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96–462 PDF 2005

S. HRG. 108–821

HOSPITAL GROUP PURCHASING: HOW TO

MAINTAIN INNOVATION AND COST SAVINGS

HEARING

BEFORE THE

SUBCOMMITTEE ON ANTITRUST, 

COMPETITION POLICY AND CONSUMER RIGHTS

OF THE

COMMITTEE ON THE JUDICIARY 

UNITED STATES SENATE

ONE HUNDRED EIGHTH CONGRESS

SECOND SESSION

SEPTEMBER 14, 2004

Serial No. J–108–95

Printed for the use of the Committee on the Judiciary

(

(II)

COMMITTEE ON THE JUDICIARY 

ORRIN G. HATCH, Utah, Chairman 

CHARLES E. GRASSLEY, Iowa 

ARLEN SPECTER, Pennsylvania 

JON KYL, Arizona 

MIKE DEWINE, Ohio 

JEFF SESSIONS, Alabama 

LINDSEY O. GRAHAM, South Carolina 

LARRY E. CRAIG, Idaho 

SAXBY CHAMBLISS, Georgia 

JOHN CORNYN, Texas 

PATRICK J. LEAHY, Vermont 

EDWARD M. KENNEDY, Massachusetts 

JOSEPH R. BIDEN, JR., Delaware 

HERBERT KOHL, Wisconsin 

DIANNE FEINSTEIN, California 

RUSSELL D. FEINGOLD, Wisconsin 

CHARLES E. SCHUMER, New York 

RICHARD J. DURBIN, Illinois 

JOHN EDWARDS, North Carolina 

BRUCE ARTIM, Chief Counsel and Staff Director 

BRUCE A. COHEN, Democratic Chief Counsel and Staff Director 

SUBCOMMITTEE ON ANTITRUST, COMPETITION POLICY AND CONSUMER RIGHTS

MIKE DEWINE, Ohio, Chairman 

ORRIN G. HATCH, Utah 

ARLEN SPECTER, Pennsylvania 

LINDSEY O. GRAHAM, South Carolina 

SAXBY CHAMBLISS, Georgia 

HERBERT KOHL, Wisconsin 

PATRICK J. LEAHY, Vermont 

RUSSELL D. FEINGOLD, Wisconsin 

JOHN EDWARDS, North Carolina 

PETER LEVITAS, Majority Chief Counsel and Staff Director 

JEFFREY MILLER, Democratic Chief Counsel 

(III)

C O N T E N T S

STATEMENTS OF COMMITTEE MEMBERS

Page 

Chambliss, Hon. Saxby, a U.S. Senator from the State of Georgia, prepared 

statement .............................................................................................................. 100

DeWine, Hon. Mike, a U.S. Senator from the State of Ohio ................................ 1

prepared statement .......................................................................................... 102

Kohl, Hon. Herbert, a U.S. Senator from the State of Wisconsin ....................... 4

prepared statement .......................................................................................... 126

Leahy, Hon. Patrick J., a U.S. Senator from the State of Vermont, prepared 

statement .............................................................................................................. 140

WITNESSES 

Balto, David A., Robins, Kaplan, Miller and Ciresi LLP, Washington, D.C. ...... 8

Betz, Robert, President and Chief Executive Officer, Health Industry Group 

Purchasing Association, Arlington, Virginia ...................................................... 5

Kiani, Joe E., Chairman and Chief Executive Officer, Masimo Corporation, 

Irvine, California .................................................................................................. 7

QUESTIONS AND ANSWERS 

Responses of David A. Balto to questions submitted by Senators DeWine, 

Kohl, and Leahy ................................................................................................... 18

Responses of Robert Betz to questions submitted by Senators DeWine, Kohl, 

Graham, and Leahy ............................................................................................. 30

Responses of Joe E. Kiani to questions submitted by Senators DeWine, Kohl, 

and Leahy ............................................................................................................. 41

SUBMISSIONS FOR THE RECORD 

Almon, Ted, President, Chairman Executive Officer, Clafin Company, Warwick, Rhode Island, letter .................................................................................... 49

Balto, David A., Robins, Kaplan, Miller and Ciresi LLP, Washington, D.C., 

prepared statement .............................................................................................. 51

Betz, Robert, President and Chief Executive Officer, Health Industry Group 

Purchasing Association, Arlington, Virginia, prepared statement and attachments ............................................................................................................. 65

Blumenthal, Richard, Connecticut Attorney General, Hartford, Connecticut, 

statement .............................................................................................................. 97

Foundation for Healthcare Integrity, Lynn James Everard, Roswell, Georgia, 

letter and attachment .......................................................................................... 105

Kiani, Joe E., Chairman and Chief Executive Officer, Masimo Corporation, 

Irvine, California, prepared statement ............................................................... 119

Medical Device Manufacturers Association, Mark B. Leahey, Esq., Executive 

Director, Washington, D.C., statement .............................................................. 128

Service Employees International Union, Washington, D.C., letter ..................... 142

Saucier, Nancy L.G., Director, Medical Industry Group, letter ........................... 147

Shaw, Thomas J., President & Chief Executive Officer, Retractable Technologies, Inc., statement ...................................................................................... 149

Standard Textile Co., Inc., Gary Heiman, President, Chief Executive Officer, 

Cincinnati, Ohio, letter ........................................................................................ 157

Wallis, Mark H., Chairman and Chief Executive Officer, Invatec, Palm Tree 

Group, Stafford Texas, prepared statement ....................................................... 160

(1)

HOSPITAL GROUP PURCHASING: HOW TO 

MAINTAIN INNOVATION AND COST SAVINGS 

TUESDAY, SEPTEMBER 14, 2004 

UNITED STATES SENATE, SUBCOMMITTEE ON ANTITRUST, COMPETITION POLICY AND

CONSUMER RIGHTS, OF THE COMMITTEE ON THE JUDICIARY, Washington, DC. 

The Subcommittee met, pursuant to notice, at 2:04 p.m., in room 

SD–226, Dirksen Senate Office Building, Hon. Mike DeWine, 

Chairman of the Subcommittee, presiding. 

Present: Senators DeWine and Kohl. 

OPENING STATEMENT OF HON. MIKE DEWINE, A U.S. SENATOR 

FROM THE STATE OF OHIO 

Chairman DEWINE. Good afternoon. We welcome you to the Antitrust Subcommittee hearing on hospital group purchasing organizations. 

Senator Kohl and I have devoted substantial energy and time to 

exploring the allegations of questionable ethics and business practices in this industry. We have commissioned two General Accounting Office studies on this issue and this is our third hearing on the 

hospital group purchasing organizations, often referred to as GPOs. 

The purpose of the hearing this afternoon is to look toward the 

future. Since our first hearing in April of 2002, I am pleased to say 

that many of the questionable practices in the industry have been 

voluntarily eradicated by the GPOs themselves. In particular, business practices such as GPOs owning stakes in their vendors or 

GPOs accepting ownership interest in the vendor in place of an administrative fee appear to have been ended. 

The GPOs took these steps in response to the Subcommittee request for them to implement voluntary codes of conduct, and they 

deserve our thanks and applause for so doing. GPOs also have 

taken important voluntary steps to address certain controversial 

contracting practices that are of concern to both Senator Kohl and 

myself. 

For example, GPO practices like the bundling of clinical preference products with commodity products, extremely high commitment levels, or sole-source contracting are often the focal point of 

debate within the medical community. Small manufacturers complain that these practices prevent fair market access to new, potentially innovative products, and as a result prevent improved patient 

care. 

Larger incumbent manufacturers and GPOs often argue in response that these practices generate significant cost savings for 

2

high-quality products without harming patient care at all. One 

GPO, for example, recently has pointed to an instance where it entered into a long-term, sole-source contract for surgical sutures and 

was able to save $55 million for its hospitals. 

My sense is that both sides make some good points. In fact, these 

are business practices with the potential to save significant money 

in certain circumstances, but unfortunately they sometimes make 

it harder for legitimately innovative products to reach the market. 

Under these circumstances, it seems that the best result is one 

that maintains maximum flexibility in the market, and in some 

ways we may already have achieved that. 

All the major GPOs have adopted codes that address these 

issues, but they vary in their details and how they are applied. As 

a result, it appears that we are seeing fewer long-term contracts, 

less bundling of clinical preference items, and less sole-sourcing, 

but that those contracting practices are still available in certain 

circumstances. 

Unfortunately, however, the Subcommittee still hears complaints 

principally from small medical device manufacturers with arguably 

cutting-edge products, and they complain that they are unable to 

negotiate a contract with GPOs. Frankly, I will be honest. It is 

often difficult to really determine or to assess the credibility of certain complaints from medical device manufacturers, and also the 

GPOs’ responses to such complaints. 

On one hand, I certainly don’t believe that every small medical 

device manufacturer that fails to win a contract with a GPO has 

a legitimate complaint. We all know that competition for contracts 

produces winners and losers, and sometimes sore losers as well. On 

the other hand, these complaints have been continuous and steady, 

and appear to have at least a degree of credibility. This makes me 

wonder if the GPOs indeed are all living up to their pledge to decrease or stop some of these controversial business practices. 

So that brings us to where we are today, to explore where we 

should go from here. I know that Senator Kohl and I share a concern that if the Antitrust Subcommittee turns its oversight spotlight away from the GPO industry, there is a risk that there may 

be back-sliding. That means we need to decide if we can trust that 

the current reforms are sufficient, or if not, what pathway we can 

take to ensure that the current reforms are actively implemented 

and, in fact, long-lasting. 

I think it is fair to say that we are at the crossroads, and sitting 

here today, I see at least three paths we could choose. I have made 

no decision, frankly, on which path is best, nor do I think we are 

necessarily limited to these three paths. But sitting here today, I 

think that these three paths are evident. 

One path is to do no more, at least for now. We have studied the 

issue, held numerous meetings within the industry, commissioned 

studies and held three hearings in this Subcommittee. The GPOs, 

hospitals and manufacturers know all of our concerns and have 

acted on them to one degree or the other. Some would argue that 

we have done our job, and perhaps more importantly the GPOs 

have done their job by adopting the voluntary codes. Under that 

view, no more action would be needed. 

3

Another path would be to formally transfer our oversight of the 

industry somewhere else. The primary example thus far of this approach is embodied in the staff discussion draft that has been circulated within the industry and provided to today’s witnesses. If we 

followed this path, It would move the oversight role to the Department of Health and Human Services, which, as an executive agency, is arguably better equipped to oversee the activities in the GPO 

industry. The Department of Health and Human Services already 

has a degree of expertise in this area and it currently oversees the 

anti-kickback exemption upon which the entire GPO industry is 

built. 

Another path would be for the GPO industry to build upon their 

work of setting up individual codes of conduct to create what I call 

a ‘‘voluntary plus’’ approach. Currently, existing voluntary codes 

are enforced by each company on its own, an approach which has 

both strengths and, of course, some weaknesses. 

On the one hand, because it is voluntary and self-enforced, it provides maximum flexibility and does not hamstring the industry. 

But on the other hand, for those very same reasons, there is no absolute assurance that it will continue to be implemented in the future or that it always will be implemented actively. Most troubling 

is the fact that there is really no mechanism to discipline GPOs 

that don’t follow their own code. 

I welcome any proposals from the GPOs that would create this 

sort of ‘‘voluntary plus’’ approach, proposals that build upon the 

current voluntary codes, but add teeth, so that the Subcommittee 

can be assured that the reforms are made permanent and that if 

a GPO chooses to disregard its own code of conduct, it is disciplined 

in a way that has real consequences. 

I have set out these three paths as what I see now, but I am not 

wedded to just these three paths. If there is a fourth pathway or 

a fifth out there that are products of this hearing, I look forward 

to considering them, also. We hope today to hear our witnesses 

comment not only on the strengths and weaknesses of the discussion draft, but on all these ideas and any others that may arise. 

Before I turn to our ranking member, Senator Kohl, I would like 

to add that throughout our oversight of the GPO industry, I have 

tried to stay in close contact with the hospitals in my home State 

of Ohio to find out how they view GPOs. Of course, GPOs work as 

purchasing agents on behalf of these very hospitals. So it is really 

the hospitals that get the ultimate benefits of GPO activities. 

I think it is fair to say that nearly all the hospitals that I have 

spoken to in Ohio are confident that their GPOs are saving them 

significant amounts of money. In this age of escalating health care 

costs, that is a very important outcome and one that we want to 

maintain. So I certainly believe that GPOs can provide significant 

benefits for hospitals. Ensuring that in the future GPOs both save 

money, but also allow for new technology and vigorous competition 

in health care products, is the goal of our hearing today, and been 

frankly the goal of this Subcommittee’s work. 

One final point. The Subcommittee first started investigating 

this issue in the fall of 2001 under the chairmanship of Senator 

Kohl. He has continued to work tirelessly on this very important 

issue, and I think it is fair to say that without his work, the SubVerDate 0ct 09 2002 10:15 May 20, 2005 Jkt 000000 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 S:\GPO\HEARINGS\96462.TXT SJUD4 PsN: CMORC
4

committee would not be holding this hearing today and the industry would not have progressed to where we are now without his 

very good efforts. So I thank him for that, and I turn now to him 

for his comments. 

[The prepared statement of Senator DeWine appears as a submission for the record.] 

Senator Kohl. 

STATEMENT OF HON. HERB KOHL, A U.S. SENATOR FROM THE 

STATE OF WISCONSIN 

Senator KOHL. Mr. Chairman, I thank you for your continued efforts on this important issue and for holding this hearing today. 

The subject matter of this hearing centers on perhaps the most important work of our Subcommittee in the last few years, namely ensuring that physicians, patients and health care workers have access to the best and the safest medical devices, devices that literally make the difference in many cases between life and death. 

With the cooperation of the industry, we have accomplished 

much over the past 2 years to reform the hospital purchasing system to make it better serve the interests of competition, of innovation and patients. The changes we have seen are real. We should 

all be proud that more patients are getting access to the best medical devices more often. So we must now find a way to ensure that 

these gains are maintained. 

A review of the reforms shows how far we have come. Most significantly, six of the largest hospital groups, known as GPOs, 

agreed to fundamental reform by adopting codes of conduct governing their business activities and ethical responsibilities. These 

codes forbid anti-competitive business practices and ban conflicts of 

interest that interfere with the GPOs’ mission of buying the best 

products at the lowest prices. 

We commend the GPOs that worked cooperatively with us in the 

process. The actions of Premier and the other GPOs that followed 

its lead especially deserve praise. Premier acted first to clearly and 

unequivocally ban each of the most troublesome practices, and 

many of its competitors followed suit and the marketplace soon 

began to open. 

We are pleased that we have made a real difference, but we also 

realize that two primary tasks remain. First, how can we be certain that these considerable gains will remain when the spotlight 

of a Senate hearing room fades away? The GPO codes of conduct 

are entirely voluntary and at present not backed with any sanctions or enforcement mechanisms. So we need to be sure that these 

reforms will not be reversed. Second, how can the industry continue to improve in those areas that still need work? 

To answer these questions, we have drafted a legislative proposal 

which will assure that our reforms are truly permanent. This draft 

was only prepared after extensive discussions with the GPO industry over the last eight weeks, discussions at which we repeatedly 

solicited their suggestions. 

Our draft legislation gives the Department of Health and Human 

Services the authority to forbid GPO business practices which are 

anti-competitive or unethical. The purpose of this legislation is simply to create a regulatory framework so that improper business 

5

practices never return to this important industry. However, our 

proposal remains just that, a proposal. So we are anxious to hear 

the suggestions and views of today’s panel regarding our ideas. 

We are also happy to consider with an open mind any non-legislative proposal that the GPO industry or others may suggest. However, it is essential that any such measure have teeth. In other 

words, any industry plan must include a real and a meaningful 

sanction if any GPO violates ethical principles or the rules of free 

competition. In an industry as important to health and safety as 

the purchasing of medical equipment for critically ill patients, half 

measures which do not assure that the best medical devices are 

available for patients are not acceptable. 

We thank our witnesses for coming here today to testify and we 

look forward to hearing their views. 

[The prepared statement of Senator Kohl appears as a submission for the record.] 

Thank you, Mr. Chairman. 

Chairman DEWINE. Senator Kohl, thank you very much. 

Let me introduce our witnesses. Dr. Robert Betz is the President 

and CEO of the Health Industry Group Purchasing Association and 

has spent more than 20 years representing health care organizations. Additionally, Dr. Betz has worked for the American Hospital 

Association and the Louisiana Hospital Association. 

Mr. Joe Kiani is the CEO and Chairman of the Board of Masimo 

Corporation, a provider of signal processing and sensor technology 

to the medical device industry. Additionally, he serves on the board 

of the Medical Device Manufacturers Association. He has testified 

before our Subcommittee in the past and we certainly welcome him 

back. 

Mr. David Balto is a partner at Robins, Kaplan, Miller and 

Ciresi, specializing in antitrust litigation. Prior to joining that firm, 

he served as policy director of the Bureau of Competition at the 

Federal Trade Commission, and as attorney-advisor to the chairman. 

Dr. Betz, we will start with you, and let me advise you all that 

we have a vote that is scheduled to begin at any moment. So I will 

break the testimony at some point. We are going to follow the fiveminute rule, and we are going to follow that very religiously today, 

which means that you are going to get a four-minute warning when 

the light goes on. That means you have got a minute. 

Dr. Betz, thank you. 

STATEMENT OF ROBERT BETZ, PRESIDENT AND CHIEF EXECUTIVE OFFICER, HEALTH INDUSTRY GROUP PURCHASING 

ASSOCIATION, ARLINGTON, VIRGINIA 

Mr. BETZ. I am Dr. Robert Betz, President and CEO of the 

Health Industry Group Purchasing Association. HIGPA represents 

over 150 health care supply organizations, including every major 

group purchasing organization in the United States, with the exception of two; also, many of the vendors with whom they do business. I appreciate the opportunity to submit testimony on behalf of 

the members of HIGPA. 

We return to the Subcommittee again today, Mr. Chairman, not 

because hospitals and other health care providers are unhappy 

6

with the current system of group purchasing. We are here today 

because some manufacturers aren’t able to capture the sales they 

desire and/or think they should have. We believe we are here today 

because a small yet vocal group of medical device manufacturers 

would like to have Congress intervene in the marketplace in favor 

of small suppliers at the expense of health care providers and the 

patients they serve everyday. 

I want to make three points, if I may, please. Number one, 

HIGPA, on behalf of the health care providers and patients that 

they serve, oppose the proposed legislation circulated to us by the 

Subcommittee staff. It is unnecessary, we believe. Furthermore, we 

believe this proposed legislation will lead to higher costs for health 

care in this country. 

Number two, 2 years ago HIGPA developed a code of conduct, in 

collaboration with this Subcommittee, which focused on several 

areas, including the following: promoting competition and innovation, eliminating the potential for conflicts of interest, ensuring 

open communications between members and vendors, establishing 

guidelines for the use of contracting tools, and providing transparency by requiring full disclosure to members of all vendor payments. 

Despite what the Subcommittee may be hearing from a vocal 

group of small manufacturers, HIGPA’s code of conduct is working. 

Our industry continues to engage in vigorous examination of ways 

to improve and strengthen our certification and compliance process. 

We continue to do this because we believe strongly that the private 

sector compliance programs are the most efficient and effective way 

to advance best practices in hospital supply purchasing and ultimately strengthens our health care system. 

Number three, at the request of some members of this Subcommittee, the Federal Trade Commission and the Department of 

Justice conducted a comprehensive examination of this industry. 

The agencies concluded in their July 2004, joint report on health 

care competition and policy that indeed they do have ample tools 

to assure competition in the GPO industry. 

Additionally, the report states that it would be counterproductive 

to amend Health Care Statement 7, the policy statement that governs group purchasing organizations. Moreover, as you know, the 

FTC has historically demonstrated a preference for self-regulation 

in industries that offer self-compliance systems. 

It is for these reasons HIGPA believes continued self-regulation 

is the viable compliance mechanism for the health care group purchasing industry. As always, you have our commitment. We offer 

to engage in productive dialogue with the Subcommittee to explore 

non-legislative approaches for assuring that the changes that have 

been made remain in place. Furthermore, our industry will remain 

vigilant in adapting its practices as the market continues to evolve. 

The final point of the testimony I make today, Mr. Chairman and 

members of the Subcommittee, I make on behalf of all the health 

care providers in the United States. Make no mistake, if Congress 

weakens the ability of GPOs to negotiate the best deals for their 

provider members, as is proposed in the draft legislation, patients 

will not be better served. Rather, the cost of health care in this 

country will increase. 

7

What will happen is manufacturers that would like to see GPOs 

severely weakened will surely realize greater financial profits. I 

urge the members of this Subcommittee not to weaken a crucial 

mechanism that helps providers reduce their purchasing costs, 

which allows them to commit more financial resources to patient 

care. 

Mr. Chairman and members of the Subcommittee, thank you. 

[The prepared statement of Mr. Betz appears as a submission for 

the record.] 

Chairman DEWINE. We are going to take a short break at this 

point. We have a vote that just started, so we should be back here, 

we hope, in about ten minutes. That is Senate time. Stay close. 

[The Subcommittee was adjourned from 2:24 p.m. to 2:45 p.m.] 

Chairman DEWINE. The hearing will come to order. Thank you 

very much for your patience. 

I have a statement for the record from Senator Leahy and Senator Chambliss which, without objection, we will make a part of 

the record at this moment. 

Mr. Kiani, you are next. 

STATEMENT OF JOE KIANI, CHAIRMAN AND CHIEF EXECUTIVE OFFICER, MASIMO CORPORATION, IRVINE, CALIFORNIA 

Mr. KIANI. Thank you. Chairman DeWine, Senator Kohl, thank 

you so much for inviting me here to testify. I know that you and 

the other members of this Subcommittee want the best care for the 

patients in the U.S., especially children and infants. Your work 

over the last two-and-a-half years has yielded a lot of progress. 

Just alone with our piece of it, you should be happy to know that 

countless babies have vision that would have otherwise been impaired; their eyes have been saved. Because of competition, for the 

over 100 hospitals that we have converted since then, on average, 

each one of them has saved $100,000 a year. 

Senator Kohl, after the last hearing that I was involved with, 

you remember I had the honor to meet with you. And at that meeting—and I know you felt the same way because we all want a free 

market—you asked me if legislation was needed. My response was 

I hope not; let’s see if the code of conduct works. Well, 2 years 

later, I am here for you showing you examples, which hopefully I 

will be able to do, that show that these codes of conduct for the 

most part have not worked. Many GPOs continue to engage in anticompetitive practices such as bundling and sole-sourcing which get 

in the way of the best products getting into the patients’ hands and 

the most competitive prices. 

Today, I am convinced that the codes won’t work, and I really believe we need oversight legislation. The discussion draft legislation 

that your staff has put together, I believe, is a great start. I believe 

that legislation bringing oversight should improve patient care, 

should reduce cost of care, and bring a robust competition to this 

industry. 

I would like to give you an update of what has happened since 

my last testimony and since the codes of conduct. Two groundbreaking studies were published, the first one at the end of 2002 

in the Critical Care Medicine Journal that showed that Masimo 

8

Technology, the one that you guys with your oversight were able 

to put on a lot of contacts, can help reduce medical errors. 

At the beginning of 2003, another ground-breaking study came 

out that showed, after 5 years at Cedars Sinai Hospital in Los Angeles, the rate of eye damage, known as retinopathy of prematurity, dropped from the national average of 12 percent to nearly zero percent. And this was because of Masimo’s technology and 

a very sound protocol. 

The other good news is that Premier did put us on contract and 

did stop their bundling with Tyco. As a result, over 1,600 hospitals 

and just about practically every children’s hospital in this country 

being under Premier got access to Masimo’s technology. And within 

2 years, our reach of our technology getting to those patients has 

increased ten-fold. 

You remember last time I was in front of you, we had not been 

able to convert one single Premier hospital to use our technology 

beyond the 10-percent limit that was imposed by Tyco and Premier. 

Today, 40 hospitals have converted hospital-wide to our technology. 

The bad news is that there is talk at Premier about creating another means to drive sole-source to the dominant vendors, and the 

story of the two other GPOs I want to share with you today is even 

more disheartening. If I could show you something here, I have 

blown this up. This is actually an excerpt from a letter that was 

sent to Novation member hospitals. As you notice—I don’t know if 

you can read that from there, but it says ‘‘The undersigned Novation member reconfirms as of ‘x’ 2003 a date that must be no later 

than October 31, 2003, that it intends to continue at its current 

commitment level of either 95 or 75 percent.’’ 

The next slide I want to put up for you even tells you the story 

better. This letter was sent to the member hospitals, despite the 

fact that we were added to the Novation contract just a day or 2 

days before the last Senate hearing, and Tyco’s patents were about 

to expire on the sensors that cost the hospitals in the U.S. about 

$300 million a year two weeks before the deadline for them to recommit. 

Another example that I want to just share with you is that 

MedAssets, who is now the third largest GPO, has an active bundling program. Even though we were put on contract, they have a 

bundling program that they bundle over 100 products together. 

I know I am running out of time and, if you like, I could either 

finish or take your questions afterwards. 

Chairman DEWINE. Why don’t we do it in questions? That would 

be good. 

Mr. KIANI. Thank you. 

[The prepared statement of Mr. Kiani appears as a submission 

for the record.] 

Chairman DEWINE. Mr. Balto. 

STATEMENT OF DAVID A. BALTO, ROBINS, KAPLAN, MILLER 

AND CIRESI LLP, WASHINGTON, D.C. 

Mr. BALTO. Thank you, Chairman DeWine and Ranking Member 

Kohl. It is my privilege to speak before you today. I represent no 

one in the medical device industry, but I am here as a former antitrust enforcer who worked over a decade at the FTC in the AntiVerDate 0ct 09 2002 10:15 May 20, 2005 Jkt 000000 PO 00000 Frm 00012 Fmt 6633 Sfmt 6633 S:\GPO\HEARINGS\96462.TXT SJUD4 PsN: CMORC
9

trust Division. In those roles, I helped to direct the FTC’s nonmerger enforcement efforts and acted frequently with Congress and 

other regulators on dealing with issues such as self-regulation. 

There are three issues before the Subcommittee today. First, is 

there a need for regulation? Second, is self-regulation sufficient? 

And, third, would the proposed legislation be a sound approach? 

I commend you and your Subcommittee staff for the hard work 

you have done in this area, but this Committee cannot be the regulator of the medical device industry. It is time to go and take that 

responsibility and give it to a responsible governmental entity, and 

the Inspector General’s Office of Health and Human Services is the 

appropriate entity. 

What you are dealing with is a serious gap in dealing with competitive issues in this industry. It is a gap because the Antitrust 

Division and the Department of Justice haven’t acted. They have 

failed to amend their guidelines. 

Let me just say as an aside, as somebody who was involved in 

the amendment of those health care guidelines in 1994 and 1996, 

the problems that Congress posed to us then were far less significant than the problems that Mr. Kiani and the other manufacturers are posing to you today. I was rather surprised that they said 

they couldn’t address every problem and that was the reason for 

not issuing guidelines. 

But even individual enforcement actions or individual litigation 

can only solve mere small episodes of anti-competitive problems. 

The Committee appropriately asked for self-regulation. I laud the 

self-regulatory efforts, but they will fail. They will fail for four reasons. They lack clear and unambiguous rules. There is no enforcement mechanism. There are no penalties for non-compliance and 

there is no procedural due process and transparency. Simply, this 

process lacks teeth. 

Moreover, I am surprised that at the end of the last hearing you 

said there was more to do, Chairman DeWine, and these GPOs did 

not further amend or further strengthen their codes of conduct. 

Now, one might suggest, well, the way to do this is to get all the 

competitors in a room together and have them come up with a 

stronger code of conduct. That would be the worst answer. It would 

be the worst answer because this is an environment in which collective action would lead to bad results. 

Frequently, competitors act under the guise of self-regulation 

and engage in self-help. If you have a problem with the way the 

College Football Association deals with the Bowl Championship Series, you are going to have quite a problem if you get all of these 

folks together, well-meaning as they might be, to go and try and 

set things straight. Now, my testimony presents for you examples 

where Congress has said, self-regulation, nice try, good efforts, it 

is not enough, it is time to regulate. I think you can base what you 

do next on those models of self-regulation. 

Let me answer two last questions. First, is the Health and 

Human Services’ Inspector General’s Office the right place to go? 

I think that is absolutely true. Although I don’t represent medical 

device companies, I represent pharmaceutical manufacturers, and 

on a regular basis those clients call me up and they say we would 

like to do x, y, or z; tell me, does the HHS Inspector General’s OfVerDate 0ct 09 2002 10:15 May 20, 2005 Jkt 000000 PO 00000 Frm 00013 Fmt 6633 Sfmt 6633 S:\GPO\HEARINGS\96462.TXT SJUD4 PsN: CMORC
10

fice permit this. There is a body of not only regulations, but also 

staff opinion letters and other advice. The inspector general’s office 

has a broad range of tools to go and advise the industry. So I think 

it is the right regulator to go and begin to address these problems. 

Second, the Committee must consider seriously whether these actions will lead to higher costs and higher prices. I know there are 

people who will complain that they think this will lead to higher 

costs for hospitals. Let me just say that from over a decade as an 

antitrust enforcer involved in anti-competitive investigations 

through the years, my experience has taught me that the elimination of impediments to competition will bring the greatest longterm benefits. When these side payments or other types of anticompetitive practices are eliminated, you will see competition flourish and innovation and lower prices come about. 

The GPOs’ efforts at establishing voluntary codes of conduct fall 

far short of effective self-regulation. Their current system is insufficient to assure that anti-competitive activity is prohibited and consumers are protected. The time for effective self-regulation, I would 

submit, has passed. Congress should act to regulate anti-competitive activity to protect the consumer’s right to a competitive marketplace. 

Thank you. 

[The prepared statement of Mr. Balto appears as a submission 

for the record.] 

Chairman DEWINE. Senator Kohl. 

Senator KOHL. Thank you, Chairman DeWine. 

Dr. Betz, we recognize that your industry has undertaken major 

efforts to reform through your voluntary codes of conduct and we 

certainly do commend you. We also appreciate and understand that 

you might oppose any government regulation of GPOs. However, 

we are reminded by multiple Federal and State investigations, as 

recently reported in the New York Times, that there is still much 

work to be done in the industry. 

Since the industry codes of conduct are voluntary and have no 

mandatory enforcement mechanism, how can we be sure that GPOs 

will continue to comply with their codes of conduct, especially if the 

oversight of this Subcommittee ends? 

Mr. BETZ. Senator Kohl, the compliance program that was put 

together by the Health Industry Group Purchasing Association for 

all of our industry members, have a couple of features I would like 

to call to your attention in answer to your question. 

First of all, some of the permanent steps that were taken are 

that our bylaws were amended to include the requirement that all 

GPOs must adopt our code of conduct into their business model in 

order to be a member of the association, and then to continue to 

be in compliance to remain a member. 

At the beginning of each year, as a second point, our Americanbased GPOs certify compliance with the code of conduct. HIGPA’s 

ongoing compliance programs offer a solid example of the industry’s 

good-faith efforts to address industry business practices now and in 

the future. 

Our code of conduct also offers a web page that offers information about HIGPA’s code of conduct principles for the world to see. 

The association’s GPO compliance officers, that all GPOs are reVerDate 0ct 09 2002 10:15 May 20, 2005 Jkt 000000 PO 00000 Frm 00014 Fmt 6633 Sfmt 6633 S:\GPO\HEARINGS\96462.TXT SJUD4 PsN: CMORC
11

quired under our code of conduct to have in place, and quite frankly something that is new—it is a new web-based vendor exchange 

program that was put in place. 

We are tasked everyday with the difficult job of learning about 

new medical products and the direction of the health care provider 

members. In accordance with the association’s code of conduct, we 

created this web-based exchange to enable health care manufacturers, whether currently contracting with a GPO or not, the ability 

to promote their new and innovative products directly to GPO 

members through HIGPA. 

Upon accessing the submission forms, manufacturers are asked 

to provide information for the representative that is doing the marketing of this particular device or new technology, the product 

name, the detailed description, with the ability to upload any marketing or research materials that they want. As part of its commitment to the Subcommittee, the GPO industry reached out to small 

medical device manufacturers, to the community, to their trade association, to find ways to collaborate and facilitate communication 

among all players in the health care supply chain. 

Finally, sir, in answer to your question, to be in compliance with 

HIGPA’s code of conduct, each GPO must designate a compliance 

officer, and this compliance officer is known to anyone in the process—the hospitals, the manufacturer representatives, to this Committee, to the regulators. Anyone who has questions regarding the 

specifics of our compliance program can contact these compliance 

officers through our website. It is through these steps that we 

make our efforts and our successes and our ongoing commitment 

a part of a permanent process. 

Senator KOHL. Mr. Betz, what is the remedy today if a GPO violates the code of conduct? 

Mr. BETZ. Sir, as I said, it is mandatory that they have to be in 

compliance. We have the only mandatory compliance program in 

the whole entire health care supply chain. Manufacturers don’t 

have it, distributors don’t have it. 

Senator KOHL. What is the remedy, that they go out of business? 

Mr. BETZ. Sir, not being in compliance with the HIGPA code of 

conduct puts a burden, I would submit, on that group purchasing 

organization or that entity when they are in a contracting process 

with a manufacturer. That is one aspect of it. I think it also puts 

a burden, quite frankly, from the hospital perspective. Hospitals 

are constantly being approached by group purchasing organizations. It is not just one hospital that has one group purchasing organization. Many studies have shown that hospitals belong to more 

than one group purchasing organization and it is a constant, competitive marketplace. We believe that the hospitals are interested 

in who is in compliance with the code of conduct as well. 

Senator KOHL. But isn’t it true that even if you should expel 

them, which we could argue may or may not happen, a GPO could 

continue to do business? 

Mr. BETZ. Yes, sir, they indeed could. 

Senator KOHL. So in the absence of some legislation and oversight, continuing oversight by HHS, if you simply have a voluntary 

kind of a program, isn’t it true that it would not be unreasonable 

for us to be quite worried, given the past history and our hearings 

12

and where we are today, that in the absence of something concrete 

such as legislation that there isn’t a chance—call it large or 

small—to come back in a year, or two, three, four or five, and we 

will pretty much back where we were before we commenced all this 

activity in this Subcommittee? 

Mr. BETZ. I think that I would disagree with part of the basis 

of your observation, if I could, Senator. I think that there are current remedies that do exist in the Federal Trade Commission and 

the Department of Justice. Also, plaintiffs have the ability to get 

together and bring action singly or collectively in this area. Our 

codes of compliance also assure that the antitrust laws and the 

anti-kickback laws are being adhered to. If they violate our HIGPA 

code of conduct, they are subject to prosecution under current laws 

that exist. 

One other point, too, is that we are very impressed that the Department of Justice and the Federal Trade Commission, again at 

the request of this Subcommittee, have looked at this area and told 

you the same thing they have told us. They think they have adequate enforcement capabilities as they currently exist. 

So we think that that, married with the codes of conduct and the 

progress that the industry has made and on our ongoing commitment—Senator, everything you have asked of our association, everything you have asked of our industry, we have delivered. You 

asked us for a voluntary code. We delivered. You asked for 90 days. 

We have delivered. 

We have gone beyond even that with the web-based exchange 

and with some other things that we currently have in the works. 

We have also committed to you that this is a living document, that 

this is a living process. We take it seriously and we think the system has been improved by it. 

Senator KOHL. I thank you, Senator DeWine. 

Chairman DEWINE. Well, let me just clarify a little bit in regard 

to your codes of conduct. Has any member been kicked out or disciplined for non-compliance? 

Mr. BETZ. Sir, we have had one instance of one organization in 

Florida that we were getting ready to kick out and it was just that 

they didn’t think we were serious about it. We had a conversation 

with the executive. They found out that we were serious about it. 

They took it to their board of directors and the board of directors 

told them to get in line. They did not want to be outside the industry code of conduct, so they did come back in. And I am pleased 

to report that all the GPO members of HIGPA are in compliance 

with our code. We have brought those certification documents on 

a regular basis to the Subcommittee staff. 

Chairman DEWINE. What would be the real-world consequences 

to a GPO if it were kicked out? 

Mr. BETZ. If they were kicked out? 

Chairman DEWINE. Yes. How would it affect its business? 

Mr. BETZ. Well, first of all, I would pray for them each and every 

day, Mr. Chairman. I believe that the reality of the situation is 

that they are going to face pressures in the marketplace, pressures 

from vendors. I mean, if you were a manufacturer, if I could, Mr. 

Chairman, who do you want to do business with? Who do you want 

13

to do business with on a long-term basis? Do you want somebody 

that is open, in compliance with the industry code of conduct? 

If you are a hospital, what do you want; what do you want of 

your GPO? Do you want to know that they have the highest ethical 

practices that they possibly can? And if you are a GPO exec, quite 

frankly, I think the competitive nature of the process is such that 

they are going to try to be more ethical than the others and take 

additional steps to try to impress the hospitals, the providers that 

they serve, and also the manufacturers. 

Again, briefly, sir, the GPOs must certify compliance to the code 

to be a member of HIGPA. The association’s bylaws reflect their 

membership requirement. The names of those in compliance are 

made public on a routine basis. And, finally, it allows hospitals and 

vendors to know which groups are operating within the best practices of the industry. 

Chairman DEWINE. Mr. Kiani, your testimony makes really a 

compelling case for why we should all want competition in the marketplace. We all want that, so that the best and most cost-effective 

medical devices are used in patient care. 

As I have told you, I have spoken to a lot of hospitals back in 

Ohio and they all tell me how important it is for them to keep the 

GPOs working for them and negotiating their contracts. They talk 

about money; that is the thing I hear. Certainly, these hospitals 

are very aware of the need to provide the best possible care. Surely, 

these doctors and nurses believe that they are using the best equipment and devices for their patients. 

If GPOs were really, in fact, cutting off access to new and improved technology, why wouldn’t these hospitals be demanding this 

technology? Why wouldn’t they be complaining about that, or why 

wouldn’t they just leave the GPO? Why don’t I hear that from 

them? Are they just not aware of the technology out there, or what 

is the problem? 

Mr. KIANI. Well, Chairman DeWine, first of all, I really wish 

maybe some of those hospitals were at these Senate hearings so 

they could for themselves see what the real issues are, and also understand the legislation you are seeking— 

Chairman DEWINE. What does that mean? 

Mr. KIANI. What I mean by that is that, unfortunately, I think 

they are misinformed, Chairman DeWine. I think they may believe 

that what we are seeking is to get rid of GPOs. All we want to do, 

and I think all your oversight is attempting to do is to make sure 

actually the GPOs are really working for the hospitals and not the 

dominant vendors. 

So in our example that I gave you, Chairman DeWine, the competition that we are seeking and that your legislative oversight 

would create, hopefully, should reduce their costs. Nothing that we 

are asking for should increase the costs. 

Chairman DEWINE. I appreciate what you are saying, but my 

point is a little different, and that is that they don’t seem to have 

this concern about new technology not getting through that they 

are missing. Maybe you don’t know what you are missing if you are 

missing it, I guess. I don’t know. What is the deal here? 

These are smart people, these are good people, these are people 

who care about their patients. They want the best for their paVerDate 0ct 09 2002 10:15 May 20, 2005 Jkt 000000 PO 00000 Frm 00017 Fmt 6633 Sfmt 6633 S:\GPO\HEARINGS\96462.TXT SJUD4 PsN: CMORC
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tients. Why aren’t they seeing what you see about the technology 

out there? Aren’t they aware of this technology or what? 

Mr. KIANI. Well, Chairman DeWine, I think for the most part 

they are not aware of the new technologies. For example, 2 years 

ago when I testified, I pointed out that the Novation contract actually imposed on the hospitals to not even look at a competing technology that competes with the incumbent vendor that is on the contract for what they call the opportunity program. The hospital 

wasn’t even supposed to look at another technology. So I do believe 

it is what they don’t know about that unfortunately makes them 

say what they say. 

Now, we have been blessed mostly because of testifying in front 

of this Committee, and as a result we have been put on contract. 

But there are hundreds of companies that have not been lucky 

enough to testify and they are still having difficulties even letting 

their products— 

Chairman DEWINE. That are as good as you that have got good 

stuff out there that are not getting through, is what your point is. 

They are not breaking through? 

Mr. KIANI. That is correct, Senator. And as a member of the 

board of MDMA, I am aware of some of those. I know there is a 

booklet that has been handed to you that cites about 20 of those 

situations that deal with thousands of contracts. 

Chairman DEWINE. Mr. Balto, several times during your written 

testimony you noted that the codes of conduct are not consistent 

throughout the industry. Some would say that that is an advantage. By allowing flexibility in the market, we assure that the market is more open than it otherwise would be. 

For example, Mr. Kiani is selling his product to Premier hospitals even though he hasn’t been successful with Novation hospitals. Isn’t flexibility in that case a good thing? 

Mr. BALTO. Well, sometimes flexibility can be positive. Let’s step 

back a second and just think about the issue of self-regulation. The 

examples that I cite in my testimony are about issues such as privacy or telemarketing. They are not the issues of patients’ health, 

about human beings’ health that Mr. Kiani and other people have 

testified about before you. So as a first matter, Congress may be 

more reluctant to permit self-regulation in this instance than in 

other instances. 

Second, in settings where you do want self-regulation to occur, 

allowing competing forms of self-regulation can be positive, and ultimately if it leads to a good enough threshold of compliance so 

that people are protected. But right now what we have is a highway of competition in the market, and somebody says it is 45 miles 

an hour and somebody says it is 65 miles an hour, but everybody 

knows there is no cop looking at how fast the cars are going. So 

long as there is no enforcement mechanism, this self-regulation 

isn’t going to work. 

Mr. KIANI. Could I add one thing to that, Mr. Chairman? 

Chairman DEWINE. Sure. 

Mr. KIANI. I have heard Mr. Betz say that if the GPOs don’t comply with their code of conduct that they will take away their membership card. Also, if we want to have competition, we can all put 

ourselves on the website. The bottom line is I think either the 

15

fourth or the fifth largest GPO in this industry does not belong to 

HIGPA, and that is HealthTrust. 

One of the examples I was going to show you was actually 

HealthTrust, who, because they didn’t have the oversight nor are 

they a member of HIGPA—in fact, if I could show you— 

Chairman DEWINE. Sure, go ahead. 

Mr. KIANI. The president, the CEO of HealthTrust wrote me this 

letter saying, ‘‘As our President says, you are either for us or 

against us in our fight against terrorism. You decide which side of 

the fight you are on. I will know by your support for this legislation.’’ Now, the legislation this gentleman is talking about is the 

California legislation that was trying to deal with this GPO issue. 

First of all, I thought we were all on the side of the patients. 

That is why we are all here today. But, secondly, this GPO who 

doesn’t belong to HIGPA represents several hundred hospitals. Actually, we used to have a token contract with them before we initially testified, but as a result of our testimony they became irate 

and a few months later they took away our contract and gave a 

sole-source contract to Tyco. 

Chairman DEWINE. Dr. Betz, when I talk to hospitals back in 

Ohio, as I said, they almost universally tell me that GPOs do, in 

fact, save money, and I have no reason to doubt them. They are 

in business to make those decisions. But here is my concern: I am 

wondering if it is possible that in the short run GPOs are saving 

money, but in the long run they may actually drive up costs. 

Here is what I mean. If GPOs tend to contract with the large 

medical supply manufacturers and therefore lock out smaller innovative firms, then maybe these small firms will not ever enter the 

market. So in the long run, maybe it is conceivable that GPOs 

might unintentionally strengthen the market power of the large 

manufacturers. 

If this is the case, in the long run the large manufacturer will 

be able to raise its prices. It has happened in other places and 

other industries. 

Mr. BETZ. Yes, sir. 

Chairman DEWINE. Why isn’t that true here? 

Mr. BETZ. Well, you again, I think, have to appreciate, in answer 

to your question, who is driving the train here? 

Chairman DEWINE. Okay. Who is driving the train? 

Mr. BETZ. Group purchasing organizations don’t make decisions 

on clinical products that are being used. The providers, the doctors 

and the hospitals and the surgical nurses and others, make those 

decisions. But we believe in a phrase that was coined some time 

ago—that group purchasing organizations provide a sentinel effect. 

If you can imagine an economic band that would exist that is the 

result of group purchasing organizations’ efforts to hold down costs 

for, say, a class of products, therein starts the processing. 

I guess groups would like you to believe, or hospitals would like 

you to believe or others would like you to believe that they get the 

absolute best price in the marketplace. Quite frankly, my 34 years 

of experience in health care tells me, in the competitive realm that 

exists, in the ever-evolving area of health care procurement and 

supply, what happens is that someone will come in with a great 

price on a new product and then the sentinel effect begins. There 

16

is a holding down of that price because of the contract that exists, 

and with that therein it becomes a negotiating point from which 

others go out and try to drive down the marketplace for that individual product. 

In the short run, is it possible when a new product comes on the 

market—I think the economic literature might point you in the direction that it is not in the beginning that groups have their biggest impact; it is the long-term effect as that sentinel effect continues to put pressure on the system as it goes down, because as 

individuals go and get better prices, then the sentinel line begins 

to drop. 

Chairman DEWINE. Mr. Balto, I was intrigued by one point in 

your written testimony. I believe you said that the threat of antitrust litigation is not sufficient to curb anti-competitive conduct in 

the GPO industry because it is too time-consuming and too costprohibitive for small start-up companies. Additionally, you say that 

antitrust litigation only addresses the specific conduct in question. 

Couldn’t you say the same for lots of other industries as well? 

What is unique about this industry that makes you conclude that 

the threat of antitrust litigation is not sufficient, so therefore we 

have to regulate? 

Mr. BALTO. First of all, let me sort of say at the outset I had 10 

years in the agency, having people come before us, including Congressional staff, saying should we regulate this? As a free marketer, that was the last thing I ever wanted to say. But I think 

there are certain instances where it is clear that the free market 

isn’t working, the supposed free market isn’t working, and it is appropriate for regulation to step in. 

I am struck by the contrast between this industry and other 

health care industries such as pharmaceuticals, where the HHS IG 

office plays an active role in enforcing the anti-kickback and other 

statutes and preventing some of these kinds of payments. Certainly, the people who received the illegal payments in the TAP 

Pharmaceutical case were unhappy when those practices ceased, 

those entities that received those kinds of payments. But ultimately, by enforcing the anti-kickback statutes, the HHS Inspector 

General’s office, I think, helps to make the market more competitive. 

Chairman DEWINE. Well, let me ask you this. Do you think it is 

reasonable to expect HHS to write up regulations that are generally applicable? Wouldn’t there be a tendency to draft regulations 

that are either highly specific, which could hamstring the industry, 

or are so vague that they are really of no use at all? 

Mr. BALTO. That is an excellent question and I think that is 

something that HHS needs to address. Hopefully, with the active 

and supportive consultation of the antitrust enforcement agencies, 

Congress can go and provide further guidance in this area. But 

what you need is an active enforcement mechanism. HHS is serving that role in other health care contexts. I think they could serve 

that role in this health care context. 

Chairman DEWINE. Mr. Kiani, do you want to take a shot at that 

question? 

Mr. KIANI. Well, I am certainly not an expert in this area, but 

I think your question was do we think HHS will write something 

17

that is good enough and doesn’t create either too much burden or 

not enough. All I can tell you is that the code of conduct for the 

last 2 years has not worked and I would hate to see your oversight 

being taken away because you are dealing with a lot of other important issues and nobody else looking at this. I would hope that, 

together, we can give HHS some guidance to what works ultimately. 

Mr. BALTO. Chairman DeWine, if I can just amplify. 

Chairman DEWINE. Sure, Mr. Balto. 

Mr. BALTO. I understand the concern that the hospitals are expressing to you. First of all, there isn’t a soul in this room that 

thinks that group purchasing in and of itself is bad. No, there is 

nothing necessarily bad. Throughout every place in the economy, 

you see forms of group purchasing that help reduce costs and bring 

benefits to consumers. 

However, there are different practices in this marketplace which 

may be superficially attractive to the buyers, such as the administrative fees and bundling, which actually at the end of the day may 

be anti-competitive. I am sure if we looked at the pharmaceutical 

settings in which the anti-kickback laws have been more aggressively enforced to drive out some kinds of practices that were clearly fraudulent and harmful to competition, we might see buyers who 

liked those things initially. But now that those practices are eliminated, we see a more competitive marketplace. 

Mr. KIANI. Chairman DeWine, you earlier asked about what 

would happen to innovation, I believe, from Mr. Betz, and I think 

the analogy that I have been thinking a lot about is if group purchasing was buying word processors for industry, we would all be 

using IBM typewriters at $100 each. 

I think Ms. Weatherman, representing the NVCA, stated very 

well that they don’t look at investing in these sectors anymore because of the lack of competition. We hope your oversight that you 

will look to create will help GPOs be better in serving the hospitals 

and getting the most innovative products at the best prices. 

Chairman DEWINE. Well, I want to thank the three of you. It has 

been very helpful. We appreciate it very much. Senator Kohl and 

I will continue to work together on this issue, and this Subcommittee will continue to stay interested in this and we will continue to monitor the situation. 

Thank you very much. 

[Whereupon, at 3:24 p.m., the Subcommittee was adjourned.] 

[Questions and answers and submissions for the record follow.] 

[Additional material is being retained in the Committee files.]

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