek better prices for goods and services," which account for about one-fourth of their costs. The groups find "good products" and negotiate contracts for member hospitals, but the hospitals "do the actual buying." In 1986, Congress exempted the groups from federal "anti-kickback laws" and allowed medical supply companies to pay their costs to help save money. Lawmakers ordered CMS to monitor the fee payments "for possible abuse, particularly those in excess of 3%" of sales, according to a congressional committee report. However, Novation admits that today about 30% of the group's contracts exceed 3% of sales. Premier accepts "virtually no fees" more than 3%, but the group has accepted stock in medical supply companies "in lieu of or in addition to cash payments" and has invested in a number of companies in the medical supply industry. Several hospital officials have said that Premier and Novation have "become preoccupied with increasing revenue, rather than negotiating the best deals on products," and have used revenue to fund programs that have "little to do with negotiating buying contracts." Premier and Novation have said that they "select products based on quality and cost," not on financial considerations. "We use a competitive bid process," Novation President Mark McKenna said. The Times reports that the purchasing groups return some revenue to the hospitals that own the groups each year, although some members "complain that not enough is returned." Other hospitals that purchase medical supplies through the groups "do not have an ownership stake [and] get no cash back."

Larry Dickson, who oversees purchasing through Novation for Providence Health System in Seattle, said that he "cannot get specific information on fees," despite his position in the hospital system. Dickson said, "There is an accountability question that is very much concerning a lot of people in health care. And if you ask, and the response you get is, 'That's none of your business,' that raises more questions than it answers." Larry Holden, president of the Medical Device Manufacturers Association, a group of small medical supply companies in Washington, D.C., added, "Billions of dollars are being controlled by two companies, and nobody knows who they are. Nobody looks at their books." However, the Times reports that many health care professionals have "highly praised" the two purchasing groups. For example, Maurice Elliott, a former CEO of Methodist Healthcare in Memphis, said that Premier saved the hospital system money, provided a "database to encourage quality" and helped find minority contractors. The two groups have said that "they are accountable only to those hospitals that own them." More than 200 hospital systems own San Diego-based Premier. VHA Inc., a group of community hospitals, and the University HealthSystem Consortium, which represents many academic hospitals, own Novation, based in Irving, Texas. "We answer the membership on every given day," McKenna said. The Times reports that Premier and Novation "enjoy much support" from the nation's hospitals in part as a result of the annual checks -- some that total hundreds of thousands of dollars -- that hospitals receive as their share of the money that medical supply companies pay the purchasing groups. However, the Times reports, hospitals have subsequently cut their purchasing staffs -- leaving them with "little expertise" to oversee their purchasing groups or to "find better deals on their own" (Bogdanich, New York Times, 3/4).