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91–807 DTP 2004

S. HRG. 108–329

HOSPITAL GROUP PURCHASING: HAS THE

MARKET BECOME MORE OPEN TO COMPETITION?

HEARING

BEFORE THE

SUBCOMMITTEE ON ANTITRUST, 

COMPETITION POLICY AND CONSUMER RIGHTS

OF THE

COMMITTEE ON THE JUDICIARY 

UNITED STATES SENATE

ONE HUNDRED EIGHTH CONGRESS

FIRST SESSION

JULY 16, 2003

Serial No. J–108–25

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 

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

Hatch, Hon. Orrin G., a U.S. Senator from the State of Utah, prepared 

statement .............................................................................................................. 161

Kohl, Hon. Herbert, a U.S. Senator from the State of Wisconsin ....................... 3

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

statement .............................................................................................................. 207

WITNESSES 

Brown, Thomas V., Executive Vice President, BIOTRONIK, Inc., Lake 

Oswego, Oregon .................................................................................................... 10

Everard, Lynn James, Healthcare Supply Chain Strategist, Coconut Creek, 

Florida ................................................................................................................... 13

Heiman, Gary, President and Chief Executive Officer, Standard Textile Company, Cincinnati, Ohio ......................................................................................... 11

Hilal, Said, President and Chief Executive Officer, Applied Medical Resources 

Corporation, Rancho Santa Margarita, California ............................................ 9

McKenna, Mark, President, Novation, LLC, Irving, Texas .................................. 8

Norling, Richard A., Chairman and Chief Executive Officer, Premier, Inc., 

San Diego California ............................................................................................ 6

Weatherman, Elizabeth H., Managing Director, Warburg Pincus, LLC, New 

York, New York .................................................................................................... 15

QUESTIONS AND ANSWERS 

Responses of Mark McKenna to questions submitted by Senator DeWine ........ 29

Responses of Mark McKenna to questions submitted by Senator Kohl .............. 49

Responses of Mark McKenna to questions submitted by Senator Chambliss .... 74

SUBMISSIONS FOR THE RECORD 

Bracco Diagnostics Inc., Robert L. Aromando, Jr., Vice President of Marketing, Princeton, New Jersey, statement ......................................................... 81

Brown, Thomas V., Executive Vice President, BIOTRONIK, Inc., Lake 

Oswego, Oregon, prepared statement ................................................................. 93

Children’s Health Corporation of America, Don Black, President and Chief 

Executive Officer, Overland Park, Kansas, statement ..................................... 112

Community Hospital Network, William E. Corley, President, Indianapolis, 

Indiana, letter ....................................................................................................... 115

Egliman, David S., M.D., MPH, Clinical Associate Professor, Brown University, statement ...................................................................................................... 116

Everard, Lynn James, Healthcare Supply Chain Strategist, Coconut Creek, 

Florida, statement ................................................................................................ 127

General Accounting Office, Marjorie Kanof, Director, Health Care, Clinical 

and Military Health Care, Washington, D.C., statement ................................. 135

Harding, William W., President and Chief Executive Officer, Union Hospital, 

Dover, Ohio, letter ................................................................................................ 160

Health Industry Group Purchasing Association, Robert Betz, Arlington, Virginia, statement and attachment ........................................................................ 163

Heiman, Gary, President and Chief Executive Officer, Standard Textile Company, Cincinnati, Ohio, prepared statement ...................................................... 187

Hilal, Said, President and Chief Executive Officer, Applied Medical Resources 

Corporation, Rancho Santa Margarita, California, prepared statement ......... 189

LSL Industries, Inc., Ash Luthra, President, Chicago, Illinios, statement ........ 209

Page

IV

Masimo Corporation, statement ............................................................................. 211

McKenna, Mark, President, Novation, LLC, Irving, Texas, statement and 

attachment ............................................................................................................ 213

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

Director, statement .............................................................................................. 229

Memorial Hermann Healthcare System, Dan Wolterman, President and Chief 

Executive Office, Houston, Texas, letter ............................................................ 243

Norling, Richard A., Chairman and Chief Executive Officer, Premier, Inc., 

San Diego, California, statement ........................................................................ 245

Oliver, William C., President, Forrest General Hospital, Hattiesburg, Mississippi, letter ....................................................................................................... 256

OSF Healthcare System, James M. Moore, Chief Executive Officer, Peoria, 

Illinois, letter ........................................................................................................ 258

Premier Health Partners, Thomas G. Breitenbach, President and Chief Executive Office, Dayton, Ohio, letter ........................................................................ 260

Retractable Technologies, Inc., Thomas J. Shaw, President and Chief Executive Officer, statement ......................................................................................... 261

Saint Luke’s Health System, G. Richard Hastings, President and Chief Executive Office, Kansas City, Missouri, letter ........................................................... 271

Shelby County Myrtue Memorial Hospital, Stephen L. Goeser, Chief Executive Officer, Harlan, Iowa, letter ........................................................................ 272

University of Utah Hospitals & Clinics, Richard A. Fullmer, Executive Director, Salt Lake City, Utah, letter ......................................................................... 275

Weatherman, Elizabeth H., Managing Director, Warburg Pincus, LLC, New 

York, New York, prepared statement ................................................................. 276

Wenick, Joel, FACHE, President Chief Exeuctive Officer, Phoebe Putney 

Health System, Albany, Georgia, letter ............................................................. 282

(1)

HOSPITAL GROUP PURCHASING: HAS THE 

MARKET BECOME MORE OPEN TO COMPETITION? 

WEDNESDAY, JULY 16, 2003 

UNITED STATES SENATE, 

SUBCOMMITTEE ON ANTITRUST, COMPETITION POLICY, AND

CONSUMER RIGHTS, OF THE COMMITTEE ON THE JUDICIARY, 

Washington, DC. 

The Committee met, pursuant to notice, at 11:09 a.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 morning. I don’t know if it is a good 

sign or a bad sign when the witnesses are here before the Chairman. Thank you for being prompt. 

Welcome to the Antitrust Subcommittee hearing on hospital 

group purchasing organizations. This hearing is, of course, part of 

the Subcommittee’s ongoing efforts to help inject competition into 

the market of hospital group purchasing organizations, also known 

as GPOs, in order to increase the quality of health care that we receive and decrease the prices we pay for it. Senator Kohl and I 

have focused on this very important issue for a long time. 

At our first hearing on GPOs in April of last year, we heard testimony about GPO practices that, quite frankly, disturbed me. For 

example, there was evidence that some GPO executives, indeed, 

some GPOs themselves, owned financial interest in their suppliers. 

This type of cross-ownership raises, at the very least, the appearance of impropriety and was cause for great concern. 

Beyond these issues of business ethics, the Subcommittee heard 

testimony regarding the competitive impact of some GPO businesses and contracting practices. There were questions raised 

about whether the structure of GPOs and the basic business practices of most GPOs might be impeding the flow of new and innovative medical devices and technologies to the market, and more importantly, preventing these new technologies from getting to the 

patients and health care workers who need them. These concerns 

were aimed especially at Premier and Novation, the nation’s two 

leading GPOs. 

In the wake of what we heard at that hearing, Senator Kohl and 

I called for the GPO industry to adopt voluntary codes of conduct 

2

to address the concerns raised by our investigation. To their credit, 

most of the GPOs, including Premier and Novation, and the industry as a whole, answered our call. After a great deal of work with 

the Subcommittee, the GPOs adopted codes of conduct reflecting a 

series of commitments regarding their ethical standards and their 

business practices. 

As promised, we are here today, 15 months later, to examine the 

progress. Our questions are relatively simple. Are GPO ethical 

standards stronger today? Are GPO business practices better than 

they were a year ago? Are new, innovative medical devices more 

available to hospitals than they were a year ago? Simply put, are 

the codes of conduct working? 

Our answers are a little more complex. The answers themselves 

are more complex. Based on a year of investigation, interviews with 

a broad range of industry participants, an interim GAO study, and 

examination of GPO business documents, I would say the answer 

is we have made some progress. 

We have made a lot of progress with regard to ethical standards. 

For example, both Premier and Novation now prohibit all their employees from owning shares of their suppliers, which removes even 

the appearance of impropriety. I think that both Premier and Novation and the industry as a whole should be applauded for these 

changes. 

It is fair to say, however, that the ethical guidelines are, as we 

might say, the low-hanging fruit. The biggest concerns of the Subcommittee are in regard to GPO business practices, where the 

progress is a little less clear and a little more difficult to measure. 

We will hear today some testimony, for example, from medical device manufacturers who believe they still face significant competitive barriers based largely on bundling, sole-source contracting, 

high commitment levels, and other GPO business practices. On the 

other hand, I think that many device manufacturers would agree 

that the marketplace they face today is at least somewhat more 

open to their efforts. 

And, of course, we must not lose sight of the fact that while 

many of these business practices may have the effect of excluding 

some competitors from the market, they also may allow GPOs to 

keep prices down, which is, of course, an important goal sought by 

GPOs and their member hospitals. In fact, I have heard from a 

number of hospitals in my home State of Ohio and they are very 

satisfied with their GPOs. 

Now, as I noted earlier, the answers we seek are complex and 

this hearing will necessarily be only one of a number of steps we 

take to lock in the positive changes made by GPOs and work with 

them on potential future changes, as needed. The General Accounting Office has released its interim report on GPO practices, and at 

the request of the Subcommittee will continue to examine the impact of GPO business practices on prices for medical devices. 

The Federal Trade Commission and the Antitrust Division are 

currently in the midst of a wide-ranging review of antitrust health 

care policy and are also at the request of the Subcommittee examining the specific question of competition within the GPO industry. 

And, of course, the Subcommittee will continue to work with all 

of the market participants, including the device manufacturers, the 

3

hospitals, and the GPOs themselves, to provide oversight and help 

increase competition wherever possible. We will spend some time 

today hearing from our witnesses with regard to any further specific suggestions that they may have. 

Before I turn to Senator Kohl, I would like to make a couple of 

additional points. We have seen some changes in this marketplace. 

We know that GPO business ethics have improved and we know 

that some of the smaller manufacturers who were virtually excluded from the process are starting to see some changes. We must 

recognize, though, that the types of changes implemented in the 

codes of conduct by the GPOs may take more time to generate significant impact in the market. Many of these changes in business 

practices have only recently been implemented and will, we hope, 

have a greater impact in the near future than they have had thus 

far. 

In addition, it is important to recognize that we cannot measure 

success only by examining how many different medical device manufacturers are awarded a GPO contract. Not every small device 

manufacturer deserves a contract on every device, and some of the 

most controversial business practices may save money for hospitals, at least in some circumstances. 

In this industry, as in most, one-size-fits-all solutions are not 

practical nor are they desirable. Instead, we must work to foster 

a dynamic marketplace in which many device manufacturers have 

a wide range of options to sell, and GPOs have a wide range of options to buy. Only then will patients be assured that competition 

is working to give them the best possible medical care at the best 

possible price. 

Let me now turn to the Ranking Member of the Subcommittee, 

Senator Kohl, who has certainly done a great deal of research and 

done a great deal of work on this particular issue. Senator Kohl? 

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

STATE OF WISCONSIN 

Senator KOHL. Thank you, Mr. Chairman, and thanks for the bipartisan effort you have made in pursuing this important issue. 

It has been more than a year since we first heard troubling allegations that patients and physicians were being denied needed 

medical devices because of anti-competitive and unethical actions of 

large hospital buying groups, known as GPOs. After a year of investigation and oversight, we are pleased that our efforts have 

begun to make the marketplace more open for innovative competitors. We are concerned, however, that not enough is happening and 

that it is not happening quickly enough. 

The primary allegation made against the GPO’s business practices was that, in many cases, GPOs prevented hospitals from buying the best and safest products for their patients. For example, 

the inability of hospitals to purchase safety needles resulted in unnecessary injuries to health care workers, who in some cases developed HIV and hepatitis. Heart surgeons reported incidents where 

they were not permitted to use the pacemaker that they judged 

medically necessary because their hospital did not have a GPO contract with that supplier. 

4

The situation was dangerous to patients and compromised public 

health, so we launched an investigation into the hospital purchasing industry. We discovered that the GPOs’ contracting practices, in many cases, froze out competition and entrenched the 

dominant positions of the large suppliers, often to the detriment of 

patient care. 

We held a hearing last year on our findings. We secured the 

agreement of Premier and Novation, the nation’s two largest GPOs, 

responsible for over $28 billion of purchasing at two-thirds of our 

Nation’s hospitals, to implement substantial changes in their business practices. To their credit, Premier, Novation, and four other 

large GPOs promised to change the way they did business. They 

all agreed to important and voluntary codes of business conduct. 

Today, we ask two questions. What progress has been made in 

the marketplace since Premier and Novation made their agreements nearly a year ago? And what remains to be accomplished? 

We identified five major areas in need of reform in the GPO industry. The first was ending conflicts of interest, such as investments by GPOs or their executives in medical suppliers with which 

they did business. 

The second was sole-source contracts, in which one supplier has 

an exclusive deal for a product with the GPO. 

The third area was high commitment levels, in which a hospital 

must purchase a very high amount, as high as 95 percent, from the 

GPO-approved vendor in order to get the best prices. 

The fourth was bundling practices, giving substantial extra discounts to hospitals that buy a bundle of different products in one 

contract. 

And the fifth was high administrative fees, GPOs collecting payments in excess of 3 percent of the value of the product sold from 

suppliers. The GPO codes of conduct addressed each of these 

issues. 

The evidence we have received from medical device manufacturers, hospitals, GAO, and the GPOs themselves tells us that while 

some progress has been made with respect to each of these issues, 

in many cases, much more needs to be done. 

While significant progress was made with respect to conflicts of 

interest, reform is much less certain in the area of contracting 

practices. In general, it appears that Premier has made more substantial reforms than Novation, but Premier’s reforms are not without their shortcomings. 

With respect to sole-sourcing, Premier has promised to ban this 

practice with respect to physician preference items, but has not 

done so entirely. Novation did not make the same pledge, and onethird of current contracts for clinical preference items are still solesourced. 

With respect to commitment levels, Premier has banned GPO-imposed commitment levels, but left the door open to commitment 

levels initiated by vendors. Novation expressly permits commitment levels above 75 percent with consent of their clinical councils. 

With respect to administrative fees, Premier took the laudable 

step of capping administrative fees at 3 percent in all contracts. 

Novation has only agreed to a 3 percent fee cap for what it desVerDate 0ct 09 2002 11:13 Feb 26, 2004 Jkt 091807 PO 00000 Frm 00008 Fmt 6633 Sfmt 6633 S:\GPO\HEARINGS\91807.TXT SJUD4 PsN: CMORC
5

ignates as clinical preference products, and their revenues from 

high administrative fees continue to rise. 

Finally, with respect to bundling, both GPOs still engage in this 

practice. The GAO report said bundling contracts at one of the two 

largest GPOs still account for more than 40 percent of its revenue. 

Novation will not terminate its bundling program until 2004 at the 

earliest, although it could do so sooner if it wished. 

This clearly is only a start on the road to true reform. While we 

applaud the positive changes that have been implemented, the industry needs to do more and needs to do it now. The past year has 

taught us that promises to change and actual change, despite the 

best of intentions, are not the same. We need to be assured that 

the commitments we have seen so far and the ones that we will 

ask to be made today become permanent and will last once the 

spotlight of a Senate hearing room fades away. 

Today, we will send a letter to the Secretary of Health and 

Human Services to seek ways to make these good reforms permanent, including requesting the appointment of an officer to oversee 

the hospital group purchasing industry. We need to ensure that 

GPOs fulfill their mission to act on behalf of hospitals to obtain the 

best products at the best prices for their patients. We also plan to 

ask the Department of Health and Human Services to strengthen 

and revise its regulations governing the Medicare safe harbor that 

permits GPO to accept administrative fees from suppliers. And finally, we will reiterate our request that the FTC reexamine and revise the joint FTC/Justice Department Health Care Guidelines. 

Mr. NORLING AND MR. McKenna, as leaders of the two largest 

GPOs providing supplies for nearly two-thirds of our Nation’s hospitals, you particularly bear a special burden. Your companies’ decisions on which products to put on contract affects the health and 

safety of millions of patients and health care workers every day. 

We depend on your good faith, your judgment, and your integrity 

to ensure that hospitals have access to the best medical products 

at the best prices. So it is essential that you continue to follow 

through on your industry’s efforts to reform. 

Our investigation so far has determined that your reforms have 

made a good start in making the market more open, but the job 

clearly is not finished. We commend you for the reforms that you 

have made, but we will continue to oversee this industry to see 

that group purchasing never denies a patient, a physician, or a 

health care worker a needed medical device. 

Thank you, Mr. Chairman. 

Chairman DEWINE. Senator Kohl, thank you very much. 

We have a vote scheduled around 12 o’clock. That is Senate language for nothing exact. That means that unless you all want to 

spend the day with us, we probably ought to try to get done before 

that vote. 

So we are going to have—we have your written testimony. We 

appreciate that. That will be made a part of the record. We would 

ask you to summarize your testimony. Tell us in three minutes 

what you think is the most important part of your testimony. We 

already have your testimony, so we appreciate that. Give us the 

highlights. Just off the top of your head, give us what you think 

6

is the most important thing that we know. We have seven very 

qualified, very important witnesses here. Give us three minutes. 

We are going to go by the rules. When you see the yellow light, 

that means you have got a minute left. When you see the red light, 

you are done and then we are going to go to the next witness. Then 

we are going to go to questions. Questions will start with Senator 

Kohl, and then I will have some questions. Unless the Senate 

changes its mind, we will have until 12 o’clock, so you can see that 

doesn’t give us a whole lot of time for questions. 

Mr. Norling, you are first. 

Mr. NORLING. Thank you, Chairman DeWine. 

Chairman DEWINE. You didn’t know which way I was going to 

go, but that is where we are going. 

Mr. NORLING. I had a suspicion. 

Chairman DEWINE. Let me give the brief introduction. Richard 

Norling is Chairman and Chief Executive Officer of Premier. He 

has served as President and Chief Executive Officer of Fairview 

Hospital and Health Care. He has testified before this Subcommittee and we welcome him back. 

Mark McKenna is President of Novation. He has served in a variety of positions since joining Novation in 1987. 

Mr. Said Hilal is the President and Chief Executive Officer of 

Applied Medical Resources Corporation, the manufacturer of surgical devices, including devices used for minimally invasive surgery. 

Mr. Thomas Brown is Executive Vice President of BIOTRONIK, 

headquartered in Portland, Oregon. I am sure I messed that up, 

and you can correct me, Mr. Brown, in a minute. 

Mr. Gary Heiman is President and Chief Executive Officer of 

Standard Textile, based on Cincinnati, Ohio. Additionally, he is 

also on the Board of Trustees for the Jewish Hospital of Cincinnati. 

Mr. Lynn Everard is a health care business and supply chain 

consultant. His publications include a white paper detailing the future of the health care supply chain and the impact of group purchasing organizations on the financial prospects of the health care 

industry. 

Ms. Elizabeth Weatherman has been a member of the health 

care group of Warburg Pincus since 1988. Ms. Weatherman has 

testified on this matter in the past and we welcome her back again. 

Mr. Norling? 

STATEMENT OF RICHARD A. NORLING, CHAIRMAN AND CHIEF 

EXECUTIVE OFFICER, PREMIER, INC., SAN DIEGO, CALIFORNIA 

Mr. NORLING. Thank you again, Chairman DeWine and Ranking 

Member Kohl. As I stated at last year’s hearing, if there is an opportunity to improve, Premier is going to take that opportunity. 

Last year, we made commitments, and I am pleased to report to 

the Subcommittee today that those commitments were kept, and 

are imbedded. 

With the adoption and implementation of the Premier code of 

conduct, I would like to share with you the highlights of what we 

have done with respect to our business practices. 

7

First of all, we contract for physician preference items on a 

multi-source basis, with no GPO commitment levels or bundling 

with unrelated products. We adopted a contracting approach in the 

last year that we call strategic sourcing. Fundamentally, this enables suppliers with products focused in very limited product areas 

to compete effectively with suppliers who offer a much broader 

product line. 

We have also substantially revised and improved our technology 

assessment and breakthrough process, which offers access even in 

the face of existing contracts. We have worked with outside firms, 

such as ECRI, a very well-known national firm that conducts research with respect to medical device products. 

I am pleased to see on the panel today Tom Brown of 

BIOTRONIK. BIOTRONIK is a relatively small producer of pacemakers and defibrillators that Premier recognized as embodying innovative technology. We were pleased to give the company an 

award this May through our technology breakthrough program. 

I am also pleased to see Mr. Hilal from Applied Medical. We 

have a pending contract proposal for its GelPort product, and last 

December, we sent the company details about our technology 

breakthrough process, and encouraged it to submit other products 

as well. We have yet to receive such, but certainly look forward to 

it. 

We have implemented, as you indicated, our conflict of interest 

of policy, but let me be specific about other items. We do limit fees 

to 3 percent. We do not charge up-front fees or marketing fees. We 

do not accept administrative fees. We do not require vendor participation in other services. We do not private label. We have begun 

a process of standardizing administrative fees, which Professor 

Hanson, who we brought in as a third-party ethicist, conveyed as 

important in limiting the potential of the perception that fees could 

influence product selection—very, very important. We contract for 

3 years or less; the few exceptions being in the interest of our owners. We seek out diversity. We have hired an ethics and compliance 

officer. 

When we introduced our code, both of you gentlemen had some 

nice things to say about it. You characterized it as industry-leading, and I would agree with you. The code is a very important start 

and we, indeed, have implemented that code fully. 

But I want to commit to you and other members of the Subcommittee in good faith that we are going to be productively involved in continuing to improve the group purchasing industry, as 

well as health care in America. 

In conclusion, I want to emphasize that you can count on our 

continued cooperation and support. Simultaneously, we believe that 

the time is right to encourage others to do their part in an ongoing 

effort to ensure the quality and effectiveness of our Nation’s 

healthcare system, and I believe you made those comments. 

The title of this hearing asked the question, ‘‘Has the market become more open to competition?’’ From Premier’s perspective, the 

answer to that is an emphatic yes. Thank you. 

Chairman DEWINE. Thank you very much. 

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

for the record.] 

8

Chairman DEWINE. Mr. McKenna? 

STATEMENT OF MARK MCKENNA, PRESIDENT, NOVATION, 

LLC, IRVING, TEXAS 

Mr. MCKENNA. Thank you, Chairman DeWine and Ranking 

Member Kohl. Like my colleague here, a year ago, we were sitting 

here and weren’t sure what to expect. This year, though, we feel 

very prepared relative to reporting to you the results of what we 

committed to deliver to the Subcommittee on behalf of our member 

hospitals that look to us to save dollars on high-quality clinical 

products and commodity products. 

We committed to promote industry best practices. You made it 

clear to us that you wanted us to ensure that small vendors had 

an opportunity to participate in group purchasing programs and 

that member hospitals had ready access to innovative technology. 

We heard you. 

On August 8, we committed to implement seven operating principles. Today, less than a year later, I am pleased to report that 

we have not only met but in many cases exceeded those principles. 

We have also systematically trained all of our employees on their 

responsibilities to follow through and implement these principles as 

a part of their daily business practice. Let me take a few minutes 

to highlight a few examples, and I would like to begin with technology. 

Novation has dedicated new resources to the identification and 

evaluation of new and emerging technology. We have also launched 

a web-based technology forum. We believe it is the only one of its 

kind in the industry. The forum invites vendors to post information 

about their new products, whether they are on contract or not on 

contract, and through our technology pipeline program, Novation is 

constantly searching the marketplace for emerging medical technology. Once we find a new product, we take the initiative to contact the vendor and work towards a contract position. 

The results have been gratifying. In just 7 months, vendors have 

posted information on the technology forum in 50 product categories, and as a result of that, we have made 20 contract awards 

to companies with innovative or new technology, and this has been 

done outside the regular bidding cycle. There currently are an additional 20—excuse me, a dozen more products that are under review, so a total of 32 events in just 8 months since we put the technology forum in place. 

Our progress in other areas of the operating principles has also 

been significant, and let me report out. First, we have revised our 

Opportunity Spectrum Program around commitment to reemphasize that participation is purely voluntary. We have eliminated all 

penalties in the event that a member elects to drop from the program, and finally, we have eliminated any requirement that the 

members purchase a combination of capital equipment and disposables. 

Novation has awarded multi-source contracts in six separate clinical preference product categories that were previously offered 

under a sole-source contract. For example, when I was here last 

year, we had one safety needle under contract, Senator Kohl, as 

you pointed out. This year, we have four. 

9

Novation has also enhanced its processes for addressing vendor 

grievances. Today, we have a formalized process and commit to get 

back to suppliers within a 90-day period with a result. And, in fact, 

we have done so with one vendor, resulting in a contract award. 

In conclusion, I want to emphasize to you that while I am proud 

of the progress that we have made in just over 11 months, we at 

Novation recognize that we have a continuing obligation to live up 

to the letter and to the spirit of these operating principles. It is an 

ongoing process that requires resolve, diligence, leadership, and 

commitment. For its part, Novation will continue to dedicate ourselves to these operating principles and to ensuring that hospital 

members have unimpeded access to a broad array of high-quality 

products at the lowest possible prices. 

Chairman DEWINE. Thank you very much. 

[The prepared statement of Mr. McKenna appears as a submission for the record.] 

Chairman DEWINE. Mr. Hilal? 

STATEMENT OF SAID HILAL, PRESIDENT AND CHIEF EXECUTIVE OFFICER, APPLIED MEDICAL RESOURCES CORPORATION, RANCHO SANTA MARGARITA, CALIFORNIA 

Mr. HILAL. We have only just begun. Chairman DeWine, Senator 

Kohl, thank you so much. Applied really appreciates this opportunity to be in front of you. 

Fourteen years ago, we started out the company with the concept 

of combining better clinical outcomes with better financial outcomes. Those are not mutually exclusive. They can be done together. We spend 22 percent of our revenue on R&D. We have over 

380 pending or issued patents. We have the highest quality. 

You would think with a commitment like that and an accomplishment like that that we would have the doors open, that we 

would be doing well. We are not. 

We face markets as closed as a castle, with the GPOs as the 

most treacherous of outer moats. We are on the other side of the 

moat. Similar to how castles have concentric lines of defense, the 

dominant players have used GPOs as the outer moat and then 

moved on to more of the localized exclusionary contracts, bundling, 

grants, and so on. It is not one circle. It is not one issue. It is a 

market that is not open. 

In markets unencumbered by GPOs, we have done extremely 

well. In the clamp market, in the padded clamp market, for example, we went from no market share in 1990 to 70 percent market 

share today, the market leader. We obsolete our own technology 

three times in that period. In the progressive European markets, 

where GPOs are not a factor, we have five times the market share 

in the trocar market as we do here. 

Fourteen months ago, frankly, we were energized and filled with 

hope, and in May of last year, we went out to the largest 40 customers and we offered them trocars at 60 percent discounts from 

their GPO prices. Now, that would have taken a $300 million market down to $120 million and the customer would have had the 

best product. But in the process, I agree, GPOs’ income would have 

gone from $9 million to $3.6 million at the 3 percent. But the issue 

10

is the customer is still waiting. The patient is still waiting. We can 

help. 

Admittedly, we have received some contracts and we are grateful 

for that, but we are not satisfied. We cannot be limited to the 

fringe markets where our impact is just the latest and the greatest. 

We can make a big difference in big markets, in markets where the 

dominant players day in, day out as the clock is ticking are making 

hundreds of millions of dollars of additional income. And in this 

process, we are not helping the patient. We are not helping the 

process through it. 

One hundred days ago, and at about the same time the Subcommittee released the agenda for the hearing, we saw some increased activity. We saw and we hoped the market would be changing. At that time, we asked Novation for an end to the contract 

with J&J which actually bundles sutures, trocars, and surgical 

products together. Novation initially turned us down, and as of 

late, asked us to submit a bid. 

In conclusion, Applied is again very grateful for the Subcommittee and for everyone that is following its lead. Fourteen 

months into the effort, we see no indication that the needed change 

will take root and grow without your continued intervention. I 

kindly urge—I respectfully urge you to continue your efforts and 

that you see that the changes to safe harbor and the prohibitions 

of sole-source contracts and bundling of unrelated products and 

vendors and limit to the term of the GPO contracts are done. 

This great nation has always been a bastion of free people and 

free markets and this market is not free and the field is not a level 

playing field. I urge you to help out. Thank you very much. 

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

the record.] 

Chairman DEWINE. Mr. Brown? 

STATEMENT OF THOMAS V. BROWN, EXECUTIVE VICE 

PRESIDENT, BIOTRONIK, INC., LAKE OSWEGO, OREGON 

Mr. BROWN. Chairman DeWine, Ranking Member Kohl, members 

of the Subcommittee, I, too, urge this Committee to continue your 

oversight of this very important issue that affects the innovation, 

quality, and cost effectiveness of medical care in this country. I 

would like to thank you for your efforts to date and stress the importance of legislation or comprehensive regulation in order to fix 

this problem permanently. 

I represent a small company. BIOTRONIK has 2.5 percent market share in the United States. But effectively, I am representing 

hundreds of companies throughout this great United States that 

have small market share. Over the past 10 years, these companies 

have found themselves generally locked out of group purchasing organizations due to their size. As a small company, they simply do 

not generate enough sales to cause GPOs to take notice. We are not 

considered a player. As a result, these companies have generally 

found themselves outside the market, looking in, when it comes to 

GPO contract opportunities. This situation, unfortunately, continues today. 

Last year, your Committee initiated hearings and study on this 

and we sincerely appreciate your efforts, and improvements have 

11

been observed. I am not going to go into those improvements because of the time constraints, but they have been mentioned and 

I would like to acknowledge those improvements. 

These are all positive steps that have resulted from the U.S. Senate Committee on the Judiciary’s efforts, but as I noted earlier, 

there remains much to be done to create equal access for small and 

large companies alike. The establishment of code of conduct is a 

good start, but one cannot assume or believe that this action alone 

will change or radically impact the central problem, which remains 

fair and equal access to contracts regardless of company size. 

The problem continues to be perpetuated by GPOs, and, in fact, 

one of the reasons this problem exists is that GPOs have a very 

special privilege. That privilege is the exemption from the Medicare 

anti-kickback and fraud statute. So long as GPOs are allowed to 

charge administrative fees and so long as GPOs are allowed to return a large portion or any portion of that fee to the member hospitals, we have a serious conflict of interest that is automatically 

biased towards large companies with large market share holdings 

because of the potential fee dollars. 

Within our GPO industry, for example, within my industry, a 

GPO could do a multi-source contract, which is two companies, and 

they could lock up 80 percent of the market just by a multi-source 

contract. A dual-source is really what I am referring to. A multisource contract is the answer. It is the way to allow everybody fair 

access. 

The administrative fee continues to be the core issue impacting 

small companies’ access into GPO systems. GPOs should be required to allow all companies to participate in contracts that incorporate administrative fees. This will eliminate the bias towards 

large market share holders, eliminate the pressure from large companies on GPOs, and allow small companies to participate on the 

basis of price, quality, technology, and service. This should improve 

the competitive process, resulting in cost savings, broader access to 

life-saving products by physicians, and the creation of a level playing field for all vendors. 

Representing all of the small companies in this industry, Senator 

Kohl, we sincerely appreciate your leadership and interest in this 

problem. Chairman DeWine, your support has been invaluable and 

we look forward to your leadership in resolving this issue. Thank 

you. 

Chairman DEWINE. Thank you very much. 

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

for the record.] 

Chairman DEWINE. Mr. Heiman? 

STATEMENT OF GARY HEIMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER, STANDARD TEXTILE COMPANY, CINCINNATI, OHIO 

Mr. HEIMAN. Chairman DeWine, Ranking Member Kohl, and distinguished members of the Subcommittee, thank you very much for 

inviting me here today to provide my perspective as a vendor of 

hospital supplies who has extensive experience with the hospital 

supply chain. I am the President and CEO of Standard Textile 

Company in Cincinnati, Ohio, a closely-held, family-owned comVerDate 0ct 09 2002 11:13 Feb 26, 2004 Jkt 091807 PO 00000 Frm 00015 Fmt 6633 Sfmt 6633 S:\GPO\HEARINGS\91807.TXT SJUD4 PsN: CMORC
12

pany that was founded by my grandfather in 1940. Today in the 

United States, we employ about 1,200 people, including 350 employees in Ohio and 600 workers in Georgia, amongst eight other 

locations within this country. 

Standard Textile produces reusable products for health care facilities ranging from surgical packs and gowns to incontinence 

products and bed sheets. We also supply some of the other fabrics 

that you see around hospitals, such as window treatments, cubicle 

curtains, and upholstery fabric. 

We began working with hospital group purchasing organizations 

about 20 years ago, competing against much larger companies, for 

example, Baxter International, Johnson and Johnson, and Kimberly–Clark. Today, we have contracts with virtually all of the 

GPOs, including AmeriNet, Broadlane, Consorta, Kaiser, 

MedAssets, Novation, and Premier. About 75 percent of our revenue is generated through GPO contracts. 

Using GPOs has helped us to reduce costs and increase the efficiency and efficacy of our marketing, sales, and customer service 

operations. Our bidding department used to be huge. Today, it has 

only three people. We have been able to cut our sales force by 15 

to 20 percent. And while our prices have dropped significantly 

under GPO contracts, we also have the benefit and efficiencies of 

much greater volume. Today, we are still a medium-sized company 

competing against Goliaths, but we are seven times larger than we 

were 20 years ago. 

I would like to give you just one example of how GPOs helped 

us as a medium-sized manufacturer, and also helped hospitals to 

adopt a technically innovative product that greatly enhanced safety 

and efficacy. 

In 1990, Standard Textile developed a patented, proprietary fabric that we use to manufacture surgical packs and gowns and sterile wraps, all Class II medical devices, for operating rooms and 

other clinical procedures. This fabric has greater barrier resistance 

to fluids and viral penetration and, as such, enhances safety. it is 

also more cost effective and environmentally friendly than disposable products because it creates no medical waste on its own. 

When we developed these products, VHA, which is one of Novation’s owners, already had a contract for disposable products with 

a much larger publicly traded competitor, Kimberly–Clark. It 

would have been easy, more convenient, and certainly the path of 

least resistance for VHA to turn down a small company like ours, 

but they didn’t. Not only did they clinically evaluate our products, 

they brought in, at their expense, a third party, Deloitte and Touche, to analyze and evaluate our financial model and determine 

that we could create overall cost savings for hospitals. 

Standard Textile doesn’t always win the GPO contracts that we 

bid on. At times, we have been defeated by other companies. As a 

supplier, we, of course, never like to lose. But the GPO committees 

that evaluate these contracts are representative of the hospital industry, are qualified, and are fair. We may not always agree or like 

their conclusions, but we do believe the process is open, fair, and 

honest. 

I can also say that whenever I have encountered a hospital or clinician who wanted to use my product, regardless of whether it was 

13

listed on their GPO contract, I have never had a problem getting 

it into their hands. They always have the freedom and the choice 

to buy directly from any supplier or manufacturer. 

In addition to being a supplier, I can also speak from a hospital 

perspective about the benefits of GPOs. I am the Board Chairman 

of the Jewish Hospital of Cincinnati, a medium-sized tertiary care 

not-for-profit hospital with about 200 beds, and growing, approximately 15,400 surgeries per year, and about $248 million in annual 

revenues. In 1998, the hospital was running an annual deficit of 

approximately $5 million. To help reverse that situation, the hospital made many significant operating changes, including greater 

utilization of GPOs to assist in managing costs. This year, I am 

pleased to say that the hospital will report— 

Chairman DEWINE. Mr. Heiman— 

Mr. HEIMAN. —a net gain from operations of $12 to $13 million. 

Chairman DEWINE. We need to move on. 

Mr. HEIMAN. I have got three more sentences, if that is okay, 

Senator. 

Chairman DEWINE. We are about there. 

Mr. HEIMAN. I have been following with great interest the recent 

discussions about GPOs. I think it is commendable that this Subcommittee has taken an active interest in the topic and I believe 

many of the changes in the GPO industry since your first hearing 

have been positive. 

But speaking as both a hospital supplier and a hospital board 

chairman, I think the existing GPO system brings enormous value 

to the health care system and I hope it remains that way. 

Again, thank you very much for inviting me to share my views 

at this hearing and I welcome any of your questions. 

Chairman DEWINE. Thank you very much. 

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

for the record.] 

Chairman DEWINE. Mr. Everard? 

STATEMENT OF LYNN JAMES EVERARD, HEALTHCARE 

SUPPLY CHAIN STRATEGIST, COCONUT CREEK, FLORIDA 

Mr. EVERARD. Mr. Chairman and Senator Kohl, if there was ever 

any doubt in your minds about the importance of your mission 

here, let me say that our Nation will not be able to do its job of 

providing quality care and a safe working environment unless or 

until the GPO problem is resolved. And Senator Kohl and Senator 

DeWine, I would like to personally thank you for your commitment 

and leadership on this issue. 

You have already introduced me. I would like to let you know 

that I am a supply chain strategist and health care business educator, and for 22 years, I have worked in the health care supply 

chain, studying its strengths, its weaknesses, and its opportunities 

for improvement. 

I am here today because of my deep concern for the safety of patients and caregivers and the financial viability of our Nation’s hospitals, all of whom continue to be harmed because competition in 

the health care supply chain is compromised due to the business 

practices of some large manufacturers and certain GPOs, fueled by 

the power granted to GPOs in the safe harbor exemption. 

14

I understand that almost a year ago, you were inclined to continue the safe harbor pending the results of this experiment with 

self-policing codes of conduct. I understand your desire to take a 

measured approach, and I think that you were wise in doing so. 

While I shared your optimism in that approach, a year later, we 

have seen very little progress and this market desperately needs to 

be open to competition. Robust competition in the health care supply chain is not only important for small manufacturers, but also 

for hospitals, as well. I believe that the evidence is insufficient to 

warrant the continuation of the special treatment in the safe harbor. 

Mr. Chairman, you asked me to discuss the progress made in the 

GPOs developing codes of conduct, and, in fact, GPOs have developed codes of conduct, much to their credit. Unfortunately, those 

codes of conduct may not have the results that were intended because they are not externally verifiable. 

The real question at this point for me is this. Are the GPOs really doing their job of saving money for hospitals? In its testimony 

before this Committee last year regarding the cost savings by his 

group, Mr. Norling of Premier stated, ‘‘We estimate that we save 

our member hospitals over $1.5 billion per year.’’ Hospitals need 

real science proving the savings produced by GPOs, not estimates. 

Last year’s GAO study, the only independent analysis of GPO savings, reported that GPOs don’t save money. 

What is the real truth? That is not an idle question. By granting 

the safe harbor, the Congress gave GPOs a great deal of power and 

a significant ability to create revenue for themselves. 

The GPO landscape is extremely complex and complicated. Sometimes it is difficult to know where the GPO ends and the side businesses begin. I believe that Congress must fully understand the 

flow of money in the health care supply chain and the GPO’s role 

in the flow of that money in order to pronounce that the safe harbor is a benefit to patients and taxpayers. I do not believe that this 

body can in good conscience implement a code of conduct until all 

of the questions about GPOs are answered. 

GPOs seeking to end years of speculation on the part of their 

foes should welcome the opportunity to fully disclose their practices 

and sources and uses of revenue, and skeptics who say, ‘‘Trust, but 

verify,’’ will have what they need, and this entire industry can 

move beyond the GPO question and focus all of its efforts on providing quality patient care and a safe work environment. 

Recently, two major GPOs announced plans to go public with a 

stock offering. Does it seem right that while other hospitals continue to struggle financially, Broadlane and MedAssets will use the 

windfall granted to them by the Congress in the form of the safe 

harbor to enrich themselves by selling stock in their companies? 

Will this be the legacy of the safe harbor? I hope not, Mr. Chairman. 

In conclusion, this hearing has been about GPO behavior, but the 

implications of that behavior affect our entire health care system. 

Elsewhere in this Congress on this very day, other members of the 

House and Senate are grappling with other health care issues. The 

outcome of your decisions here today will clearly affect the work 

15

that they are doing and the health care system that hundreds of 

millions of Americans depend on to take care of them. Thank you. 

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

for the record.] 

Chairman DEWINE. Ms. Weatherman? 

STATEMENT OF ELIZABETH H. WEATHERMAN, MANAGING 

DIRECTOR, WARBURG PINCUS, LLC, NEW YORK, NEW YORK 

Ms. WEATHERMAN. Thank you, Senator DeWine and Senator 

Kohl. I would like to thank you for inviting me back. I would like 

to encourage you to refer to my written testimony for the details 

supporting the views that the National Venture Capital Association 

and myself, as a 15-year veteran investing in the medical device 

arena, hold very strongly as our views. 

But what I would like to do right now is very quickly emphasize 

what I think are the true take-homes from my testimony. First and 

foremost, it is really, really hard to bring innovative new breakthrough technology to market in the U.S. and around the world. 

There are major technological challenges to developing the technology. There are intellectual property barriers. There are regulatory barriers, the standards to which we must adhere in terms 

of demonstrating the safety and the efficacy of the devices that are 

being developed to assure that they are going to work for the 

American patients and that they are going to be safe. It is a 

veritable gauntlet, and more new technologies fail to reach market 

than succeed. 

So my second point, that to have an additional roadblock on the 

part of GPOs, where they can essentially block a new technology 

based on, I am sure their in some cases good intentions, simply 

puts up an additional barrier, an additional risk in the mind of 

venture capitalists who are already taking huge risks, huge 

amount of capital that they are investing into companies long before they know whether their technology is ever going to generate 

revenues, much less a profit. 

We thank you so much for the spotlight that you have put on the 

practices that the GPOs have used over the years and we do think 

that the code of conduct that you have asked them to adopt is significant progress. However, a major flag for us is the effort that 

Senator Eschutia attempted to make, the State Senator in California, to adopt the code of conduct that the GPOs themselves had 

adopted for themselves into legislation was fought by many of the 

GPOs very hard. It makes us wonder, how serious are these guys 

really about adopting a uniform code of conduct and implementing 

it and executing it and really being clear and that they are going 

to continue to be consistent with it and really take it seriously. 

They may be trying to address the letter of what you have asked 

them. We question the spirit of some of them. 

So in conclusion, we would like to ask you to do any and all 

things you can to assure that the abuses that they have committed 

over the years are corrected once and for all and forever. Thank 

you. 

Chairman DEWINE. Thank you very much. 

[The prepared statement of Ms. Weatherman appears as a submission for the record.] 

16

Chairman DEWINE. Senator Kohl? 

Senator KOHL. Mr. Norling and Mr. McKenna, we spent considerable time and effort working with you last year to draft new 

codes of conduct. We would like to spend some time today going 

through each of these most important issues your codes of conduct 

were supposed to address: Bundling, high administrative fees, solesourcing, and high commitment levels. In assessing this progress, 

one of our main concerns is the conclusion that the GAO reached 

in its report released to our Subcommittee today that, quote, ‘‘Some 

GPOs’ conduct codes include exceptions and qualified language that 

can limit the potential of the conduct codes to affect change.’’ 

One GPO practice which many fear can damage competition is 

known as bundling. This is the practice of entering into one contract for multiple products, either from one vendor or from multiple 

vendors. A hospital gets an added discount only if it purchases 

from the bundle, but typically, it must purchase virtually all of its 

requirements, often 95 percent, from every product in that bundle. 

If a hospital does not meet this requirement for just one product, 

then it loses the additional discount for every product. This makes 

it very difficult, if not impossible, for the small manufacturers of 

just one medical product to compete with the bundle offered by the 

large dominant suppliers. 

Mr. McKenna, you pledged to terminate Novation’s bundling program, but only after it expires in the first quarter of 2005. We understand that you are now considering revising this program sometime in 2004. Novation’s vendor contracts have a provision in 

which they can be terminated on 90 days’ notice by Novation. And 

so we ask, why not exercise this provision and abrogate the bundling contracts today? Why should those patients who benefit from 

the products outside the spectrum bundle have to wait another 

year or two, Mr. McKenna? 

Mr. MCKENNA. Senator Kohl, just as a basis, our program is entirely voluntary. There is access pricing for all of our members to 

utilize any product under contract with no commitment whatsoever. 

With that as a basis, as a hospital looks to maximize their value, 

there are different price points they can purchase at at different 

levels of commitment. But in no way does the committed program 

that you reference link one product to another. These contracts are 

put in place separately and the hospitals on their own determine 

whether or not they want to purchase at higher levels to gain 

greater value and benefits. There is no precondition of any of these 

contracts to contain base pricing. It is their decision alone. 

We have eliminated any penalties from a member removing 

themselves from these programs. That has been completed. We 

have removed any anti-competitive language that was in the program. We have removed any capital equipment requirements in the 

program. We have lowered purchasing levels in two particular categories, urology and pulse oximetry products, which we have now 

also gone to a dual-source on. 

And then, lastly, we have accelerated the work to put a next-generation program in place, Senator, and these programs bring significant value to our members. One of our primary obligations is 

to the hospitals we serve. And so we are very serious about doing 

17

this. We will do it ahead of schedule. But these things do take time 

to do them properly. 

Senator KOHL. Mr. Hilal, would you like to respond? 

Mr. HILAL. With all due respect, it sounds like a parallel universe because that is not what we see in the marketplace. We had 

the case of walking up to an account and showing a group of hospitals how we can save them $400,000 on purchases of about a little under $1 million. The answer came back that should they dare 

to do that, the cost on the other products would go up by $600,000. 

For us, it took a lot of work and a lot of arithmetic and a lot of 

meetings in order to show the folly of that approach. In our written 

testimony, you will see an analysis of how the customer is actually 

not only intimidated by such numbers, but confused by such numbers that actually come from the dominant supplier more often 

than not. 

So with the GPOs leading this whole bundling issue and its impact on penalties and price changes, it becomes very difficult for 

the customer to make a clear decision on where they can save 

money and where they can’t. 

Senator KOHL. Again, Mr. McKenna, why don’t you just terminate your bundling program right now? 

Mr. MCKENNA. Senator, our commitment program has been built 

at the request of our members, our hospitals. It brings them high 

levels of value with them making the sole decision as to whether 

they access base-level pricing by nothing at all or choose to participate in this program. As previously stated, we have accelerated our 

efforts to change practices in our committed programs. We have 

done that. We have communicated that to the supplier community 

and to our hospitals and we are on schedule to look at this program 

to make it more user-friendly to all stakeholders in the supply 

chain way ahead of schedule. 

Senator KOHL. Why don’t you do it right now? 

Mr. MCKENNA. Once again, our primary objective is to make sure 

that we serve the hospitals that we work at their behest and we— 

Senator KOHL. Why don’t you offer them the maximum discounts 

without the bundling? 

Mr. MCKENNA. It has been our experience, and we recently just 

had one, that in some cases, discounts will change, and we want 

to make sure that as we go through our open competitive bid process, that we give them equal or greater value and it is our commitment to do that. 

Senator KOHL. Can you give us a pledge that you will work with 

even greater intensity to eliminate this practice by the end of 2003? 

Mr. MCKENNA. What I can commit to, Senator, is by the end of 

2003, we will have initiated a pilot to get this new program out and 

running within our hospitals with the anticipation that in early 

2004, we could then launch it to the broader hospital network. 

Senator KOHL. Okay. Mr. Norling, Premier has pledged not to 

engage in bundling of products across different vendors. However, 

the GAO’s testimony indicates, 5 months later, one of the two large 

GPOs derived a whopping 40 percent of its purchase volume from 

medical-surgical products from contracts in which a single vendor 

bundled products together. Does your code of conduct permit this? 

This is the very type of bundling practice which Applied Medical 

18

has faced. Mr. Norling, will you agree to revise your code of conduct to ensure that this type of bundling is ended, as well? 

Mr. NORLING. Thank you, Senator Kohl, and I would reiterate 

that we have already agreed not to bundle across multiple vendors. 

Let us be clear with respect to the single-vendor situation. I think 

I can illustrate this best, in terms of the challenges involved, with 

regard to Mr. Hilal’s comments. 

Later this month, we will be issuing a request for proposals covering the endomechanical product area which includes trocars. We 

are also going to issue a request for proposals regarding sutures. 

These are areas that have been bundled traditionally, particularly 

under the influence of a particular large manufacturer. Applied 

Medical and all manufacturers in this product area will receive a 

request for a proposal. We will be breaking these products out into 

eight separate categories with no bundling. 

So specific to the example that has been presented here, and specific to the point I made earlier about what we called strategic 

sourcing—of trying to get product categories at a level in which 

small companies can compete effectively with large companies—

that is exactly what we are doing. 

But large companies have traditionally insisted as a quid pro quo 

for giving the contract and giving the discounts on this kind of 

practice. We are seeking to make some changes, the commitments 

in the existing code. I don’t think it needs a modification to the existing code. It needs continued implementation, which we are talking about. 

But can we do this alone? No. I think there are some manufacturer behaviors, in this case large manufacturer behaviors, that 

need to occur. And very frankly, with respect to all of our comments about the larger needs here—I ask where is the manufacturers’ code of conduct that applies to these kinds of circumstances as 

well? 

Senator if you would forgive me, just to correct the record, I am 

told I made the statement that we don’t accept administrative fees 

in my haste to respond to Senator DeWine’s time period. I would 

like to clarify that what I was trying to say was that we don’t accept up-front or marketing fees. It may have been Freudian, but we 

do indeed accept administrative fees. 

Senator KOHL. Mr. Hilal, before we move on, do you want to respond to Mr. Norling? 

Mr. HILAL. I am delighted. We are looking forward to this openness, to the fact that Premier has chosen to unbundle that package. 

We believe we can offer value to Premier. We look forward to working with them on that area. 

Senator KOHL. Does anybody else want to respond to this whole 

question of bundling? 

Mr. MCKENNA. I would like to offer one additional comment. 

Senator KOHL. Yes, Mr. McKenna? 

Mr. MCKENNA. We have also looked at—in our definition of a 

bundle, and time for debate, but it is linking one product to another to get a price discount. What Mr. Norling has described in 

this product category, we have also put on notice the supplier in 

question and are working towards unbundling those products so 

that we can open up this. But as Mr. Norling has stated, this has 

19

not been something that has been easy for the industry. Once 

again, our primary objective is to do no harm to those that we 

serve, so with that in mind, we are on a mission, as is our colleague here, to do similar activities. 

Mr. HILAL. Senator Kohl, if I may, if I may add just the comment 

that I truly believe that GPOs that comply with the spirit of what 

you are aiming at accomplishing also need the support from the 

dominant suppliers, because in some situations, they have no 

choice. Facing large organizations that are bundling, I believe that 

this has to be stopped at the source, also. So I believe there is a 

sincere attempt here that is moving in the right direction. 

Senator KOHL. Before we go back to Senator DeWine, I would 

like to get your comment, particularly Mr. McKenna, on administrative fees. Premier made an impressive commitment in this area, 

promising never to accept administrative fees higher than 3 percent from suppliers and standardized fees with respect to each 

product category. 

Mr. McKenna, Novation’s pledge on this issue was much more 

limited and only applied to clinical preference products. Mr. 

McKenna, I am sure you believe that anything Premier can do, you 

can do better. 

[Laughter.] 

Senator KOHL. So will you pledge to us today to follow Premier’s 

lead on administrative fees? Will you do that, Mr. McKenna? 

Mr. MCKENNA. Senator Kohl, we believe that—and I think it was 

made in one of the statements either you or Senator DeWine made, 

that multiple business models are good. They are good for competition. So our business model may be different than Mr. Norling’s. 

I think our primary objective, however, is to deliver the highest 

possible quality products at the lowest possible prices. 

I also noted in reviewing the panel’s testimony that our administrative fee percent, which has been declining over the past few 

years, was the exact same percent as noted in Mr. Norling’s testimony, 2.1 percent. 

And if I may, we agreed to lower fees and reduce all fees on clinical preference products to less than 3 percent. For all those categories we have analyzed, we have done that. We agreed to standardize our fees on our private label, and we have done that. And 

we agreed not to enter into any new contracts for clinical preference products that provide fees above 3 percent, and we have 

done that. 

So with that in mind, we think the system is fair and open. We 

are committed to fully implementing the principles that we have 

agreed to with the Subcommittee and we will continue to do so. 

Senator KOHL. Senator DeWine? 

Chairman DEWINE. Mr. McKenna, Mr. Norling, Mr. Hilal describes a kind of different world than the world you described. You 

tout your innovative technology programs as giving more access to 

small innovative companies, such as his. He describes a kind of medieval world where there is this castle and there is this moat, and 

he didn’t describe it as such, but I see in this moat some alligators 

and crocodiles and he just can’t get even close to the castle without 

getting eaten alive. So it is an entirely different world that I am 

hearing and Senator Kohl is hearing and the audience is hearing. 

20

How do you explain that to us? Why does the world look so different to Mr. Hilal than it does to you all? You are in the castle. 

The picture he paints is you are in the castle. You guys are, I 

guess, the knights in the castle and he is trying to get in. Why is 

the world so different? 

Mr. NORLING. Actually, Senator, if I may, I thought he was portraying us as the moat, frankly. 

[Laughter.] 

Mr. NORLING. I am not— 

Chairman DEWINE. I don’t know. I think you have got the drawbridge up, I think. 

Mr. NORLING. All right, fair enough. 

[Laughter.] 

Chairman DEWINE. You have got the drawbridge up. I think he 

would like the drawbridge down. 

Mr. NORLING. I would respectfully submit that the drawbridge is 

certainly on the way down, if not totally down. 

[Laughter.] 

Chairman DEWINE. Okay. Well, he wants it all the way down. 

Now, we have all had enough fun, but why is the world different, 

in all seriousness? Why are we seeing these different stories here 

and where are we going? 

Mr. NORLING. Senator, let me go to a fundamental point here. It 

has always been the case that if a hospital wants to purchase a 

physician preference item off contract, it can, and I can tell you, 

with the implementation of our code of conduct, there are no consequences from Premier if it does so. So I think that is a significant 

step associated with the code of conduct. 

But beyond that, in 1997— 

Chairman DEWINE. If they want to, technically, they can do it. 

Mr. NORLING. If the hospitals want to buy, they can. There is 

nothing that Premier does, as of this point, that restricts them 

from doing so. I think that is a fundamental point. 

Chairman DEWINE. Okay. 

Mr. NORLING. I think the other point is—what is Premier doing 

to encourage access? And I would tell you that it was in 1997 that 

we put our technology breakthrough clause in place which said, 

even if there is an existing contract, perhaps a sole-source with one 

of these big players, someone with innovative technology could access Premier resources, have that technology assessed, and be 

given the absolute opportunity for a contract. 

Now, that is one example, I think, of a very, very aggressive 

process by Premier to welcome this sort of thing. I am not suggesting we have done absolutely everything they could possibly 

have done, and I will suggest that we will continue to work hard 

on this. These not-for-profit hospitals out there are under great 

pressure. If there is a new technology that either is going to help 

with cost or quality for patients, it is our obligation to make it accessible, and we are working very hard at doing that. 

Chairman DEWINE. But why do you think he is seeing the problem? If you were in his position, why do you see the problem? 

Mr. NORLING. Number one, I am speaking for Premier, and so I 

will let Mr. McKenna make his points, and frankly, there are a lot 

of others who could very well be here speaking to the moats they— 

21

Chairman DEWINE. You are not helping me understand it. Mr. 

McKenna? 

Mr. MCKENNA. Let me try to be brief but focused on responding. 

First of all, I think we have got some bridges built and they are 

down. I am not sure that we have made them visible to all the companies that need to have access. I think that is a tribute, however, 

and comment to the work that we are doing and the principles that 

the Subcommittee asked us to implement. 

Once again, our program is voluntary. If a clinician wants something and a hospital wants to buy it, they go buy it. It happens 

every single day. 

But more importantly, I think, in particular Mr. Said’s company, 

timing is always an issue. But since we have implemented the 

principles, we have awarded through our amended agreements 

process one product contract on one item, and then we have several 

others in motion. We have started to build a relationship with the 

company, we have met several times, and I sense it is a speed 

issue. Our commitment would be to accelerate to a degree possible 

building this relationship and putting products on contract that our 

clinicians find advantageous to them and we are committed to do 

so. 

If you look at the access points now as far as building bridges 

across the moat, there is a technology forum that allows any supplier, whether they are on contract or not, to post their products, 

and we have trained all of our folks on that that touch contracting. 

Mr. NORLING. Senator, can I give you a specific response with regard to Applied Medical— 

Chairman DEWINE. Sure. 

Mr. NORLING. —because I think Mr. Hilal— 

Chairman DEWINE. And then we want to hear from the guy trying to get in the castle. 

Mr. NORLING. Absolutely. On December 12 of 2002, we discussed 

all of Applied Medical’s other products other than the one we already had on contract. We told the company about our tech breakthrough program and how to submit reviews for those products. 

The same day, another Mr. Hilal, their senior vice president, emailed a Premier staff member thanking her and indicating an intent to submit Applied’s products. We sent the company the whole 

process of how to do that. 

So this isn’t an effort—this isn’t us holding back. This is us being 

straightforward and saying, here is how you access Premier, even 

though we have a contract in place. I have got Federal Express receipts, very frankly, displaying this process. So I am not trying to 

create a controversy here other than to say, this an example, with 

one of the members testifying here, where we have gone out of our 

way to say, here is how you can access this market via our tech 

breakthrough process. 

Mr. HILAL. Senator, if I may answer— 

Chairman DEWINE. Yes. 

Mr. HILAL. Actually, we had that offer, and later on, Premier individuals advised us specifically to not pursue that route for two 

reasons. One is because it is very lengthy. We are good at development. We are fast at development. But if delays take two and 3 

years at a time, our advantage is gone. Eventually— 

22

Chairman DEWINE. Two or 3 years? 

Mr. HILAL. Two or 3 years of getting into an account or getting 

a technology to take hold. We have to implement— 

Chairman DEWINE. What takes two or 3 years? 

Mr. HILAL. It takes two to 3 years usually to launch a new product and get the clinical results and get the clinical papers and the 

efficacy established, and then from that standpoint, the applications to get into these kinds of exceptional clinical. So from that 

standpoint, Premier advised us, Premier individuals advised us to 

hold off on that because they felt that the GelPort was already established. It had enough clinical papers behind it and they wanted 

to get it on a contract immediately, and that happened that way. 

So we did not have to take the longer route. 

Now, interestingly enough, as we got the GelPort in, one thing 

that we added to it was trocars, additional devices used with the 

procedure that happened to be on other sole-source contract. Now, 

we added them gratis. We added them with no additional cost to 

that device. I submit to you, Senator, that today, Mr. Chairman, 

that today, we see more hospitals, especially university hospitals, 

literally throwing away $300 worth of value for fear of violating 

their contracts and their compliance, and then they turn around to 

Johnson & Johnson and buy these same equivalent products from 

them. 

And so the market is really not that open except to the niche 

products. Our issue is not whether or not we can go into niche markets, where our technology is superior, and sometimes the only 

technology. We would like to participate in the larger markets 

where we can bring not only innovation, but value and savings. We 

can make a difference if we are only allowed in. 

Right now, if I may push the analogy one more step, we are allowed into the hamlets. We are not allowed into the castle. 

Mr. BROWN. Chairman DeWine— 

Chairman DEWINE. Mr. Brown? 

Mr. BROWN. If I may, sir. Thank you. To answer your question 

more directly about why is there a moat, the moat is really a direct 

result of the billions of dollars worth of administrative fees that are 

at stake within the GPO systems as a whole. Self-regulation is 

akin to putting the fox in charge of the henhouse. We really need 

your help in allowing equal and fair access to all companies because of this administrative fee issue. That is the moat. We can’t 

get over it. 

Mr. HEIMAN. Senator DeWine? 

Chairman DEWINE. Well, how would you do that? 

Mr. BROWN. Well, I think there are a number of ways. I will give 

you an example. There is one GPO by the name of Health Trust 

that has taken—made the decision to create multi-source contracts, 

not dual-source. From the eyes of a small vendor, a dual-source 

contract is no better for the example I used earlier. But if you use 

a multi-source contract and allow all of the players to play, if you 

are going to charge a fee, if there is a better way, if the GPOs believe that they can get better pricing without allowing all vendors 

to play, then let them do that without charging the fee. But if you 

are going to charge the fee, everyone should have equal access. 

Chairman DEWINE. Mr. Heiman? 

23

Mr. HEIMAN. Senator DeWine, I have a somewhat different perspective. When I became President of our company, we were approximately a $70 million company and we were competing against 

giants like Baxter, Johnson & Johnson, and Kimberly–Clark, and 

I believe that the smallest of these three was Baxter International, 

with sales of about $5 billion. I don’t think any of these groups 

have ever been known for their kind and compassionate marketing 

and sales tactics. 

But at the end of the day, this really seems to me to be a story 

of everyday America. Some people won, some people didn’t win, 

and those that didn’t win just aren’t happy about it. And what I 

have always told my people is that if you didn’t win, don’t come to 

me and start complaining and griping. Start figuring out how you 

need to win. 

So we started out as a small company. We worked hard. We built 

better mousetraps and we earned the opportunity. We listened to 

our customers. We improved and we gained access over time and 

achieved POs. I think in doing that, we have created a win-win relationship that really is good for everybody in the industry. So that 

has been my perspective as a small supplier, small manufacturer 

who has been able to grow in this industry. 

Mr. HILAL. Mr. Chairman, if I may just add one comment. 

Chairman DEWINE. Sure. 

Mr. HILAL. I truly believe that the person that has to win is the 

patient. Eventually, we are all in this very special business in 

order to help patients get better medicine, more available medicine, 

more affordable medicine. It is not enough for one of us to have a 

good year, to make $1 million, to buy a bigger home. There is an 

obligation that comes with this industry. We are in it for a special 

reason. We are caretakers, whether we are making a product or operating on a patient, and my feeling is that we tend to forget that 

sometimes in a competitive situation. But the fact is, we still have 

to look for those results that give the best product at the best price. 

Chairman DEWINE. Senator Kohl? 

Senator KOHL. Ms. Weatherman, you testified before our Subcommittee when we first looked at the GPO issue a year ago. So 

today, what is your assessment of impact of the GPO’s new codes 

of conduct and the ability of new and innovative medical device 

manufacturers to gain access to the marketplace? 

Ms. WEATHERMAN. I think if you look at venture capital investing over this time period over the last 12 months, it has declined 

in the medical device arena. In 2001 and 2002, the investment rate 

per quarter was roughly half-a-billion per quarter, and so far this 

year, the average has been closer to half of that. 

It is a multi-factorial equation as to why the investment has 

dropped, but my point is, having an additional sort of whimsical 

barrier that the judgment that key people within GPOs can make 

in the decision making process to allow a new technology to get on 

contract, to not get on contract, is another barrier and another factor that increases the risk for VCs to want to invest in technology 

before it has gotten to market. So it is a factor. How powerful a 

factor versus other factors, it is hard to measure. But my overall 

point is, it is a factor that is not conducive, in our experience and 

24

the experience of the companies we have invested in, to furthering 

innovation. 

Senator KOHL. What more, in your opinion, do we need to do to 

encourage people in your industry to believe that this sector is open 

to new, innovative competitors? 

Ms. WEATHERMAN. It seems to me either the exemption to the 

antitrust should be rescinded for GPOs or that the code of conduct 

is actually put into law or a form where we can very clearly see 

that it is going to be adhered to across the entire universe of GPOs, 

not sort of depending on the interpretation of different significant 

players, which I think, as you have heard the testimony, there is 

a difference in interpretation between the two leaders. 

I think an even playing field would be far better. Having the 

intermediary aspect of deciding what is innovative technology and 

what is not would be extremely positive, for that not to be the purview of the GPOs or, for that matter, the large manufacturers. Let 

the customers decide which products they want to purchase and 

have the full basket available to them. 

Senator KOHL. Mr. Everard, do you want to make a comment? 

Mr. EVERARD. Sure. I would agree with that completely. I think 

one of the elements that we are missing is that the GPO product 

councils do not have—the individuals on those product councils, 

where there may be 25 individuals, none of those individuals has 

a fiduciary responsibility to all 1,500 or 2,000 hospitals or whatever 

it is. And for them to make those decisions, in my mind, seems to, 

in some ways, usurp the authority of the clinical caregivers in 

those individual hospitals. So if we could take that out, it would 

be very helpful. 

The other thing that I would like to say at this point is that as 

we discuss GPOs and the safe harbor, we have really got only two 

choices. That is, we either eliminate the safe harbor and return 

this industry to a level playing field where everybody gets the same 

opportunity to compete for business, one small or medium-size account at a time, where we don’t completely change the landscape 

of competition, or if we want to keep the safe harbor, then we are 

going to have to implement some very, very significant oversight 

and there are going to have to be rules for participation and penalties for breaking those rules. That is the only way that we will 

be able to keep all of this fair and above board, and that is the only 

way that patients, caregivers, and taxpayers are going to feel comfortable with the system that has been created. 

Senator KOHL. Mr. Brown? 

Mr. BROWN. Yes, sir. I would like to say—to address this issue 

of product councils. I think if you look at this on one hand, it looks 

like a fair way to assess which company should be allowed to participate in the GPO contract. But in actuality, what the product 

councils generally reflect is the standard market share that is existing today out in the marketplace. And so as a result of that, the 

little guy is still generally excluded from fair access. So, somehow, 

that has to be addressed, as well. 

I would like to address a comment made by Mr. Norling and that 

is the new technology assessment program does help small companies, and my company is a good example of that. And while we are 

very encouraged by this and that we have been selected by Premier 

25

to participate in their program, I would also, on the other side of 

the ledger, like to say that this only reflects a small percentage of 

our product line. It only reflects those products that the GPO has 

considered extremely new and innovative. While I have a complete 

large sector of products to be able to market to GPOs, I am still 

locked out from that viewpoint. 

Mr. NORLING. Senator, if I may respond to that—the product 

council process, I think, is an interesting one because you can’t 

bring representatives of 1,500 hospitals together to do that. And if 

you are asking each hospital to effectively put that sort of process 

in place, we contract for 300,000 different products. So I think of 

the mass of attempting to deal with that. 

How is this effectively and fairly done is the question that is 

raised here, and I don’t want to get into a debate here, but that 

is why we have chosen to go outside to, in our case, ECRI to do 

the technology assessment of products. They offer clear standards 

in terms of what they do and how they do it. 

So our product councils are given clinical results from our databases in terms of where they exist, and where we have good insights. They are given reviews from a number of outside consulting 

firms, including ECRI. That, in turn, is brought to these councils. 

Now, frankly, these folks are a great representation of the 1,500 

hospitals and clinicians trying to make a difference for patient 

care. I am not saying that they perfectly represent every interest, 

and very frankly, that is why the idea that choice does exist is a 

very important element. But at some point, you need a resource to 

effectively screen this incredibly high volume, bring objective data 

to the process, and then a representative group to make a decision. 

Now, if that decision were enforced by Premier arbitrarily on 

hospitals, on clinicians, I think it would be a good point. But that 

is indeed not the case, and I think I have submitted that. 

You have to have a mechanism to do the best job you can to get 

fair representation of the patient and the clinicians into the process. I am very open to ideas of what might be better, but I assure 

you, having individual hospitals putting processes in place to assess 300,000 line items is not the answer. 

Senator KOHL. Mr. McKenna, Novation recently informed the 

Subcommittee that several plainly anti-competitive contract terms 

had now been removed from all of its contracts. These contract 

terms forbid Novation hospitals from even evaluating competitive 

products or forbid a Novation hospital from purchasing any products that competed with products sold in the bundled Opportunity 

Spectrum Program. While we are glad that Novation has finally 

seen fit to eliminate these contract terms, we were astounded that 

such plainly anti-competitive provisions were found in Novation’s 

contracts in the first place. 

Mr. McKenna, should the fact that these contract terms were 

contained in Novation contracts for many years cause us concern 

that Novation might well revert to these and other similar anticompetitive practices should the spotlight of our oversight ever be 

lessened? 

Mr. MCKENNA. No, Senator Kohl, to the contrary. Broadly, and 

then specifically, let me address your concern. 

26

We have gone through and taken each of the operating principles. We have put a management-level person responsible for 

each principle and we have gone through and trained every employee that has anything to do with contracting. So we have made 

a commitment, which is a long-term commitment, to make systemic 

changes to our organization culture to, on a daily basis, make this 

a part of everyone’s work. 

In regard to the former language that has now been removed, at 

the time we put those contracts in place, the driver really came 

from the for-profit side and we were attempting to make sure we 

stayed level with them relative to value. And so we packaged our 

stand-alone contracts that were—they were put in place one at a 

time and then we offered additional value if the customer on their 

own elected to participate in those contracts. 

So just a perspective as to how we got to where we are. But I 

think a testament to the principles that we have all agreed to, we 

have now taken the steps to eliminate those issues and have communicated that to both the supplier community and certainly to 

our membership. 

Senator KOHL. Mr. Norling, will you commit to review Premier’s 

contracts for language that could be considered or construed as 

anti-competitive and report back to this Committee that you have 

indeed done that review? 

Mr. NORLING. I will absolutely commit to that. I am not aware 

of any language that can be construed as anti-competitive, but we 

will make a systematic review of our contract terms and conditions. 

I will indicate, Senator, that typically that is a negotiating point 

company-by-company, offering-by-offering. So the terms and conditions, apply to not one contract, but a whole series of them. But 

I will look at our standard and I will make sure that, with regard 

to our practices, that guidelines are in place to assure there are no 

anti-competitive elements to it. 

Senator KOHL. Any other comments from the panel? Yes, sir, Mr. 

Hilal? 

Mr. HILAL. Senator, if I may, more important than us recognizing that the drawbridge is down, it is important that hospitals 

themselves know, because what lingers behind any of these practices is an impression that stays around for years, a misperception 

of what hospitals can and cannot do, unfortunately fueled by the 

large or dominant suppliers. 

It behooves us when we change these things to strongly urge the 

GPOs to communicate to their members that things have changed. 

Unless and until they do that, things do not change in the field. 

Thank you. 

Senator KOHL. Mr. Chairman? 

Chairman DEWINE. Mr. Everard, if the GPOs fail to win savings 

the way you say they do, why don’t the hospitals just leave the 

GPOs? 

Mr. EVERARD. That is a very good question. 

Chairman DEWINE. They understand the business, don’t they? 

Mr. EVERARD. That is one of the problems that we have. The arguments of the GPOs is that if they went away, immediately, hospitals would face higher prices. I believe that that argument is—

the logic of that argument is really based more upon education 

27

than economics. What I mean by that is that the current pricing 

structures of GPOs become known the day that they hit the street. 

They become almost common knowledge. It would be very difficult 

and a very brazen move on the part of any major manufacturer to 

raise prices unilaterally, knowing that the prices are already out 

there, without having a good reason to do it. 

In general, hospitals have not devoted much effort to managing 

their supply chains. They have chosen in many cases to outsource 

that decision making process to GPOs. As a result, they are now, 

years later, left defenseless. Within those hospitals, there simply is 

not a supply chain expert who would be able to properly assess the 

value of the GPO. 

The other part of this is that in most GPO relationships, hospitals receive a substantial rebate check at the end of the year. The 

rebate is ostensibly money that is left over from GPO operations 

expenses that is now returned back to the shareholder hospitals. 

The CEOs of hospitals count on those checks. Some of them are 

quite large, $1 million. They are wondering what they would do 

without that $1 million if that relationship and the rebate check 

went away. So they are almost held hostage by the need to get the 

rebate. 

What many of them don’t understand is that a number of hospitals, smaller hospitals, small IDNs, have gotten together and 

gone out and achieved price savings on their own that take their 

pricing and make it 13 percent or more below the prices that are 

being paid by hospitals who are members of the GPO. So there are 

models out there that have worked. Hospitals are able to move 

away. But the hospitals generally don’t understand that that option 

is available to them and they are taught to fear going out on their 

own. Any time a hospital goes out and fails because it didn’t do it 

the right way, the GPOs publicize that to all the other hospitals 

to make sure that everybody is afraid of making that move. 

So one of the issues that we face in this industry is that the hospitals simply don’t have the knowledge or understanding of real 

supply chain, and let me give you an example. Mr. Norling referred 

to a term called ‘‘strategic sourcing.’’ The way that GPOs use strategic sourcing is completely different than the way that it is used 

in manufacturer outside of health care. 

One of the things I find fascinating is the dichotomy between the 

way that large manufacturers, and small ones, for that matter, in 

health care go about buying their products from their raw materials suppliers and then the way that they turn around and sell 

them to hospitals. It is a completely different method and completely different model and I would like to know why that is and 

I would like to encourage hospitals to adopt that model for themselves. 

Chairman DEWINE. I want to thank the panel very much. We 

have actually, as you can see, survived without a roll call, which 

they keep telling us is going to occur at any moment. We have survived. I thank you very much for your testimony. 

The biggest thing I take away from this hearing is that people 

in different parts of the industry see a different world. That was 

brought out very well by the testimony. GPOs feel as though they 

are very open to new products. Mr. Heiman, as a supplier, certainly 

28

supports that view in very eloquent testimony today. But two other 

suppliers supported by Mr. Everard and Ms. Weatherman say that 

the process is too uncertain, it is too burdensome. Simply put, they 

are locked out. They are outside the castle. 

You know, this is a big industry. We can’t expect complete agreement and uniformity within an industry, but these differences are, 

I must say, very stark. It suggests to me that this Subcommittee 

has more work to do. We must continue our oversight, and so I intend to continue this oversight. We will continue to look at this industry. We will continue to have oversight, and we will, I expect, 

have a hearing in the future again. 

I would think it is fair to say that our work in this area is not 

complete, but we appreciate you all coming in. You have given 

some very valuable testimony and the hearing is adjourned. Thank 

you very much. 

[Whereupon, at 12:35 p.m., the Subcommittee was adjourned.] 

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

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