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85–986 PDF 2003

S. HRG. 107–899

HOSPITAL GROUP PURCHASING: LOWERING

COSTS AT THE EXPENSE OF PATIENT HEALTH

AND MEDICAL INNOVATIONS?

HEARING

BEFORE THE

SUBCOMMITTEE ON ANTITRUST, 

BUSINESS RIGHTS, AND COMPETITION

OF THE

COMMITTEE ON THE JUDICIARY 

UNITED STATES SENATE

ONE HUNDRED SEVENTH CONGRESS

SECOND SESSION

APRIL 30, 2002

Serial No. J–107–76

Printed for the use of the Committee on the Judiciary

(

(II)

COMMITTEE ON THE JUDICIARY 

PATRICK J. LEAHY, Vermont, Chairman 

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 

MARIA CANTWELL, Washington 

JOHN EDWARDS, North Carolina 

ORRIN G. HATCH, Utah 

STROM THURMOND, South Carolina 

CHARLES E. GRASSLEY, Iowa 

ARLEN SPECTER, Pennsylvania 

JON KYL, Arizona 

MIKE DEWINE, Ohio 

JEFF SESSIONS, Alabama 

SAM BROWNBACK, Kansas 

MITCH MCCONNELL, Kentucky 

BRUCE A. COHEN, Majority Chief Counsel and Staff Director 

SHARON PROST, Minority Chief Counsel 

MAKAN DELRAHIM, Minority Staff Director 

SUBCOMMITTEE ON ANTITRUST, BUSINESS RIGHTS, AND COMPETITION

HERBERT KOHL, Wisconsin, Chairman 

PATRICK J. LEAHY, Vermont 

RUSSELL D. FEINGOLD, Wisconsin 

CHARLES E. SCHUMER, New York 

MARIA CANTWELL, Washington 

JOHN EDWARDS, North Carolina 

MIKE DEWINE, Ohio 

ORRIN G. HATCH, Utah 

ARLEN SPECTER, Pennsylvania 

STROM THURMOND, South Carolina 

SAM BROWNBACK, Kansas 

VICTORIA BASSETTI, Majority Chief Counsel 

PETER LEVITAS, Minority 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 ................................ 4

Hatch, Hon. Orrin G., a U.S. Senator from the State of Utah ............................ 68

Kohl, Hon. Herb, a U.S. Senator from the State of Wisconsin ............................ 1

Leahy, Hon. Patrick J., a U.S. Senator from the State of Vermont .................... 8

Schumer, Hon. Charles E., a U.S. Senator from the State of New York ............ 20

Thurmond, Hon. Strom, a U.S. Senator from the State of South Carolina ........ 69

WITNESSES 

Barrett, Trisha, BSN, Assistant Director, Materiel Services, Value Analysis 

Facilitator, University of California, San Francisco Medical Center, San 

Francisco, California ............................................................................................ 21

Detlor, Lynn R., Principal, GPO Concepts, Inc., San Diego, California .............. 40

Goldstein, Mitchell, M.D., Neonatologist, Citrus Valley Medical Center, West 

Covina, California ................................................................................................ 27

Kiana, Joe E., President and Chief Executive Officer, Masimo Corporation, 

Irvine, California .................................................................................................. 24

McKenna, Mark, President, Novation, LLC, Irving, Texas .................................. 11

Norling, Richard A., Chief Executive Officer, Premier, Inc., San Diego, California ..................................................................................................................... 9

Weatherman, Elizabeth A., Vice Chair, Medical Group, National Venture 

Capital Association and Managing Director, Warburg Pincus, LLC, New 

York, New York .................................................................................................... 42

QUESTIONS AND ANSWERS 

Responses of Mark McKenna to questions submitted by: 

Senator DeWine ................................................................................................ 76

Senator Hatch ................................................................................................... 87

Senator Leahy ................................................................................................... 71

Responses of Richard A. Norling to questions submitted by: 

Senator Hatch ................................................................................................... 87

Senator Leahy ................................................................................................... 71

Responses of Joe E. Kiana to questions submitted by Senator Leahy ................ 75

SUBMISSIONS FOR THE RECORD 

Brown, Thomas V., Executive Vice President, Biotronik, Inc. ............................. 95

Cohen, Gary, President, BD Medical Systems, Becton Dickinson and Company ....................................................................................................................... 90

ECRI, Jeffrey C. Lerner, President and Chief Executive Office, Plymouth, 

PA .......................................................................................................................... 110

Emory University School of Medicine, Augusto Sola, MD, Professor of Pediatrics and Obstetrics and Gynecology, Director, Division of Neonatal-Perinatal 

Medicine, Atlanta, Georgia, letter ...................................................................... 184

Engibous, Doris, President, Nellco Tyco Healthcare, Pleasenton, CA, letter ..... 163

Hazen, Paul, President and CEO, National Cooperative Business Association . 157

Hipps, Julia Naumhein, RN BS ............................................................................. 135

Holden, Larry, President, Medical Device Manufacturers Association ............... 144

Muris, Hon. Timothy, Chairman, Federal Trade Commission and Hon. 

Charles James, Assistant Attorney General, Letter ......................................... 142

Pevco Systems International, Inc., Frederick M. Valerino, Jr., President .......... 169

Saint Vincent, Catholic Medical Centers, Daved J. Campbell, President, Chief 

Executive Officer .................................................................................................. 183

Page

IV

Scanlon, William J., GAO, Director, Health Care Issues ..................................... 112

Shaw, Thomas J., President & CEO, National Cooperative Business Association ........................................................................................................................ 172

(1)

HOSPITAL GROUP PURCHASING: LOWERING 

COSTS AT THE EXPENSE OF PATIENT 

HEALTH AND MEDICAL INNOVATIONS? 

TUESDAY, APRIL 30, 2002

UNITED STATES SENATE, 

SUBCOMMITTEE ON ANTITRUST, BUSINESS RIGHTS, 

AND COMPETITION, 

COMMITTEE ON THE JUDICIARY, 

Washington, D.C. 

The committee met, pursuant to notice, at 2:54 p.m., in room 

SD–226, Dirksen Senate Office Building, Hon. Herb Kohl, chairman of the subcommittee, presiding. 

Present: Senators Kohl, Leahy, Schumer, and DeWine. 

OPENING STATEMENT OF HON. HERB KOHL, A U.S. SENATOR 

FROM THE STATE OF WISCONSIN 

Chairman KOHL. This hearing will come to order. I held it for 

Senator DeWine, who is unavoidably detained for just a few minutes and he requested that we proceed. 

Today, this subcommittee turns its attention to an issue affecting 

the health and safety of every American who has ever or will ever 

need treatment at a hospital, in other words, every one of us. This 

issue is how hospitals form buying groups to purchase nearly everything used by hospitals, everything from pacemakers to thermometers, from surgical devices and CAT scanners to needles and 

band-aids, and how these groups affect the cost and quality of patient health and medical innovation throughout our country. 

These guying groups, known as group purchasing organizations, 

or GPOs, are at the nerve center of our health care system. Because they determine what products are in our hospitals, they directly affect patient health and safety. Because they control more 

than $34 billion in health care purchases, they impact the cost we 

all pay for our health system. Because they represent more than 

75 percent of the nation’s hospital beds, they are a powerful gatekeeper who can cut off competition and squeeze out innovation. 

Gaining a GPO contract is essential for any medical equipment 

supplier. GPOs determine which medical devices will be used to 

treat us when we are sick or injured, which manufacturers will 

survive and prosper, and, in fact, which ones will fail. It does not 

do any good to invent the next great pacemaker or safety needle 

if you cannot get it to patients because a GPO stands in your way. 

With that kind of power comes responsibility. But too often, it 

seems that GPOs have failed to serve as honest brokers seeking to 

2

serve the best interests of hospitals and patients. We are going to 

detail three major concerns. 

First, conflicts of interest raise the specter of critical health care 

decisions being influenced by financial ties to suppliers. We have 

heard startling allegations of scandal and conflicts of interest that 

have infected the GPOs. Premier’s chief executive received millions 

of dollars worth of stock options from a company with a contract 

supplying pharmaceutical services to Premier hospitals. His response, that he recused himself from contracting decisions with respect to the company at issue and that his financial interests were 

disclosed and approved by Premier’s board, is good, but not good 

enough. He should have severed all ties to the company when he 

joined Premier. 

On another occasion, Premier steered business to a pharma- ceutical supply company and thereby helped turn its $100 investment into a stake worth $46 million last year. Novation today demands that medical suppliers it contracts with sell their products 

on a for-profit e-commerce site in which Novation has a substantial 

interest and in which many of Novation’s senior executives hold 

personal stakes. 

These practices, in our judgment, are appalling and should not 

be tolerated. We cannot accept a situation where a decision on 

which medical device will be used to treat a critically ill patient 

could conceivably or even theoretically turn on the stock holdings 

of a GPO executive. 

Second, contracting practices may reduce competition and innovation in health care and narrow the ability of physicians to choose 

the best treatment for their patients. In one case we know of, a 

hospital denied a physician permission to use a vital pacemaker for 

a patient on the operating table, but not yet anesthetized, and all 

because there was no GPO contract for that particular pacemaker. 

The pacemaker that was on contract that the hospital required him 

to use was in the midst of an FDA investigation into its effectiveness and safety. Hospitals have failed to buy safety syringes which 

prevent accidental needle sticks because doing so would mean buying off the GPO contract. As a result, nurses have suffered easily 

preventable injuries and have developed HIV and hepatitis. 

GPO contracting policies have created a system that keeps many 

good products out of circulation while enabling large manufacturers 

to entrench their market position. Practices such as sole sourcing, 

high commitment levels, which require a hospital to purchase as 

much as 90 percent of a product from one company in order to get 

the maximum discount, and bundling, which gives hospitals extra 

discounts and bonuses for buying a group of products, can seriously 

damage the ability of doctors to choose the best products for their 

patients and for competitive manufacturers to survive and innovate. 

Third, the General Accounting Office today revealed that these 

buying groups, whose goal, after all, is to save money, do not always get the best deal. We all support the basic purpose of GPOs, 

to hold down health care costs with volume purchasing. But the 

GAO study raises serious doubts as to whether GPOs are doing a 

good enough job in achieving this goal. In many cases, hospitals 

can get a better deal if they go outside the GPO. It seems like 

3

sometimes GPOs may produce the worst of both worlds, little savings and fewer choices. 

We, therefore, call on the entire GPO industry to work with us 

to create a code of conduct that will address these ethical problems 

and contracting issues. The industry should clean up its own act, 

and we believe they want to, but without quick and effective selfregulation, we would have to consider Congressional action. 

In addition, Senator DeWine and I are today writing to the Justice Department and the Federal Trade Commission to request that 

they reexamine their guidelines that protect GPOs from Federal 

antitrust scrutiny in most cases. 

Our goal should be to ensure that the GPO system truly achieves 

cost savings in the cost of medical equipment and that these savings do not come at the expense of patient health and medical innovation. We thank our witnesses for coming here to testify and we 

look forward to hearing their views. 

[The prepared statement of Senator Kohl follows:] 

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

Today our subcommittee turns its attention to an issue affecting the health and 

safety of every American who has ever, or ever will, need treatment at a hospital—

in other words, all of us. This issue is how hospitals form buying groups to purchase 

nearly everything used by hospitals—everything from pacemakers to thermometers, 

from surgical devices and CAT scanners to needles and Band-Aids—and how those 

groups affect the cost and quality of patient health and medical innovation. 

These buying groups—known as group purchasing organizations or GPOs—are at 

the nerve center of our health care system. Because they determine what products 

are in our hospitals, they directly affect patient health and safety. Because they control more than $34 billion in health care purchases, they impact the cost we all pay 

for our health system. Because they represent more than 75 percent of the nation’s 

hospital beds, they are a powerful gatekeeper who can cutoff competition and 

squeeze out innovation. Gaining a GPO contract is essential for any medical equipment supplier. GPOs determine which medical devices will be used to treat us when 

we are sick or injured, which manufacturers will survive and prosper—and which 

ones will fail. It doesn’t do any good to invent the next great pacemaker or safety 

needle if you can’t get it to patients because the GPO stands in your way. 

With that kind of power comes responsibility. But too often it seems GPOs have 

failed to serve as honest brokers seeking to serve the best interests of hospitals and 

patients. 

We have three main concerns. 

First: conflicts of interests raise the specter of critical health decisions being influenced by financial ties to suppliers. We have heard startling allegations of scandal 

and conflicts of interests that have infected the GPOs. Premier’s chief executive received millions of dollars worth of stock options from a company with a contract supplying pharmaceutical services to Premier hospitals. His response—that he recused 

himself from contracting decisions with respect to the company at issue and that 

his financial interests were disclosed, and approved by, Premier’s Board—is good, 

but not good enough. He should have severed all ties to the company when he joined 

Premier. On another occasion, Premier steered business to a pharmaceutical supply 

company and thereby helped turn its initial $100 investment into a stake worth $46 

million dollars last year. Novation today demands that medical suppliers it contracts with sell their products on a for-profit e-commerce site in which Novation has 

a substantial interest and in which many of Novation’s senior executives hold personal stakes. 

These practices are appalling and cannot be tolerated. We cannot accept a situation where a decision on which medical device will be used to treat a critically ill 

patient could conceivably or even theoretically turn on the stock holdings of a GPO 

executive. 

Second: contracting practices may reduce competition and innovation in health 

care and narrow the ability of physicians to chose the best treatment for their patients. In one case we know of, a hospital denied a physician permission to use a 

vital pacemaker for a patient on the operating table but not yet anaesthetized—all 

because there was no GPO contract for that pacemaker. The pacemaker that was 

4

on contract—that the hospital required him to use—was in the midst of an FDA investigation into its effectiveness and safety. Hospitals have failed to buy safety syringes which prevent accidental needle sticks because doing so would mean buying 

off the GPO contract. As a result, nurses have suffered easily preventable injuries 

and have developed HIV and Hepatitis. 

GPO contracting policies have created a system that keeps many good products 

out of circulation while enabling large manufacturers to entrench their market position. Practices such as sole sourcing, high commitment—levels—requiring a hospital 

to purchase as much as 90 percent of a product from one company in order to get 

the maximum discount—and bundling—giving hospitals extra discounts and bonuses for buying a group of products—can seriously damage the ability of doctors 

to choose the best products for their patients and for competitive manufacturers to 

survive and innovate. 

Third: the General Accounting Office today revealed that these buying groups—

whose goal is to save money—don’t always get the best deal. We all support the 

basic purpose of GPOs—to hold down health care costs with volume purchasing. But 

the GAO study raises serious doubts as to whether GPOs are doing a satisfactory 

job achieving this goal. In many case, hospitals can get a better deal if they go outside the GPO. It seems like sometimes GPOs may produce the worst of both 

worlds—little savings and fewer choices. 

We therefore call on the entire GPO industry to work with us to create a code 

of conduct that will address these ethical problems and contracting issues. The industry should clean up its own house, and we believe they want to. But without 

quick and effective self-regulation, we would have to consider congressional action. 

In addition, Senator DeWine and I are today writing to the Justice Department and 

Federal Trade Commission to request that they re-examine their Guidelines that 

protect GPOs from Federal antitrust scrutiny in most cases. 

Our goal should be to ensure that the GPO system truly achieves cost savings in 

the cost of medical equipment, and that these savings do not come at the expense 

of patient health or medical innovation. We thank our witnesses for testifying today 

and look forward to hearing their views. 

Chairman KOHL. I call now on my colleague and the ranking 

member of this subcommittee, Senator Michael DeWine. 

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

THE STATE OF OHIO 

Senator DEWINE. Mr. Chairman, thank you very much. Let me 

begin by saying that I am also quite disturbed by some of what we 

have learned in our investigation of group purchasing organizations. 

There is certainly some anecdotal evidence and some indication 

that GPOs in some cases have strayed from their original purpose 

of allowing hospitals to work together to limit costs. We clearly 

have some specific incidents that we need to explore today, and I 

know we will, and we need to decide how to prevent them in the 

future. 

In addition, we need to examine the enormous changes in the 

medical supply marketplace and the changes that have occurred in 

GPOs. As medical costs have skyrocketed, many hospitals struggle 

on a daily basis. They struggle to reduce costs while attempting to 

maintain high quality health care 

GPOs have become an increasingly important part of this effort 

to reduce costs. However, I think it is fair to say that due to consolidation and other changes in the GPO system, GPOs today look 

very different than the system that was originally planned and contemplated. 

Some reports indicate that hospitals channel as much as 70 to 

80 percent of their non-labor expenditures through GPOs. Within 

that 70 to 80 percent of purchasing, two large GPOs, Premier and 

Novation, handle purchasing for over 60 percent of the nation’s 

5

hospitals. This level of concentration gives these two firms a very 

important role in the medical device market, and their buying arrangements have a tremendous impact on the market. 

This importance is magnified by the fact that Premier and Novation will often have only one or two suppliers on contract for a 

given product or product category. For the one or two suppliers 

who are able to make a deal with them, they are virtually assured 

a very big market for their products. The others, however, will face 

real problems in gaining access to a large or significant segment of 

the market. 

As long as these contracting and purchasing decisions are based 

on a reasonable mix of quality and cost factors, these outcomes are 

not necessarily troubling, and we have been told that, often, health 

practitioners do play a significant role in determining which products are placed on GPO contracts, a role which helps to assure that 

product quality and patient care are part of the decision. 

However, there are some indications that other factors have 

sometimes been considered, factors that have more to do with the 

financial health of the GPO than the health of the patient. For example, information provided to this subcommittee demonstrates 

that executives of some GPOs have a financial interest in companies that have been granted GPO contracts. Obviously, it is completely unacceptable for private financial interests to play any role 

in contracting decisions. 

More broadly, I am concerned about the extensive range of businesses and programs run by GPOs and the manner in which they 

are funded. Approximately 15 years ago, Congress gave the GPOs 

an exemption from the anti-kickback laws in order to allow them 

to collect administrative fees from suppliers. But the result of that 

decision is a system in which some believe the GPOs have conflicting interest and mixed incentives. It is not always clear whether GPOs are serving the hospitals who own them or the suppliers 

who have in some ways become their clients. We need to explore 

this issue today. 

Furthermore, Mr. Chairman, we need to examine the competitive 

implications of the GPO system. It is critical that we maintain a 

competitive environment in which new and improved medical devices are able to gain a foothold in the marketplace. However, 

many have complained that the GPO structure is acting as an impediment to innovation by allowing incumbent suppliers to lock in 

large portions of the buying market for their products. 

That assessment seems to have some support among those in the 

investment community. In fact, we will hear testimony today that 

investors are increasingly unwilling to fund start-ups, the kind of 

companies that often provide technological improvements, because 

the odds are stacked too heavily in favor of incumbents on GPO 

contracts. This is a very troubling possibility. 

On balance, it does seem likely that GPOs have delivered savings 

to hospitals. Many of the hospitals in my home State of Ohio have 

reported that to me, although, as the recent GAO study indicates, 

GPOs do not necessarily always save money for hospitals. As I 

have noted, legitimate questions have been raised about what impact the current structure of the GPO market is having on innovation and health care. We cannot overlook the long-term costs that 

6

we will pay, both in dollars and in quality of care, if we allow our 

purchasing structure to impede innovation in medical devices. 

So, Mr. Chairman, I look forward to hearing from our witnesses. 

I will closely evaluate everything that we hear today. Certainly, we 

must remain focused, focused on making health care affordable to 

all Americans. It is equally important to ensure that the system operates in a way that will provide the best possible health care for 

patients. 

As an initial step, as Senator Kohl has already indicated, the 

chairman and I both agree that a code of conduct addressing a 

number of specific practices will help address our concerns. In the 

meantime, Senator Kohl and I have sent a letter to the Justice Department Antitrust Division and the Federal Trade Commission 

asking them to examine the competitive effects of the GPO system. 

If, after careful evaluation, we determine that further changes 

are, in fact, necessary, we will work closely with all interested parties as we seek a system that will provide our hospitals with the 

best products at competitive prices. Thank you, Mr. Chairman 

Chairman KOHL. Thank you, Senator DeWine. 

[The prepared statement of Senator DeWine follows:]

STATEMENT OF HON. MIKE DEWINE, A U.S. SENATOR FROM THE STATE OF OHIO

Let me begin by saying that I am also quite disturbed by some of what we have 

learned in our investigation of group purchasing organizations. There is certainly 

some anecdotal evidence, and some indication that GPOs in some cases have strayed 

from their original purpose of allowing hospitals to work together to limit costs. We 

clearly have some specific incidents that we need to explore today, and we need to 

decide how to prevent them in the future. 

In addition, we need to examine the enormous changes in the medical supply marketplace, and the changes that have occurred in GPOs. As medical costs have skyrocketed, many hospitals struggle on a daily basis to reduce costs while attempting 

to maintain high-quality health care. 

GPOs have become an increasingly important part of this effort to reduce costs. 

However, I think it is fair to say that due to consolidation and other changes in the 

GPO system, GPOs today look very different than the system that was originally 

contemplated. 

Some reports indicate that hospitals channel as much as 70 to 80 percent of their 

nonlabor expenditures through GPOs. Within that 70 to 80 percent of purchasing, 

two large GPOs, Premier and Novation, handle purchasing for over 60 percent of 

the nation’s hospitals. 

This level of concentration gives these two firms a very important role in the medical device market, and their buying arrangements have a tremendous impact on 

the market. 

This importance is magnified by the fact that Premier and Novation will often 

have only one or two suppliers on contract for a given product or product category. 

For the one or two suppliers who are able to make a deal with them, they are virtually assured a very big market for their products; the others will face real problems in gaining access to a large segment of the potential market. 

As long as these contracting and purchasing decisions are based on a reasonable 

mix of quality and cost factors, these outcomes are not necessarily troubling. We 

have been told that often health practitioners do play a significant role in determining which products are placed on GPO contracts, a role which helps to assure 

that product quality and patient care are part of the decision. 

However, there are some indications that other factors have sometimes been considered, factors that have more to do with the financial health of the GPO than the 

health of the patient. For example, information provided to the Subcommittee demonstrates that executives of some GPOs have a financial interest in companies that 

have been granted GPO contracts. Obviously, it is completely unacceptable for private financial interests to play any role in contracting decisions. 

More broadly, I am concerned about the extensive range of businesses and programs run by GPOs, and the manner in which they are funded. Approximately 15 

years ago, Congress gave the GPOs an exemption from the anti-kickback laws in 

7

order to allow them to collect administrative fees from suppliers. But the result of 

that decision is a system in which some believe the GPOs have conflicting interests 

and mixed incentives. It is not always clear whether GPOs are serving the hospitals 

who own them or the suppliers, who in some ways, have become their clients. We 

need to explore this issue today. 

Furthermore, we need to examine the competitive implications of the GPO system. It is critical that we maintain a competitive environment in which new and 

improved medical devices are able to gain a foothold in the marketplace. However, 

many have complained that the GPO structure is acting as an impediment to innovation, by allowing incumbent suppliers to lock in large portions of the buying market for their products. 

That assessment seems to have some support among those in the investment community. In fact, we will hear testimony today that investors are increasingly unwilling to fund startups, the kind of companies that often provide technological improvements, because the odds are stacked too heavily in favor of incumbents on GPO contracts. This is a very troubling possibility. 

On balance, it does seem likely that GPOs have delivered savings to hospitals. 

Many of the hospitals in my home State of Ohio have reported as much to me, although, as the recent GAO study indicates, GPOs do not necessarily always save 

money for hospitals. As I have noted, legitimate questions have been raised about 

what impact the current structure of the GPO market is having on innovation and 

health care. 

We cannot overlook the long-term cost that we will pay, both in dollars and in 

quality of care, if we allow our purchasing structure to impede innovation in medical 

devices. 

I look forward to hearing from our witnesses, and I will closely evaluate everything we hear today. Certainly we must remain focused on making health care affordable to Americans. It is equally important to ensure that the system operates 

in a way that will provide the best possible health care for patients. As an initial 

step, I agree with Senator Kohl that a code of conduct, addressing a number of specific practices, will help address our concerns. In the meantime, Senator Kohl and 

I have sent a letter to the Justice Department Antitrust Division, and the Federal 

Trade Commission, asking there to examine the competitive effects of the GPO system. If, after careful evaluation, we determine that further changes are necessary, 

we will work closely with all interested parties as we seek a system that will provide our hospitals with the best products at competitive prices.

Chairman KOHL. Now, to our witnesses. I will introduce the 

seven and then we will start with their testimony. 

Mr. Richard Norling is Chairman and CEO of Premier, Incorporated. He joined Premier in 1997, first as Chief Operating Officer. Before that, Mr. Norling was President and CEO of Fairview 

Hospital and Health Care System, headquartered in Minneapolis–

St. Paul, Minnesota. 

We have with us Mr. Mark McKenna, President of Novation. He 

served on the management team that structured the joint venture 

between VHA and UHC, resulting in the creation of Novation. 

Prior to joining VHA in 1987, Mr. McKenna was Director of Marketing for IMED Corporation of San Diego. 

Ms. Trisha Barrett is a registered nurse and Assistant Director 

of Materiel Services and Value Analysis Facilitator at the University of California Medical Center in San Francisco. Ms. Barrett 

serves on the Novation Nursing and Clinical Practice Council. 

Mr. Joe Kiani is the co-founder and CEO of Masimo Corporation, 

a privately-held medical technology company. He is also an inventor on more than 30 patents related to signal processing sensors 

and patient monitoring. 

Dr. Mitch Goldstein is a physician at the Citrus Valley Medical 

Center and the University of California–Irvine Medical Center. He 

specializes in neonatal medicine. 

Ms. Elizabeth Weatherman is the Managing Director of Warburg 

Pincus, where she has been a member of the health care group 

8

since 1988. Ms. Weatherman also serves as the Vice Chair of the 

National Venture Capital Association Medical Group. 

Mr. Lynn Detlor is the Principal of GPO Concepts, Inc. He served 

as President of Premier Purchasing Partners from 1986 to 1999. 

Mr. Detlor joined Premier through a merger with the American 

Health Care Systems, where he served as President. 

We welcome you all here today. We request that you hold your 

statements to five minutes. 

Before we commence, I would like to ask the chairman of our 

committee, Senator Leahy, if he has an opening statement. 

STATEMENT OF HON. PATRICK J. LEAHY, A U.S. SENATOR 

FROM THE STATE OF VERMONT 

Chairman LEAHY. Mr. Chairman, just hearing your comment 

about keeping it brief, I just want to compliment both you and Senator DeWine. As I have said on many occasions, the two of you, the 

subcommittee should be a model for the rest of the Senate in the 

way you handle it. 

One, we all agree that we worry about escalating health care 

costs, whether you are a legislator or a provider or you are a consumer or anything else. I am concerned on this one issue: Do the 

GPO’s contracts and other practices with large established medical 

and pharmaceutical supply companies keep newer and smaller 

companies from bringing innovative items in? Do the fees paid by 

suppliers to the GPOs who act as go-betweens for the hospitals exceed statutory limits? Do some GPOs have officers and employees 

with inappropriate connections to large medical suppliers? Should 

they be funded by the suppliers at all, rather than by the member 

hospitals? 

So these are the issues. I will, because of our other hearing, I 

will leave most of these for the record, but I do want to compliment 

you, Mr. Chairman and Senator DeWine, and thank you for holding this hearing. If I could put my whole statement and my questions in the record. 

Chairman KOHL. It will be done and we thank you for your appearing here, Senator Leahy. 

[The prepared statement of Senator Leahy follows:]

STATEMENT OF HON. PATRICK LEAHY, A U.S. SENATOR FROM THE STATE OF ARIZONA

Escalating health care costs are a source of concern to all of us, as legislators and 

as health care consumers. The struggle to keep health care costs as low as possible, 

while ensuring that the quality of care remains high, is the Herculean task confronting our nation’s health care providers and hospital administrators. In recent 

years, the development of Group Purchasing Organizations, or GPOs, has been heralded as an effective tool to meet this pressing need. The New York Times reported 

today that the General Accounting Office has just released a study concluding that 

hospitals do not necessarily benefit from participating in GPOs. 

GPOs allow hospitals to aggregate their buying power in making purchases from 

suppliers of medical equipment, pharmaceuticals, and the many ordinary products 

necessary for the daily functions of any hospital. By purchasing in bulk, the hospitals ostensibly would save money, and because the GPOs handle much of the administrative burden of dealing with the suppliers, the hospitals would then be relieved of those tasks. 

However, recent media reports and industry commentaries suggest there are 

issues we need to address in the context of GPO purchasing. I see this hearing as 

an opportunity for the Judiciary Committee and for the public to learn more about 

how GPOs operate, how they benefit hospitals, and whether there are any changes 

that could improve their operations. 

9

Serious questions on several topics should be answered, including: 

• Do the fees paid by suppliers to the GPOs who act as the go-betweens with the 

hospitals exceed the statutory limits? • Do some GPOs have officers and employees with inappropriate connections to 

large medical suppliers? • Should the GPOs be funded by the suppliers at all, rather than by their member hospitals? • Do the GPOs’ contracts and other practices with large, established medical and 

pharmaceutical supply companies keep newer and smaller companies from bringing 

innovative and high-quality products into our nation’s hospitals? • In light of the new GAO report, do GPOs actually save hospitals money? 

I look forward to exploring these questions with the panel today, and I thank Senators Kohl and DeWine for their laudable and bipartisan efforts to ensure that these 

questions—and other important antitrust issues—are considered in this forum. I 

commend the chairman and the ranking member of this subcommittee for their productive working relationship. This level of cooperation should be the rule and not 

the exception in the Senate. 

Another significant effort to improve the quality and lower health care costs is 

the Drug Competition Act of 2001, S. 754, which was reported out of this Committee 

unanimously last October. Drafted in the wake of several Federal Trade Commission suits against large brand name drug makers who paid off their generic rivals 

to keep their lower cost drugs off the market, that bill would require that such deals 

be filed with the antitrust enforcement agencies. The FTC and the Justice Department would then have the tools they need—tools they have asked us for—to combat 

these pernicious practices which keep prescription drug costs unnecessarily high by 

blocking generic entry into the marketplace. But that bill has been awaiting Senate 

action for 6 months, the victim of a partisan anonymous hold. Such politically motivated efforts only hurt consumers, and I would hope that this body could focus on 

the best interests of the American people, rather than on short-term political gain. 

I thank the witnesses for coming before us today and I look forward to hearing 

their testimony.

Chairman KOHL. We start with your testimony first, Mr. Norling. 

STATEMENT OF RICHARD A. NORLING, CHIEF EXECUTIVE 

OFFICER, PREMIER, INC., SAN DIEGO, CALIFORNIA 

Mr. NORLING. Thank you, Chairman Kohl, Senator DeWine, and 

Senator Leahy. I am Richard Norling, Chairman and CEO of Premier. As a former hospital CEO who spent 28 years in not-for-profit health care, I know that hospitals are under enormous pressure 

from Medicare, Medicaid, and other payers to deliver high quality 

care at the best possible price for their patients, and hospitals need 

all the help they can get. Premier provides them with a very important tool, namely group purchasing services. I would like to talk to 

the subcommittee on specifically how that works. 

Premier is an alliance of some 1,600 not-for-profit hospitals and 

health care systems, from major medical centers to small rural 

community hospitals. To put it simply, our mission is to do everything we can to help our not-for-profit hospital members provide 

the best patient care at the best possible price. We are a performance improvement organization. 

One important part of what we do is negotiate contracts with 

suppliers for our hospitals, but we are not a middleman for hospital 

purchasing. In addition to our contracting program, we offer many 

other valuable services to our hospitals. For example, Premier is 

the most significant health care database available in America 

today to help hospitals share information and implement best clinical practices. We estimate that we save our member hospitals over 

$1.5 billion per year through all our programs. 

Premier is a driving force for innovation. Premier hospital systems, like Aurora Health Care in Wisconsin, Cleveland Clinic in 

10

Ohio, demand immediate access to the newest and most effective 

technology. We work closely with our hospitals to identify and 

evaluate promising new products and processes. We have staff 

dedicated to tracking key medical developments to identify the very 

best products. Our technology assessment team’s primary job is to 

evaluate promising new technologies with an eye towards bringing 

those advances into our hospitals. Our contracts give us flexibility 

to add breakthrough technologies regardless of the existence of existing contracts. 

If I can, a couple of examples with regard to our record on innovation. We regularly examine the marketplace and move rapidly to 

evaluate new technologies and make available under group contracts those that are real breakthrough advances. In January, 

shortly after the cutting-edge given imaging camera pill was 

launched—I have an example of that right here—our staff recognized the potential of this pill-sized device, which, after being swallowed by the patient, provides the most advanced images of the 

small intestine available. It is a very, very exciting technology. 

Within 30 days of learning that, we had a group contract with this 

company, the only group purchasing organization at this time with 

a contract of this revolutionary new product. 

Second point, even when a contract is already in place, we can 

add breakthrough products to our portfolio. In early 1999, well before Congress passed the Needle Stick Safety Act, which I might 

note we very strongly supported, Premier reached out to the industry for new safety products in this arena. Through our Technology 

Breakthroughs Program, we added three new syringes and four 

blood-drawing devices with safety features to expand our portfolio, 

all but one of these from small manufacturers. Currently, we have 

96 sharps safety products categories on contract with 772 individual products available to our members. These are manufactured 

by 15 different companies. 

The facts are clear. Our contracting process is open to all suppliers and we are always interested in and actively seek out more 

advanced and safer products. If this were not the case, there is no 

doubt our member hospitals would go elsewhere. 

Let me emphasize how we engage those hospitals. All product selections are made with substantial clinical input by committees of 

people who work at our hospitals. Once they, the committees, make 

their decisions, we negotiate the contracts. But Premier does not 

purchase products, hospitals do. Our group purchasing contracts do 

not require our hospitals to use a contract for all of their needs in 

any product category. Our members can and do buy items to meet 

their unique needs and preferences while still getting a negotiated 

discount for products under group contracts. 

Like all GPOs, we receive administrative fees in return for our 

services. Our fees average 2.1 percent, well within Federal guidelines. We have no fees in excess of 3 percent involving medical 

products or pharmaceuticals. We do not require up-front payments, 

and since 1997, 67.4 percent of all administrative fees we receive 

through group purchasing have been distributed as cash payments 

or credited to Premier hospitals as incremental equity in their retained earnings. 

11

After Premier’s creation in late 1995 through a three-way merger, we inherited from our predecessor organizations some practices 

that have figured in recent criticisms of our organization. As Premier has matured and evolved, many of those practices have been 

discontinued. 

In conclusion, we are very proud of our accomplishments in pursuing excellence in health care. We are committed to operating 

openly, honestly, and transparently. We intend to cooperate with 

the subcommittee and the health care community to explore every 

avenue to make our work even more effective. If there is an opportunity to improve, Senators, we will take it, and may I say that I 

applaud you for your proposal on the idea of an industry-wide set 

of ethical practices and you have Premier’s absolute full support in 

trying to seek that common ground that I think is so important. 

Thank you. 

Chairman KOHL. We thank you, Mr. Norling. 

Now from Novation, we have Mr. McKenna. 

STATEMENT OF MARK MCKENNA, PRESIDENT, NOVATION, 

LLC, IRVING, TEXAS 

Mr. MCKENNA. Good afternoon, Chairman Kohl, Ranking Member DeWine, and Senator Leahy. It is my pleasure to be with you 

today representing over 2,300 health care organizations. I am also 

compelled to relay this message from our members. The value, cost 

savings, and other benefits they receive through Novation are necessary and crucial to their survival and to their ability to provide 

quality patient care in their communities. 

Novation was formed in 1998 by combining the group purchasing 

programs of VHA and the University Health System Consortium, 

two national health care alliances with members in all 50 States. 

From major academic medical centers to rural 50-bed facilities, 

these hospitals share a common mission of community service, a vision of continually improving the quality of care, and an imperative 

to operate more efficiently. These hospitals rely on us and the collective strength of their membership. 

Group purchasing saves hospitals hundreds of millions of dollars 

annually. By our estimate, last year alone, we saved our members 

over $1 billion by aggregating their buying power and by consequently avoiding other costs. Many hospitals, especially those 

serving rural communities, could not realize these savings on their 

own. Here is just one result of how these savings can directly improve community health and why our members value what we do. 

In Menomonee Falls, Wisconsin, Community Memorial Hospital 

saved $1.5 million over the last 2 years through purchases made 

by Novation contracts, and they report that these savings have 

helped them fund a free clinic for indigent care patients in their 

community. 

The benefits enjoyed by Community Memorial reflect a sound 

business model. It is a cooperative model, similar to others outside 

the health care sector, such as agriculture and electronics. 

Now, I would like to take a moment to briefly comment on Novation’s business practices. I am proud of our organization and what 

we accomplish every day on behalf of our members. We are member-driven and rely heavily on member input in determining the 

12

needs, identifying and evaluating products, and by helping individuals share ideas and best practices. 

Novation provides many ways for physicians and other clinical 

professionals from our member organizations to guide us in administering an objective and open bid process, resulting in the selection 

of high-quality, low-cost products. We use over 20 member advisory 

councils. Our councils include more than 450 individuals from 300 

health care organizations. These represent both large and small 

hospitals. Our contract decisions are supported by a matrix evaluation that considers safety, quality, availability, support, customer 

service, education, and, of course, cost. 

Some suppliers may provide a single product. Others provide 

more. But each product is chosen on its own merits through this 

fair, objective, and inclusive process. In fact, all our bids are posted 

on our public website so they are all available to all suppliers. This 

methodology results in low best bid, which in our definition means 

providing our members the highest quality products at the lowest 

possible costs. 

I should point out that many suppliers can and do take advantage of opportunities to provide contracts through Novation. In fact, 

approximately 25 percent of our suppliers meet the Small Business 

Administration’s definition of a small business. One example, Triad 

Disposables, a small Upper Midwest company that makes alcohol 

preps, which won a bid over much larger competitors, proves this 

out. 

Our contracts are also flexible, allowing us to continually seek 

and offer new and alternative products and the latest technology. 

For example, our members told us that Possis Medical had an innovative device to more effectively treat blood clots, and after receiving input from members on our advisory councils, we promptly 

added it to our portfolio. 

Finally, our members can freely choose whether or not to purchase through Novation contracts, and we believe that this voluntary approach has been key to our success and greatly enhances 

the satisfaction of our members. They retain the freedom to choose 

the products that best meet their specific needs. 

In the time allotted, I hope I have been able to give you a sense 

of how group purchasing benefits hospitals and how Novation adheres to a strong, fair, and ethical process in contracting. As you 

know, hospitals across the country are under severe budget constraints and desperately need ways in which to reduce their costs 

and serve their communities. Thank you for this opportunity to tell 

our story. 

[The prepared statement of Mr. McKenna follows:]

STATEMENT OF MARK MCKENNA, PRESIDENT, NOVATION, LLC 

Chairman Kohl, Ranking Member DeWine, and distinguished members of the 

Subcommittee, thank you for this opportunity to tell our story and share with you 

examples of the value we believe Novation delivers to the nation’s patients and hospitals. My name is Mark McKenna. I am the president of Novation, the supply chain 

management company for VHA Inc. and University HealthSystem Consortium 

(UHC), two alliances comprised of community-owned not-for-profit hospitals and 

academic health systems throughout the United States. 

Our focus at Novation is to help the hospital members of VHA and UHC realize 

efficiencies and cost savings in their purchasing functions. As I’m sure you know, 

the environment of health care has changed dramatically in the last 10 years—

13

through the Balanced Budget Act of 1997, staffing shortages, advances in technology, aging populations and managed care. Our nation’s hospitals are facing these 

pressures and the rising costs of supplies, as well. At the same time, reimbursements from HMOs and Medicare continue shrinking, while many more patients are 

uninsured and are unable to pay at all. Hospitals are caught in the middle. Novation, as an extension of its owner alliances, works to lessen this financial pressure 

by helping those it serves create a more cost-efficient supply chain, while keeping 

quality the top priority. 

For example, Community Memorial Hospital, a VHA member and not-for-profit 

health care organization in Menomonee Falls, Wisconsin, employs almost 1,300 people and provided care to more than 60,000 patients last year, including many indigent patients. By choosing to purchase quality products through Novation contracts 

they realized tangible costs savings of well over $700,000 in 2001, in addition to significant cost-avoidance. These savings went directly to their bottom-line and helped 

them maintain their community outreach and indigent care services to their community, such as their free clinic. This hospital’s story is only one of many around 

the country. 

At its very core, group purchasing benefits hospitals as well as the entire health 

care system. As it currently stands, group purchasing brings the most value to hospitals and maintains a fair market for suppliers. All of the hospitals Novation serves 

are under tight budget constraints. Thousands of free standing large, medium and 

small hospitals—especially smaller facilities in rural areas—would experience increased costs and struggle to survive if the system was changed. 

Health care group purchasing was created by groups of hospitals that came together to gain efficiencies. History traces the concept of group purchasing in the 

health care industry to as far back as the late 1800’s. However, it really didn’t take 

hold until the late 1970’s, when health care costs, specifically supply costs, were escalating at an alarming rate. Not-for-profit and academic hospitals, hurting financially, sought a way to aggregate purchasing strength to lower supply costs and to 

better compete with the for-profit hospital chains. By pooling their efforts, they were 

able to achieve more together than they could alone. 

VHA and UHC are organized as cooperatives and as such, return 100 percent of 

their cooperative income to members in cash and equity. In 2001, VHA returned approximately 32 percent of its revenue to members in cash payments. UHC distributed almost 40 percent of its revenue to members in cash payments. Members indicate that the combination of VHA and UHC’s cash and equity returns, pricing, and 

value beyond price for products and services are superior to other alternatives. 

These cooperative payments and the clinical services that the alliances offer help 

hospitals carry out their missions. 

Fees also fund other services of the alliances and are utilized in board-approved 

initiatives such as information technology resources, research, benchmarking, educational programs, and other efforts to improve health care—things that would be 

too costly for hospitals to do on their own. 

We continue this vision of slowing rising health care costs, helping hospitals fulfill 

their mission of healing and saving lives. Novation serves the purchasing needs of 

more than 2,300 health care organizations—the members of VHA and UHC. Our 

company was formed in January 1998 when these two alliances created a new joint 

venture firm that would efficiently serve the purchasing needs of both alliances. 

VHA, is a nationwide network of more than 2,200 leading community-owned health 

care organizations and their physicians. It comprises 26 percent of the nation’s community hospitals. UHC, representing most of the academic medical centers in the 

United States, is an alliance of 87 academic medical centers and 110 associate members. In total, VHA and UHC represent health care organizations in all 50 states. 

Cooperative group purchasing, as well as Novation’s overall approach, are commonly recognized business models. Novation’s relationships with suppliers are similar to business-to-business relationships in other industries where agents broker 

services such as real estate, financial services, travel and hospitality and other buying agents in the electronics and food industries. 

Cooperatives have served this country well. They enable their members to reap 

the benefits of joint endeavors while still maintaining their independence. They 

allow the members to own and control the business and to operate it for their benefit. Our cooperative structure is similar to other cooperatives in the farming, building, hardware and restaurant industries. Supplier-paid fees are a means by which 

cooperatives operate. This is the most effective way to fund our operations, given 

the financial constraints that most hospitals operate under. 

Novation receives fees from suppliers just as other cooperatives do. The amount 

of the fee offered is generally based upon the value placed on Novation’s services 

14

by the supplier and usually varies based upon the product category. Fees are paid 

based on a percentage of member purchases from the agreements accessed. 

Our average overall fee is 2.1 percent. Of those fees that are above 3 percent, the 

vast majority are for NOVAPLUS agreements—our private label brand owned by 

VHA and UHC members. These slightly higher fees involve trademark and licensing 

fees. Novation, VHA and UHC are fully accountable for the fees they collect from 

suppliers and manufacturers and disclose all fee information to the member hospitals. 

The Federal Government has previously reviewed the issue of administrative fees 

received by group purchasing organizations from suppliers and determined that 

based on the benefit of these organizations to the nation’s health care system, the 

fees they generate on behalf of their memberships should be permitted. On April 

17, 1985, Richard P. Kusserow, HHS Inspector General said:

‘‘We [HHS OIG] believe the current practice of reimbursement by vendors to 

group purchasing agents should be permitted . . . The use of volume purchasing through group purchasing agents clearly reduces the cost of purchases 

by hospitals. Therefore, we would encourage use of such arrangements regardless of the reimbursement methodology.’’

Novation works as an agent on behalf of VHA and UHC hospitals, ultimately answering to them. Whereas publicly held manufacturers ultimately answer to stockholders for their financial performance, we answer to hospitals for financial performance as well as by how well we help them fulfill their missions of healing. Member 

satisfaction is extremely important to Novation. Half of our yearly incentive plan 

for all employees is based on member satisfaction. As stewards of the members’ finances, the other half is based on achieving operating income goals. 

With significant involvement from, and on behalf of, VHA and UHC members, Novation works with medical supply companies to offer contracts for products of the 

highest quality at the most cost-efficient price. When comparing Novation’s product 

portfolio to member and prospective member hospitals’ supply purchasing Novation 

has saved VHA and UHC member hospitals approximately $2.1 billion since its inception in 1998. 

Dennis Barry, President and CEO of Moses Cone Health System in Greensboro, 

NC and chairman-elect for the board of the American Hospital Association, probably 

sums it up best:

‘‘[They] bring significant value to us as an organization: better pricing for 

consumables and equipment than we could arrange on our own; a range of other 

services . . . helpful to our organization; the ability to network with other similar sized organizations throughout the country on a whole range of questions 

or issues.’’

You will hear many benefits and aspects of group purchasing and Novation mentioned today, but the primary one to remember can be summed up in our mission 

statement: In partnership with VHA and UHC, Novation will deliver industry-leading supply chain management solutions that assist community-based, not-for-profit 

and academic hospitals in improving financial, operational and clinical performance. 

Novation, and group purchasing as a whole, brings tremendous value to health 

care. In this regard, my testimony will focus on five topics: 

• The philosophy and ethics of Novation’s overall business practices 

• The value created by Novation’s competitive ‘‘low best bid’’ process 

• The fair, open and competitive nature of Novation’s bidding process for suppliers of all sizes 

• The flexibility of participation in our product and program offerings 

• The clinical & operational benefits beyond group purchasing of the VHA and 

UHC alliances 

Now, I would like to tell you about the way Novation delivers value to member 

hospitals: 

NOVATION’S OVERALL BUSINESS PHILOSOPHY

Our overall philosophy is to deliver the greatest possible value to hospitals, keeping both quality and cost squarely in focus. This is accomplished in large part 

through our open competitive bid process and through extensive member input. 

On a more practical level, our day-to-day purpose is to offer and manage contracts 

with a variety of companies that provide VHA and UHC hospitals with the ability 

to access high quality products in a cost-efficient manner. Much of what we contract 

for is commodity-oriented products. 

15

Our contracting objective is to provide members with the highest quality products 

at the lowest total delivered cost. Recognizing the diversity of the hospitals we 

serve, all participation in our product agreements is purely voluntary. We seek to 

provide additional value to hospitals based upon their purchasing volume, commitment and ability to drive purchasing efficiencies across their respective systems. To 

that end, considerable attention has been given to the following elements: 

• Involvement of VHA and UHC member representatives in the process 

• Development of a structured process with ‘‘high integrity’’ to accommodate the 

competitive bid requirements of public institutions 

• Reliance upon the business acumen and facilitation skills of staff to guide the 

process 

Because of our eight-step contract process—what we believe to be the most extensive in the industry—hospitals can have confidence that Novation ensures consistent, high-value agreements. This process is used across all departments and program areas of the company to achieve a consistent, high-value outcome. 

Novation’s contracting process includes the following steps: 

1. Identifying VHA and UHC member contract needs 

2. Conducting member and market research 

3. Developing and analyzing bids with councils 

4. Deciding awards 

5. Resolving and clarifying contract issues 

6. Finalizing the award 

7. Launching the agreement 

8. Retaining records 

To determine contracting priorities, Novation relies on member input and member 

purchasing behavior. Through the direction of member councils, made up of clinical 

and procurement professionals, as well as surveys and other research, we distribute 

Invitations to Bid for specific product categories. These include specific questions related to member-determined specifications. 

Additionally, we post and maintain a bid calendar of products that are up for bid 

on our public web site, inviting all suppliers, large and small, to request an invitation to bid. While many manufacturers offer multiple product lines, they must submit separate bids for each product category based upon the bid calendar. Novation’s 

supplier agreements are generally 3-year agreements with two 1-year optional extension years, exercised at the discretion of Novation and the hospital members. 

Member councils also help determine if an agreement is sole (one supplier) or multisourced (multiple suppliers.) Generally, when there is little difference in the overall 

award decision criteria matrix results, a multi-source award is recommended to give 

members more choice. 

‘‘LOW BEST BID’’ CONTRACTING PROCESS

Novation is proud of its innovative ‘‘low best bid’’ approach to contracting. In fact, 

it is one of the first things new Novation employees learn as they are oriented into 

the company. Understanding the low best bid process is the key to understanding 

Novation’s overall strategy. The concept centers around the view that hospitals derive the most value from supply agreements when other qualitative (non-financial) 

factors are considered rather than just the lowest price. The product with the best 

value for hospital members is not necessarily the product with the lowest price. The 

low best bid takes into account both financial and non-financial criteria. All decision 

criteria are established by member councils and through research and vary from 

product category to product category. For example, non-financial requirements 

might include: patient and care provider safety, customer service, product quality, 

clinical knowledge of company representatives, educational offerings and cost in use. 

Financial criteria can include price, fees and other value measures such as free 

goods for trial, which are deducted from the cost of the product. These criteria are 

entered into a matrix—what we call a Decision Criteria Award Matrix—standardizing the way decisions are made. To calculate the low best bid, the financial scores 

are divided by the non-financial scores for each bidder. This fair and equitable process, created with significant member involvement, ensures a mix of both high quality and cost effectiveness. 

Our contracting process is thorough and exhaustive. The average contract decision 

takes 9 months, and some take as long as 11⁄2 years from start to finish. In addition 

to member-based criteria and input, the decisions take into account such things as: 

interviews, field trials and published literature, as well as the opinions of multiple 

member clinicians. Imagine the time, resources and cost associated with these activities if more than 2,000 hospitals did them individually. 

16

The entire contracting process is member-driven. As the contracting arm for the 

members of VHA and UHC, Novation works with prestigious hospitals around the 

country that employ some of the most well-respected clinical professionals. Novation 

seeks member input in many ways including through surveys, councils, task forces 

and focus groups. In fact, Novation sponsors 23 standing member councils and several other ad hoc task forces, representing more than 300 hospitals, that help shape 

Novation’s product portfolio. 

Novation keeps its member-centered focus throughout its award selection process. 

Physicians, nurses, pharmacists, directors of operating rooms, other clinicians and 

materials managers from around the country are included on councils. These member councils help decide the bid criteria before the invitations to bid are even sent 

to suppliers. 

It’s also important to note that Novation’s highly objective and fair contracting 

process makes the concept of ‘‘inherent conflicts’’ practically impossible. Fees are one 

small part of a host of quality, non-financial and pricing criteria, which is also set 

by members. Mathematically alone, fees alone never drive decisions. Quality plays 

too important a role—as it should. 

WORKING WITH SUPPLIERS OF ALL SIZES

Novation’s public competitive bid process allows all eligible suppliers to participate in a fair manner. Novation welcomes competition from manufacturers as it allows us to gain better value for the members we serve. The competitive bid process 

and our low best bid approach, provide a level playing field for manufacturers large 

and small. Our bid calendar is continuously posted on our public web site to ensure 

the bid is open to all interested parties and those interested in receiving a bid are 

encouraged to request one. 

Of the approximately 500 suppliers contracted with Novation, 25 percent of them 

are small businesses, as defined by the Small Business Administration. A shining 

example of Novation working with a small company is our relationship with Triad 

Disposables, a small business based in Wisconsin. Through the contracting process, 

they were awarded the contract for alcohol wipes, a low-tech but vital supply for 

all hospitals. During the contract process, they won over other larger suppliers, including one of the largest in health care, simply because they brought the most 

value to the members per the decision criteria established by the members. 

Innovative technology suppliers, in addition to small suppliers, are found throughout our portfolio of supplier contracts. One innovator, Possis Medical, is a leader in 

creating a significant new medical market for the mechanical removal of blood clots 

with a procedure known as ‘‘rheolytic thrombectomy.’’ Soon after the FDA approved 

this new technology, Novation placed it on contract in September 1999, following 

input from members. The members involved in the decision consisted of interventional radiologists, radiology technologists, interventional cardiologists and cardiovascular administrators and nurses. Additional input was obtained through market research studies to VHA and UHC members. 

It is important to note the distinction between ‘‘new’’ (something not available 

anywhere else) and ‘‘different’’ (something similar that accomplishes the same outcome) technology. Novation is committed to providing agreements containing the latest technology to members—the competitive bid process and provisions in our contracts ensure it. 

Novation strives to be sensitive to continually evolving health care technology, to 

remain relevant to those we serve. Through our contracting process, we ensure that 

we contract for the technology that is most acceptable to VHA and UHC hospitals 

at the time of the bid award. Should technology change during the term of the 

agreement and the current supply partner not provide the latest technology, Novation can add other suppliers or terminate the existing agreement and put out a bid 

for a new agreement if the members find the technology change so substantive to 

deem the current agreement’s offerings outdated. All agreements contain termination clauses that allow Novation to terminate the agreement with the existing 

supplier with 90 days written notice when necessary. 

An example of a supplier with a new technology being added to the portfolio is 

Megadyne, a small company that makes an innovative product—reusable grounding 

pads—used to protect patients from electrical shock. Novation already had disposable grounding pads on contract with 3M and Valley Lab. Megadyne’s reusable pads 

employed a new technology that VHA and UHC members wanted added to the portfolio. These reusable pads are and example of ‘‘new’’ technology. 

An example of technology that is simply ‘‘different’’ is in the field of pulse 

oximetry. The selection of Nellcor over Masimo is a good example of how Novation’s 

bid process works fairly. During the contracting process, which took almost 18 

17

months to complete, we used enormous amounts of clinical input from members, including the active involvement of five separate member councils made up of more 

than 40 hospital professionals as well as survey results involving more than 850 

member hospitals. Regarding the non-financial criteria, our process revealed that 

Masimo’s technology is based on ‘‘rhythmic and repetitive’’ patient motion while 

Nellcor’s technology is based on ‘‘random and chaotic’’ patient motion. Masimo’s 

product was deemed to be a different technology, but not a new technology. Our clinicians gave us input that random and chaotic patient motion is a more realistic 

measure, especially when the patients are children and babies. Overall, in the nonfinancial categories, Nellcor received higher marks from clinicians than any other 

competitor in every single category. In the end, the results were overwhelmingly in 

favor of Nellcor, far above all other bid participants. Ultimately, the member councils recommended the bid award go to Nellcor. 

Besides meeting member standards, suppliers with new technologies also face additional challenges. Some truly ‘‘new’’ technologies must wait for FDA approval. 

Others are available, but must wait long periods for reimbursement approval, 

making them cost-prohibitive to many health care institutions. Finally, many companies with ‘‘new’’ technologies are not always interested in contracts with group 

purchasing organizations, believing that with no competition they can command 

higher pricing for their product on their own. 

Possibly even more telling regarding clinical input in decisions, is the support of 

many clinicians at VHA and UHC member hospitals following bid awards. Because 

participation in our contracts is voluntary, hospitals often conduct their own clinical 

trials on some contracted products, even after the rigorous review the Novation contracting process gives to the products. By conducting their own clinical trials, members ensure they are choosing to access the products that best meet their needs. 

This not only underscores the clinical decision of our member councils, but also underscores the inherent freedom of choice that member hospitals enjoy in the Novation relationship. 

In addition to relying on member input to keep us updated on health care technology changes, Novation’s contracting staff—with significant input from Novation’s 

field-based service delivery team—is responsible for monitoring their respective 

product’s markets for technological advances. These staff members typically have a 

high degree of experience, training and expertise related to their area of responsibility—often having direct experience in these areas at provider organizations. 

Should a Novation staff member learn of changes in product technology, the staff 

member can review the impact of the technology changes with one of Novation’s 

member councils. 

As a member-driven organization, it is always in the members’ best interest to 

make sure that our agreements meet the needs of the VHA and UHC members—

clinically, financially and operationally. 

FLEXIBILITY OF MEMBER PARTICIPATION

Hospital participation in Novation agreements is totally voluntary. Novation 

strives to offer VHA and UHC hospitals the most competitive value on the highest 

quality products based upon members’ purchase patterns and ability to deliver volume, commitment and purchasing efficiencies. 

However, we also recognize that each hospital’s ability to commit varies. In response, Novation offers a portfolio of agreements and programs in which organizations can freely choose to participate in, without disadvantaging those that cannot. 

For example, Novation offers a committed purchasing program we call OPPORTUNITY. Novation’s approach to commitment is a self-selecting philosophy in which 

members are free to choose whether they wish to participate. We believe the voluntary nature of OPPORTUNITY has helped make it the industry’s leading and 

most successful committed purchasing program. In addition to offering best pricing, 

the program helps organizations focus their efforts on further improving efficiencies 

through standardization and utilization. OPPORTUNITY delivers cash rewards for 

commitment and the potential to increase VHA’s and UHC’s cooperative returns. 

OPPORTUNITY rewards VHA and UHC hospitals that voluntarily meet previously 

agreed-upon commitments in designated product categories. There are no Novation 

programs that require 100 percent participation. 

Our contracts offer product coverage of about 75 percent of the total supplies the 

average hospital uses. So, there is 25 percent we don’t have on contract at all—these 

products could represent fast-changing technology areas, local or regional products 

or large capital expenditures. Of the 75 percent product coverage we offer, VHA and 

UHC hospitals typically use our contracts for about 55 percent of their purchases. 

So, overall, VHA and UHC hospitals use Novation’s services to purchase about 40 

18

percent or less of their product needs, all of which is accessed on a voluntary basis. 

Hospitals choose what works best for them. 

The significant involvement of the councils and hospitals as a whole, play an important role in the aggregated purchasing strength of the VHA and UHC facilities. 

We actually see ourselves as a champion for the small rural or community hospital 

that would have a difficult time providing these services on their own. Through our 

aggregated approach, small rural and community hospitals enjoy the buying 

strength of large health systems. More than 700 VHA and UHC member hospitals 

have fewer than 100 licensed beds. According to the March 2000 Muse & Associates 

study, The Role of Group Purchasing Organization in the U.S. Health Care System, without Novation to contract on their behalf, these small health institutions could 

be spending up to 15 percent more on hospital supplies. Additionally, of our 23 

member councils and task forces, about 30 percent of the participants are representatives from small hospitals with 100 beds or less. 

To better illustrate this, if I may quote Susan Park, Purchasing Agent of VHA 

member Sarah D. Culbertson Memorial Hospital in Rushville, IL, she says,

‘‘We have limited resources, as a 58-bed facility, and Novation is always willing to work with us to meet our needs. With Novation’s help, we gain the benefits of a bigger hospital that we couldn’t get on our own. Through Novation, we 

are not little, but mighty.’’

CLINICAL & OPERATIONAL BENEFITS OF THE VHA AND UHC ALLIANCES

It’s important to note that health care organizations affiliate with VHA and UHC 

and gain access to Novation’s services for a number of benefits beyond simply supply 

chain management. These include: nationwide collaboration on clinical improvement 

initiatives; high-quality educational opportunities; groundbreaking research on 

emerging technologies; consulting services that improve operational efficiencies; research on consumer trends; advocacy on public policy issues; and innovative services 

provided by VHA and UHC that might not otherwise be affordable for individual 

organizations or available from other sources. Alliances represent the coming together of their member organizations in areas other than purchasing. More can be 

done to improve the country’s health through collaboration and scales of efficiency. 

For example, VHA recently launched the nationwide program, Women’s 

HeartAdvantage, as part of a national initiative to change how women are treated 

for heart disease and to educate women about their own risks for heart disease. 

VHA is collaborating with hospitals across the Nation to implement the first hospital-based program to address heart disease, which is the greatest health threat 

to women. To address this largely unrecognized health crisis, VHA conducted nationwide and market-specific benchmarking research on the attitudes and awareness among women about heart disease. Interval results from the Yale-New Haven 

Hospital demonstration program revealed that after 10 months of the Women’s 

HeartAdvantage program, awareness significantly increased from 26 percent to 39 

percent. In fact, already we know it’s helped save at least one life. After experiencing chest pain, a patient mentioned to her doctor that she had read about YaleNew Haven’s participation in Women’s HeartAdvantage. The symptoms she read 

about reminded her of her own discomfort. She was sent to the hospital, where doctors performed an emergency balloon angioplasty, and she’s doing fine. 

Likewise, UHC helps members identify standards of excellence among academic 

health centers and community providers so that members can achieve optimal quality and productivity. 

UHC’s improvement and effectiveness services focus on enhancing practice management, improving members’ clinical and operational performance, and providing 

the support and resources for effective clinical decisionmaking. UHC’s 

benchmarking projects use data-driven processes to identify models of efficiency and 

best practice, share up-to-date information, and initiate effective, long-term clinical 

and operational improvements. A recent benchmarking study focused on ischemic 

strokes. Participating hospitals reported current patient care protocols for treating 

stroke victims. UHC compiled and reviewed the information and produced a report 

that identified best practices in patient care. The University of Utah Hospitals and 

Clinics was one of the stroke project participants. Using the findings from the UHC 

study, the hospital’s staff formed a clinical ‘‘brain attack team’’ of physicians, nurses 

and pharmacists. The team reviewed the findings and modeled their response and 

treatment patterns on better performers’ practices. Since implementing their new 

response protocols, they have experienced improved outcomes with many of their 

stroke patients. 

Attention to safety is also a vital initiative. Novation’s comprehensive safety initiative promotes and enhances patient, care provider and environmental safety. 

19

Through this initiative, Novation increases member awareness of its safety-related 

contracted products; promotes and tracks supplier-sponsored safety initiatives; obtain member input on safety projects through councils; and incorporates safety specifications into the contract process. Our quality assurance/regulatory affairs team 

ensures the delivery of safe and effective products by conducting manufacturing inspections and audits of supply partners, monitoring customer complaints and enforcing all regulatory guidelines. 

During 1999 and 2000, 25 VHA and UHC member organizations participated in 

the Novation Education in Anesthesia Techniques program. This program is an anesthesia clinical simulation training program offered by Novation’s anesthesia business unit. The initiative was presented, reviewed and supported by the Novation 

Anesthesia Advisory Council which consists of clinicians such as nurses and pharmacists. This program allows organizations to receive a free, cutting-edge and accredited training program for anesthesiologists, nurses and pharmacists. Nine out 

of ten participants felt that their clinical staff gained enhanced clinical knowledge 

from the program. Multiple clinical participants wrote to us following the program. 

One letter from a physician and professor at the University of Minnesota said the 

program was ‘‘tremendously successful educationally for medical students, residents, 

fellows, anesthetists and staff.’’ 

Additionally a fourth-year medical student that attended the program wrote to us 

saying:

‘‘I attended a training session on the identification and treatment of a tension 

pneumothorax. The very next morning, one of our patients developed a tension 

pneumothorax in the PACU. After the incident, when the resident began asking 

questions about how to treat this condition, I was able to answer correctly.’’

Additionally, VHA and UHC, operational efficiency solutions are offered to hospitals through Marketplace@Novation, Novation’s Internet information solution containing a members-only Web site and e-commerce services for hospitals and suppliers. Hospitals can access contract and program information, publications and 

other Novation supply chain tools. In the late 1990s, VHA and UHC members 

strongly indicated a need and a desire for electronic health care procurement. VHA 

and UHC’s strategic investment in Neoforma to build Marketplace@Novation ensures that members have easier access to innovative technologies and reduces members’ development costs for these services. 

The health care industry is large, fragmented and surprisingly behind in the information arena. Easily accessible information available to all parties in the supply 

chain is non-existent. In 1995, the industry-wide study, ‘‘Efficient Healthcare Consumer Response’’ stated that by addressing current inefficiencies in the supply 

chain, $11 billion of additional savings could be realized by America’s hospitals. Despite the industry’s best efforts to try to address these issues, very little was accomplished. The evolution of the Internet and the 2001 study, ‘‘The Value of e-Commerce in the Healthcare Supply Chain’’ identified specific steps we can take to 

achieve potentially 2–10 percent savings and help hospitals accelerate the technology timeline to reach supply chain efficiencies enjoyed by other industries. Those 

steps are the guiding development principles behind the Marketplace@Novation. 

Marketplace@Novation is an evolution of our core competency of aggregating purchases to reduce supply costs. The Internet makes it possible to streamline the process, create new efficiencies and connect existing information systems to perform productive new activities. Marketplace@Novation will enable members to purchase virtually all their supplies through our e-commerce services. In fact, any supplier—

both those with and without Novation agreements—can post all of their product information on Marketplace@Novation—not just those products on contract—to allow 

greater visibility. These services will allow members and suppliers to automate current manual purchasing processes. 

It will reduce administrative costs by aggregating purchasing information across 

all health care organization sites. Marketplace@Novation is a logical extension of 

what we already do for VHA and UHC members—deliver value. 

As it grows and develops, Marketplace@Novation is proving to be successful. In 

just over a year since its first member hospital went online, Marketplace@Novation 

has seen dramatic increases in the transaction volume and rapid hospital and supplier adoption. Currently, more than 700 VHA and UHC hospitals and almost 240 

supply and distribution companies have signed on to participate in 

Marketplace@Novation e-commerce services. This leading supply chain solution facilitates the efficient exchange of information with hospitals and their suppliers for 

the procurement of goods and services, resulting in streamlined processes, reductions in administrative costs and more efficient healthcare purchasing. 

20

CONCLUSION

Safety, quality patient care and good stewardship of resources are the top priorities of the hospitals and health care professionals we serve. Their passion, commitment, and insight are transferred to us through their involvement in everything we 

do as a company. We are dedicated to helping hospitals around the country realize 

significant efficiencies and cost-savings—the underlying reason for the existence of 

group purchasing organizations. In today’s health care environment of tight budgets, 

these savings are invaluable in allowing hospitals the breathing room to have resources for safe and quality patient care, providing indigent care, hiring practitioners, providing community outreach programs and offering the best services most 

effective to better the health of our nation. 

On behalf of Novation, VHA, UHC, their hospitals and their patients, I deeply appreciate the opportunity to share with you of the value and benefits we bring to 

public and community-owned hospitals around the United States.

Chairman KOHL. Before we proceed further, I would like to ask 

Senator Schumer, who is on a very tight schedule, to make his always very brief and concise statement. 

[Laughter.] 

OPENING STATEMENT OF HON. CHARLES E. SCHUMER,

A U.S. SENATOR FROM THE STATE OF NEW YORK 

Senator SCHUMER. Thank you, Mr. Chairman, and I want to 

thank you for squeezing me in right now and, more importantly, 

for your leadership, and I thank Ranking Member DeWine, as well. 

What I want to do is just ask that my statement be added into 

the record, my whole statement, to make the point, of course, that 

health care costs are out of control. We have to find solutions to 

this. I think it is very important that all of us keep in mind that 

GPOs, in concept, are not all a bad thing. They perform a valuable 

service by permitting hospitals to buy supplies more effectively, 

and when hospitals can purchase quality equipment at cheaper 

prices, consumers save money. 

Now, health care bills are soaring. We know that. Savings cannot 

come at the cost of the quality of care. So the balance we need to 

strike at this hearing today is important. We have to not throw out 

the baby with the bathwater, look at the concept of GPOs and understand why they are needed, see if how business has been conducted works—there have been some serious allegations that it has 

not—and I look forward to, Mr. Chairman, not only to your hearing, but knowing your thoughtful diligence and persistence at these 

issues, to help you come up with whatever solutions might make 

things a little better. 

Chairman KOHL. Thank you, Senator Schumer. 

Senator SCHUMER. Thank you. I apologize. This committee always has a lot of things going and we have the bankruptcy conference, as well, but I wanted to come in here, so thank you. I appreciate it. 

Chairman KOHL. Thank you for coming. 

[The prepared statement of Senator Schumer follows:]

STATEMENT OF HON. CHARLES E. SCHUMER, A U.S. SENATOR FROM THE

STATE OF NEW YORK

Mr. Chairman, thank you for squeezing me in to make a few brief remarks. As 

you know because of all the work you’ve done on the bill, we’re trying to work out 

the final details in the bankruptcy legislation that’s in conference. But I did want 

to take a couple of moments out of that process to say a few words here. 

21

It’s no secret that health care costs in this country are spiraling way out of control. An ever increasing percentage of Americans’ monthly income is going to pay 

absurdly high health care bills. We need to find solutions to this problem that will 

only get more serious as the baby boomers move into their later years. 

One area that I’ve been looking at is prescription drugs. Senator McCain and I 

have a bill that would make generic drugs more broadly available and reduce patients’ reliance on high-priced drugs from the big pharmaceutical companies. Passing that bill would be a start, but only a start. 

In the past few months there’s been a lot of debate about the role of group purchasing organizations in the health care system. As you mentioned in your statement, the New York Times ran a front page article raising some serious questions 

about the practices of certain GPOs and I’m pleased to see that they’re here today 

to give some answers to those questions. 

As we examine the problems, it’s important for all of us to keep in mind that 

GPOs, in and of themselves, are not a bad thing. They perform a valuable service 

by permitting hospitals to buy supplies more affordably. When hospitals can purchase quality equipment at cheaper prices, consumers save money. 

Not to put too fine a point on it, but lower operating costs lead to lower-cost operations. 

With health care bills soaring through the roof, every dollar counts. But savings 

can’t come at the cost of quality care. That’s the balance we need to strike and this 

hearing today is important because it will examine both the problems with and the 

advantages of using GPOs. 

Government shouldn’t jump in with fixes to problems that industry can clean up 

on its own. That’s why I’m so pleased to hear that the GPOs have committed to creating their own code of conduct which, we trust, will resolve the concerns that have 

been raised about the ways GPOs operate. 

Mr. Chairman, I know that you share my view on that issue and I believe that 

holding this hearing, focusing attention on these issues, and taking a constructive 

approach to solving the problems you’re highlighting here is just the kind of limited 

government intervention that serves our constituents well. 

I look forward to reading the testimony of everyone here and to reviewing your 

answers to the questions posed. I apologize for not being able to stay to participate, 

but duty on the bankruptcy bill calls.

Chairman KOHL. Now, we proceed to Ms. Trisha Barrett. 

STATEMENT OF TRISHA BARRETT, BSN, ASSISTANT DIRECTOR, MATERIEL SERVICES, VALUE ANALYSIS FACILITATOR, 

UNIVERSITY OF CALIFORNIA, SAN FRANCISCO MEDICAL 

CENTER, SAN FRANCISCO, CALIFORNIA 

Ms. BARRETT. Chairman Kohl and Senator DeWine, it is a pleasure to be with you this afternoon to share my perception of how 

our hospital benefits from its association with Novation. My name 

is Trisha Barrett. I am the Value Analysis Facilitator for the University of California–San Francisco Medical Center, a member of 

UHC, where my responsibilities include the clinical coordination 

for product selection and standardization. 

I have been a nurse for 25 years. Previous to joining UCSF, I 

served in a similar capacity at a VHA facility. I have thus served 

on the Novation Nursing Council as both a VHA and a UHC member representative. I am proud to serve an organization like UCSF 

Medical Center, where our mission focuses on caring, healing, 

teaching, and discovering. 

UCSF Medical Center is a 500-bed academic hospital. Annually, 

we perform over 20,000 surgical procedures and provide literally 

tens of thousands of days of care. To meet this demand, we maintain a product and device inventory anywhere from 20,000 to 

30,000 items. Recently, we were named one of the top ten hospitals 

by U.S. News and World Report. 

22

Beyond the daily challenges of providing care and saving lives, 

America’s hospitals face nursing shortages, constraints imposed by 

managed care, and important patient and health care worker safety issues. Overshadowing these challenges is financial pressure due 

to ever-rising costs of pharamceuticals, supplies, devices, and 

equipment. While Medicare, Medicaid, and private payer reimbursements go down, the cost of health care continues to rise. 

Novation helps our organization remain financially viable, allowing us to place our energies where they belong, on patient care. We 

spend about $120 million each year for supplies, 50 percent of that 

through Novation contracts. The remaining 50 percent is spent on 

products that are not on contract or on products that may compete 

with Novation contracts, but our clinicians choose to use them. 

That is one of the good things about Novation. Use of their services 

and product contracts are voluntary. However, we do use Novation 

agreements whenever we can because they bring value to UCSF 

Medical Center. 

The Medical Center benefits from my participation in councils 

and task forces because it provides a forum where I am able to provide clinical expertise and product experience in the formation and 

analysis of Novation contracts. Clinicians like me from across the 

country gather and collaborate to share our experience, reach consensus, and advise Novation in structuring and awarding contracts 

that we know will best meet the needs of our patients and our 

staff. 

For example, I am currently working with fellow clinicians 

throughout the country to establish quality criteria for the upcoming IV catheter bid. We clinicians share our experiences and opinions to formulate catheter quality and supplier service criteria. For 

instance, many hospitals have lost on-site nurse educators, either 

to national nursing shortage or to financial constraints. Therefore, 

educational support will be a high priority for the supplier we 

choose, that the supplier will be able to provide 24-hour-a-day, 

seven-day-a-week training during conversion from old product to 

new. These discussions lead to consensus and advice that make the 

final bid award a good one. 

It is important to note that as clinicians who actually use medical products to treat, heal, and save lives, we place a high priority 

on product quality and performance in our discussions and our decisions. I take my role as a health care professional very seriously, 

so when I was invited to participate on the Novation Nursing 

Council in 1999, I welcomed the opportunity. Being a council member is something I do above and beyond my day-to-day responsibilities at UCSF and often involves being away from my family. However, having the opportunity to assist Novation in contracting for 

the highest quality, most clinically acceptable products available on 

behalf of our patients makes it all worthwhile. More importantly, 

I can trust in other Novation contracts because I know there are 

hundreds of others like myself working on other member councils. 

I have the privilege of assisting some of the best doctors and 

nurses in the country at UCSF. With that privilege comes the 

moral and legal responsibility to invest the hospital’s funds wisely. 

When selecting products, I ask my fellow clinicians to think of 

these funds as they would their own family budget. 

23

There has been a perception that member hospitals are a passive 

third party when these awards are made. Nothing could be further 

from the truth. At each individual facility, the hospital must evaluate Novation’s offering, committed or not, on its clinical and financial merits. 

In closing, I would suggest that the members of the committee 

proceed very carefully in considering any new laws that could potentially place additional financial pressure on an already fragile 

health care system. Without companies like Novation, I am concerned that hospitals, and ultimately patients, would pay more for 

health care. In addition, we in hospitals would be forced to dedicate 

significant additional resources to contracting, diverting those precious resources away from care at the bedside. Thank you. 

Chairman KOHL. Thank you for your statement, Ms. Barrett. 

[The prepared statement of Ms. Barrett follows:]

STATEMENT OF TRISHA BARRETT, VALUE ANALYSIS FACILITATOR, UNIVERSITY OF

CALIFORNIA, SAN FRANCISCO MEDICAL CENTER

Chairman Kohl, Senator DeWine, and distinguished members of the Subcommittee, it is a pleasure to be with you this afternoon to share my perspective 

of how our health care organization benefits from its association with Novation. 

My name is Trisha Barrett and I am the Value Analysis Facilitator for the University of California, San Francisco Medical Center—a member of University 

HealthSystem Consortium (UHC)—where my responsibilities include the clinical coordination for product selection and standardization. I have been a nurse for 25 

years. Previous to joining UCSF, I served in similar capacity for Alta Bates Summit 

Medical Center in Berkeley and Oakland California, a member of VHA. I have thus 

served on the Novation Nursing and Clinical Practice Council as both a VHA and 

UHC member representative. 

I am proud to serve in an organization like UCSF Medical Center where our mission focuses on caring, healing, teaching and discovering. UCSF Medical Center is 

a 500-bed academic hospital, located in northern California that employs 5,500 

health care professionals. Annually, we perform 20,000 surgical procedures, and provide tens of thousands of inpatient and outpatient days of care. To meet this demand, we maintain a product and device inventory of anywhere from 20,000 to 

30,000 different items. Recently, we were named one of the top ten hospitals in the 

Nation by U.S. News and World Report. 

Beyond the daily challenges of providing care and saving lives, America’s 

healthcare organizations face shortages of nurses, constraints imposed by managed 

care, patient and healthcare worker safety issues, the aging of the baby boomer generation and more. Overshadowing these challenges is financial pressure due to the 

ever-rising costs of pharmaceuticals, supplies, devices and equipment. While Medicare, Medicaid and private payer reimbursements go down, the cost of health care 

continues to rise. Novation helps our organization remain financially viable, allowing us to place our energies where they belong—on patient care. We spend about 

$120 million each year for supplies—50 percent of that through Novation contracts. 

We at UCSF choose to access just over 50 percent of the Novation contracts available to UHC hospitals. The remaining 50 percent is spent on products that are not 

on contract, or on products that may compete with Novation’s contracts that our clinicians choose to use instead. That’s one of the good things about Novation—use of 

their services and product contracts are voluntary. However, we do use Novation 

agreements whenever we can because they bring value to UCSF Medical Center. 

The Medical Center benefits from my participation on councils and task forces because it provides a forum where I am able to provide clinical expertise and experience in the formation and analysis of Novation contracts. Clinicians like me from 

hospitals across the country gather and collaborate to share our experience, reach 

consensus, and advise Novation in structuring and awarding contracts that we know 

will best meet the needs of our patients and staff. 

For example, I am currently working with fellow clinicians throughout the country to establish quality criteria for the IV catheters bid. Clinical council members 

share our experiences and opinions during meetings and conference calls where we 

discuss IV catheter quality criteria and supplier service criteria. We recently discussed the need for the supplier to support hospitals with education and training. 

24

Many hospitals have lost onsite nurse educators either to the national nursing 

shortage or to financial constraints. Educational support is a high priority for the 

supplier we choose—that they be able to provide training 24 hours a day 7 days a 

week during conversion from old product to new. These meetings and discussions 

lead to consensus and advice that makes the final bid a good one and also makes 

it satisfying to participate on the councils and task forces. 

It is important to note that as clinicians—who actually use medical products to 

treat, heal and save lives—we place a high priority on product quality and performance in our discussions and decisions. I take my role as a health care professional 

very seriously, so when I was invited to become a part of Novation’s Nursing and 

Clinical Practice Council in 1999, I welcomed the opportunity. Being a member of 

a council is something I do above and beyond my current responsibilities at UCSF 

and involves being away from my family periodically. However, having the opportunity to assist Novation in contracting for the highest quality, most clinically acceptable products available on behalf of patients makes it all worth it. More importantly I can trust in other contracts because I know there are hundreds of others 

like myself working on the other member councils. 

I have the privilege of assisting some of the best doctors, nurses and other 

healthcare professionals in the country. With that privilege comes the moral and 

legal responsibility to invest the organization’s funds wisely. I ask fellow clinicians 

to think of these funds as they would their own family budget. When possible, we 

use Novation contracts. Beyond that, we concentrate our own hospital resources at 

searching and bidding for those items our care providers need that are not on contracts or offered by suppliers who choose not to participate in Novation bids. 

In closing, I would suggest that the members of the committee proceed very carefully in considering any new laws that could potentially place additional financial 

pressure on an already fragile health care system. Without companies like Novation, 

I am concerned that health care organizations, and ultimately patients, would pay 

more for health care. In addition, we would be forced to dedicate significant additional resources toward contracting, diverting precious resources away from the delivery of care. 

Thank you.

Chairman KOHL. Now, we are going to hear from Joe Kiani, who 

is a co-founder and CEO of a privately-held medical technology 

company. Thank you for being here. 

STATEMENT OF JOE E. KIANI, PRESIDENT AND CHIEF EXECUTIVE OFFICER, MASIMO CORPORATION, IRVINE, CALIFORNIA 

Mr. KIANI. Thank you, Chairman Kohl and Ranking Member 

DeWine. Good afternoon. We are happy to be here to testify. We 

thank you. 

Masimo is a typical American start-up company. Our goal was to 

make a contribution to humanity by improving care and reducing 

cost of care. We also wanted to become financially independent and 

reward investors who invested in our dream. 

Masimo actually started very humbly in our garage. I took a 

loan, a second loan on my home, and since then, $90 million has 

been invested in Masimo by some of the leading health care investors in this country. 

Masimo has developed the next-generation pulse oximetry. Pulse 

oximetry, in case you do not know—we have lived this for 14 

years—is the non-invasive monitor to measure oxygen in the blood, 

and it is important, because if your blood oxygen drops below normal, within three minutes, you can get brain damage, and within 

five minutes, you can die. On neonates, there is an additional problem. If they get too much oxygen, they can get eye damage. 

Masimo is the innovator in the industry. The problems that were 

thought to be inherent limitations with pulse oximetry, we solved. 

These were problems of motion artifact, like you would see with baVerDate Mar 21 2002 14:00 Apr 11, 2003 Jkt 085986 PO 00000 Frm 00028 Fmt 6633 Sfmt 6601 C:\HEARINGS\85986.TXT SJUD4 PsN: CMORC
25

bies moving or agitated patients in the intensive care unit or recovery room, and maybe just as importantly, very sick patients have 

very low perfusion, which means very low blood flow. 

In fact, there have been over 50 clinical studies over the last several years by independent researchers across the country that have 

proved that Masimo SET is indeed superior and it has improved 

care and reduced costs. But you gentlemen do not need to decide 

that here. We understand your role as policy makers is to not favor 

any company, but to foster a free market. We are not asking for 

special treatment. We are just asking for you to show oversight on 

this and help us compete in a free market. 

We believe there needs to be reform because there is a system 

here that precludes innovative devices to get to the hands of the 

clinicians who are the best to know what is best for the patients, 

and this is happening at the expense of not only manufacturers 

like ours, but expense of clinicians, patients, and payers. 

The fact that our primary competitor, who owns more than 90 

percent of the pulse oximetry market, can pay group purchasing organizations to exclude Masimo from the market is dead wrong. It 

is not good for Masimo and it is not good for the society. 

The title of the hearing is, ‘‘Hospital Group Purchasing: Lowering 

Costs at the Expense of Patient Health and Medical Improvements?’’ I presume this title assumes that GPOs are saving money. 

I do not understand how they can save money when they exclude 

competition in most instances. 

My dad used to say to me, to keep your honest neighbors honest, 

lock your front door. Well, with very good intentions, Congress left 

the door open in 1986 and allowed kickbacks to be paid by suppliers to group purchasing organizations. I guess in a polite world, 

those are not called kickbacks, they are called administration fees, 

marketing fees, other types of fees. 

GPOs, and when I mean GPOs, I am talking about the most powerful group purchasing organizations like Novation and Premier, 

are using this policy to enrich themselves and a few companies by 

selling them exclusivity and market share, to these powerful companies. Their strategy is to maximize the group purchasing organizations’ and these companies’ revenues at the expense of vendors, 

hospitals, patients, and payers, and as you very well know, government is one of those payers and pays over 40 percent of health care 

expenditures. 

Why have we concluded this? For 4 years, we have had direct experience dealing with Premier and Novation, who we believe actually control over 70 percent of U.S. hospitals’ purchasing. There has 

been a systematic pattern of exclusion of competition by sole-source 

contracting, by bundling, by questionable tactics, which include 

threatening manufacturers of Masimo-type devices, the same manufacturers that actually are current, or some of them are still current GPO contractees, with expulsion if they show Masimo technology to their member hospitals. We discovered the hard way that 

the breakthrough process, the breakthrough technology process, or 

the technology assessment process, is a sham. I have specific examples that I will be happy to share with you here today and I welcome your questions on that. 

26

Is this all sour grapes? There is an exhibit I would like to show 

you. I think it is important, if you will allow us, Chairman Kohl, 

to show it. 

Let us look at this exhibit. Masimo has 100 percent success rate 

in the free markets. In the magenta, you see the sole-source GPOs. 

In the yellow, you see the free markets. Last year, we did not lose 

one deal, we did not lose one opportunity at a hospital that was in 

a free market. AmeriNet is actually one GPO who has allowed 

Masimo in contract, and we are grateful of that. They are acting 

differently. They do believe members should have choice and voice 

and they do believe in bringing value. Then also, independent hospitals, zero. I did not expect to see the statistics, Chairman Kohl, 

but we lost zero. 

At the same time, we lost 48 contracts, 22 at Premier, 24 at Novation, and 22 at Consorta. These are all sole-source contractees 

with Tyco–Nellcor, who is the 90 percent market share competitor 

of ours. As you can see, in hospital-wide conversions, what that 

means, these are hospitals that chose that every one of their patients should have access to Masimo SET, in the free markets, over 

50 percent of those hospitals chose to have every patient there be 

monitored with our technology. As you can see, the sole-source environment, in Novation, we did have some success, 10 percent, but 

those happen to be the most famous institutions, like Massachusetts General Hospital, where they are not easily bullied by such 

tactics. Thank you. 

We are not just an anecdote. I know some would like you to believe that, but Masimo’s story is just one of many, just one example. Chairman Kohl, there are numerous other companies—I can go 

from A to Z, companies like Applied Medical, Biotronics, Retractable Technologies, St. Jude Medical, and Utah Medical—that suffer 

the same problems that I am talking about today. 

The current system for group purchasing organizations like Premier and Novation sell markets and exclusivity to group selling organizations, these big companies I big call them, has a negative impact on health care. Many companies are exploiting the system to 

exclude competition. Competition and innovation is, therefore, stifled. Prices are artificially kept high. Patient care is being harmed. 

Today, it is the best pulse oximetry, the best pacemaker, the best 

safety needle, but tomorrow, it could be the best cancer treating 

medication that is kept out. 

We need a solution. The solution should restore free market. I 

have my own. I would be happy to share with you what my recommendations for those solutions are. But we believe competition 

is not only the key to innovation and improved health care, but as 

one hospital purchasing manager has put on his walls, he put, 

‘‘Competition is the mother of lower prices.’’

So I would be happy to answer your questions and I thank you 

for this opportunity. 

Chairman KOHL. Thank you for your testimony today, Mr. Kiani. 

Now, we move on to Dr. Mitchell Goldstein, a physician at the 

Citrus Valley Medical Center at the University of California, Irvine 

Medical Center. He specializes in neonatal medicine. 

Dr. Goldstein. 

27

STATEMENT OF MITCHELL GOLDSTEIN, M.D., NEONATOLOGIST, CITRUS VALLEY MEDICAL CENTER, WEST COVINA, 

CALIFORNIA 

Dr. GOLDSTEIN. Good afternoon. Thank you for inviting me to 

testify today. I am Dr. Mitchell Goldstein. I am a practicing 

neonatologist and clinical researcher in southern California. 

I am here because I have become concerned that products offering improved care and potentially decreased costs are being kept 

from reaching patients due to purchasing constraints. GPOs operate in the middle ground, selectively contracting with manufacturers and supposedly providing discounted pricing to hospitals. 

Pulse oximeters’ incessant beeping and alarming were more of a 

distraction than a useful clinical tool when I started practice. During one outbreak of retinopathy prematurity, a disease caused by 

too much oxygen given to premature infants, an associate of mine 

went through the neonatal intensive care unit, shutting off every 

oximeter in the room. The devices were the cause of inappropriate 

oxygen administration. This was the beginning of my interest in 

improving this technology. 

Since 1994, I have conducted several studies on pulse oximetry. 

I found a 90 percent reduction in false alarms in neonatal patients 

using Masimo technology. Looking at the independent studies, 

Masimo SET has been shown to be overwhelmingly superior to its 

competition. 

Masimo SET has not been placed on the GPO’s availability list. 

Those of us physicians who have tried to lobby for purchase of 

Masimo SET in GPO-dominated hospitals have dealt with the incessant smoke and mirrors techniques. One former associate of 

mine in an area children’s hospital has indicated in a national neonatal forum that his hospital’s GPO contract prevents them from 

acquiring more than a certain percentage of Masimo pulse 

oximeters. His hospital has also requested that he not speak publicly about these constraints. 

Several years ago, I was involved in the care of a newborn several weeks of age. The baby came to the emergency room in extreme condition. The skin was blue. Resuscitation was begun. The 

conventional monitors gave no indication of improvement. The 

pulse oximeter could not measure the infant’s oxygen saturation. 

No amount of effort appeared to improve the situation. The nurses 

and respiratory therapists questioned the wisdom of continuing the 

resuscitation. I attached a novel new oximeter that we had only because of our research. We finally had a number to work with. 

If not for the presence of the Masimo pulse oximeter, life-sustaining efforts would have been discontinued. At this hospital, the 

same pulse oximeters that did not work are still in use. GPO-related incentives prevented the introduction of a better product. Another oximeter’s failure nearly cost several small premature babies’ 

lives. In one case, this device reported a near-perfect saturation 

when the baby had no oxygen in the blood at all. 

While these occurrences have been reported to the manufacturer 

and subsequently to the FDA, these oximeters are still in clinical 

use in this particular hospital. Why? Because despite the manufacturer’s admission that the oximeter was not designed to work in 

this type of situation, a GPO-mandated contract stipulates that 

28

this hospital cannot engage in contracting to purchase another 

manufacturer’s pulse oximeters. 

Bunnel Incorporated produces a state-of-the-art newborn ventilator that prevents chronic lung disease by delivering very fast but 

very small ventilator breaths. An innovative device with improved 

ventilation and better monitoring has been put on the shelf because 

of lack of funding. The reason? Venture capitalists will not advance 

the funds necessary to continue the development of the ventilator 

because the manufacturer does not have an existing relationship 

with any of the GPOs. Efforts to produce a ventilator for adults 

have met with similar outcome. The GPOs have not only restricted 

market access, but have discouraged and prevented research and 

development of newer innovative technologies. 

Another ventilator company, Infrasonics Corporation, with an innovative line of ventilators with promising clinical results, was unable to capture sufficient market share to remain viable due to 

GPO contracting. 

Utah Medical Products makes special newborn central line catheters designed to reduce complications. In some hospitals, these 

catheters are smuggled in or kept under lock and key because they 

are prohibited under the GPO contract. Physicians are discouraged 

from officially approaching the vendor for in-hospital competitive 

trials. 

Who is it, after all, that decides which equipment is covered by 

the GPO contracts? What criteria are used? What happens to the 

research and development process? If the proper equipment is not 

made available, how does the individual patient suffer? 

In my field, the answer is clear. Take away the incentive to develop newborn-appropriate devices, pulse oximeters, ventilators, 

catheters, and other equipment, develop only for the highly profitable product lines, cater to the lowest common denominator, and 

patient care will be compromised, the point that babies go blind 

from being exposed to inappropriate amounts of oxygen, flail helplessly while convulsing on ventilators designed principally for 

adults, and once again, lose their lives to the ravages of premature 

lung disease. 

As physicians, we weigh thoroughly our choices for care and 

medical therapeutics. Where medical care has become subservient 

to contracting demands, our ability to practice medicine is curtailed. Innovation deferred, health care denied. Give us the option, 

the freedom of choice to select the medical equipment that will 

most adequately meet our patients’ needs at the best possible price. 

Thank you very much. 

Chairman KOHL. We thank you very much, Dr. Goldstein. 

[The prepared statement of Dr. Goldstein follows:]

STATEMENT OF MITCHELL GOLDSTEIN, M.D., NEONATOLOGIST, CITRUS VALLEY

MEDICAL CENTER

Patient care is dependent on the availability of equipment designed specifically 

to meet patient needs. The individual needs of patient care are often subservient 

to the contracting demands of institutions. Without doubt, the need to decrease cost 

is a powerful drive to achieving better access to health care. A better balance sheet 

allows a hospital to more efficiently meet its needs. Group Purchasing Organizations 

operate in the middle ground selectively contracting with manufacturers and supposedly providing discounted pricing to hospitals. However if the equipment availVerDate Mar 21 2002 14:00 Apr 11, 2003 Jkt 085986 PO 00000 Frm 00032 Fmt 6633 Sfmt 6621 C:\HEARINGS\85986.TXT SJUD4 PsN: CMORC
29

able doesn’t provide for the individual needs of the patient, at what price is cost 

savings achieved? 

During my training and early practice as a Neonatologist, pulse oximeters (devices designed to measure the amount of oxygen in the blood) had been more than 

a casual annoyance. The incessant beeping and alarming of the non-functional devices were more of a distraction than a useful clinical tool. During one outbreak of 

retinopathy of prematurity (blindness caused by too much oxygen given to premature infants) an associate of mine went through the neonatal intensive care unit, 

shutting off every oximeter in the room. These devices were the cause of inappropriate oxygen administration. Several weeks later I was discussing our frustration 

with a manufacturer of newborn hospital equipment and expressed my concern that 

no one in the field was working to enhance the State of the art. He gave me contact 

numbers for Masimo. This was the beginning of my interest in their technology. 

Since 1994, I have been involved in clinical studies with Masimo Signal Extraction Technology (SET) pulse oximeters. My early studies demonstrated the practicality of a ‘‘Novel Pulse Oximeter Technology Resistant to Noise Artifact and Low 

Perfusion’’ and that this technology was . . . ‘‘Capable of Reliable Bradycardia (low 

heart rate) Monitoring in the Neonate’’. Subsequently, I was able to demonstrate a 

90 percent reduction in false alarms in neonatal patients using Masimo technology. 

I showed that ‘‘Conventional Pulse Oximetry Can Give Spurious Data in a Neonatal 

Population at Risk for Retinopathy of Prematurity (ROP),’’ demonstrated the feasibility of reliable pulse oximetry operation during neonatal transport, and revealed 

that Masimo SET reliably tracks neonatal heart rate variability. We investigated 

and concluded that ‘‘Selective Inattention to Pulse Oximetry Alarms is Unsafe in Infants at Risk for Apnea of Prematurity’’. In studying Nellcor alarm management 

technology, SatSeconds, we showed that in an effort to limit ‘‘nuisance’’ alarms, the 

Nellcor N–395 misses relevant desaturations and jeopardized the detection of the infant at risk for sudden infant death syndrome. 

Other groups have looked critically at the emerging pulse oximeter technologies. 

Dr. Barker has shown significantly fewer missed true events and false alarms using 

Masimo SET technology in adults. He has demonstrated that Masimo SET is on the 

top of the curve relative to performance when compared to other oximeter technologies using a model of motion and low perfusion. Dr. Torres’s group has shown 

the failure rate of the Nellcor 395 to be four times that of Masimo SET. Dr. 

Brouillete has shown that Masimo SET is more accurate for monitoring breathing 

obstruction during sleep in children and that the Nellcor 395 is not adequate for 

a sleep laboratory setting. Dr. Hay has shown decreased false alarms, missed true 

events, and measurement failures by Masimo SET relative to other technologies. Dr. 

Sola has demonstrated a significant decrease in retinopathy of prematurity. Overall 

looking at major independent studies, Masimo SET has been shown to be overwhelmingly superior to its competition. 

Despite this plethora of evidence, Masimo SET has not been placed on the GPO’s 

availability list. Those of us physicians who have tried to lobby for purchase of 

Masimo SET in GPO dominated hospitals have dealt with the incessant ‘‘smoke and 

mirror’’ techniques. One former associate of mine at an area Childrens Hospital has 

indicated in a national neonatal forum that his hospital’s GPO contract prevents 

them from acquiring more than a certain percentage of the ‘‘superior’’ Masimo SET 

oximeters. His hospital has also requested that he not speak publicly about these 

constraints. Dr. Sola’s experience, as reported in the New York Times article, caused 

him to question the entire buying process. ‘‘In country with freedom of choice, this 

was the hardest thing for me to understand,’’ said Dr. Sola. ‘‘If the baby was choosing consciously, we know what the baby would choose.’’

Several years ago, I was involved in the care of a newborn several weeks of age. 

The baby presented to the emergency room in extreme condition. The skin was poorly perfused and blue. The blood pressure was not measurable. The baby was brought 

to the newborn intensive care unit immediately. Artificial ventilation was provided, 

central lines were placed, and fluids and cardiac medications were given. The conventional monitors gave no indication of improvement. I had approached the parents 

about the seriousness of the situation after working on the baby for over a half 

hour. The nurses and respiratory therapists questioned the wisdom of continuing 

the resuscitation. The pulse oximeter could not measure the infant’s oxygen saturation. The baby still appeared blue and poorly perfused. No amount of effort appeared to improve the situation. Out of desperation, I attached a novel new oximeter 

(which only available to me on a research protocol) designed to work through poor 

perfusion. Finally, we had a number to work with. Despite the fact that the other 

oximeter was attached, for the next several hours, until the blood pressure was in 

the normal range, there was no saturation readout. If not for the presence of the 

Masimo pulse oximeter, life-sustaining efforts would have been discontinued. The 

30

baby, who was subsequently diagnosed with a complex heart defect, would have died 

instead of receiving a life sustaining heart transplantation. At this hospital, the 

same pulse oximeters that failed to measure this baby’s vital signs are still in use 

despite my years of research demonstrating the superiority of Masimo’s technology. 

GPO related incentives prevented the introduction of a better product. 

Is this an isolated case? No, there are numerous other clinical examples of 

oximetry failure. Within the past several months at yet another hospital, I have had 

the displeasure to witness another device’s failure nearly costing several small premature babies’ lives. In one case, this device reported a near perfect saturation, 

when the baby had no oxygen in her blood. While these occurrences have been reported to the manufacturer and subsequently to the FDA, these oximeters are still 

in clinical use in this particular hospital. Why? Because despite the manufacturer’s 

admission that the oximeter was not designed to work in this type of situation, a 

GPO mandated contract stipulates that this hospital cannot engage in contracting 

to purchase another manufacturer’s pulse oximeters. 

There are additional examples. In the area of assisted ventilation, GPO mandated 

contracts have restricted innovation. Bunnel Incorporated has for many years produced a State of the art newborn ventilator that helps prevent chronic lung disease 

by delivering very fast but very small ventilator breaths. An innovative device under 

development that would have produced improved ventilation with better monitoring 

has been put on the shelf for lack of funding. The reason? Venture capitalists will 

not advance the funds necessary to continue the development of the ventilator because the manufacturer does not have a relationship with any of the GPO’s. Efforts 

to produce a ventilator for adults have met with similar outcome. Because of predatory tactics, the GPO’s have not only restricted market access to only a select few 

companies but have discouraged and prevented research and development of newer 

innovative technologies. 

Infrasonics Corporation manufactured one of the more popular neonatal and pediatric ventilators. The InfantStar and InfantStar 950 were in widespread use in neonatal units across the country. These ventilators distinguished themselves in being 

the ‘‘workhorses’’ of neonatal ventilation. With the rise of GPO related contracting, 

Infrasonics had decreased ability to sell to its market. Despite the fact that the 950+ 

was under development and provided many new and innovative modes of neonatal 

and pediatric ventilation, further sales and development of the product line were ultimately scuttled. These new ‘‘market pressures’’ decrease the number of options 

available to provide patient care. 

Utah Medical Products makes special newborn central line catheters designed to 

ease insertion, reduce the risk of perforating blood vessels, and prevent complications such as catheter breakage, clotting, or adhesion to the wall of these blood vessels. In some hospitals, these catheters are smuggled in or kept under lock and key 

so that they can be available for ‘‘only the sickest’’ patients. Physicians are discouraged from ‘‘officially’’ approaching the vendor for in hospital competitive trials. Hospitals are falsely led to believe that they can rely on a consistent pricing schedule 

offered through the GPO’s to meet physician expectations for choice and quality. 

Hospital costs can increase secondary to related complications, and again patient 

care suffers. 

The argument that the GPO’s offer for standardization of patient equipment 

across a hospital or across a hospital network is persuasive. Put the same equipment in numerous centers across the country, standardize the equipment in the hospital so that you decrease the cost of training nurses and respiratory therapists, 

achieve the efficiencies of being able to order in large quantities, and increase the 

amount of money supposedly available for research and to ‘‘improve patient care’’. 

But, there is a significant downside. Who is it after all that decides which equipment is carried by the GPO contract? What criteria are used? What happens to the 

research and development process? If the proper equipment is not made available, 

how does the individual patient suffer? In the case of my field, the answer is clear. 

Take away the incentive to develop newborn appropriate devices, pulse oximeters, 

ventilators, catheters, and other equipment, develop only for the highly profitable 

product lines, cater to the lowest common dominator; and patient care will be compromised to the point that babies go blind from being exposed to inappropriate 

amounts of oxygen, flail helplessly while convulsing on ventilators designed principally for adults, and once again lose their lives to the ravages of premature lung 

disease. 

As physicians, we learn to weigh thoroughly our choices for care and medical 

therapeutics. Where medical care has become subservient to contracting demands, 

our ability to practice medicine is curtailed. Give us the option, the freedom of 

choice, to select the medical equipment that will most adequately meet our patient’s 

needs at the best possible price.

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Chairman KOHL. Now, we turn to Mr. Lynn Detlor. He is the 

principal of GPO Concepts, Inc. 

STATEMENT OF LYNN R. DETLOR, PRINCIPAL, GPO 

CONCEPTS, INC., SAN DIEGO, CALIFORNIA 

Mr. DETLOR. Senator Kohl, thank you, Senator DeWine. My professional career in health care began in 1972. Group purchasing in 

health care at that time was in its infancy. Hospital medical supply 

costs averaged 6 to 7 percent of our annual expense budget, as 

compared to today in a hospital, where the expense for medical 

supplies could range anywhere between 23 to 28 percent, depending on the acuity of care delivered. The growth in new technology 

has helped to expand the growth in the supply cost arena. 

The political impact of Medicare legislation in the mid–1970s on 

operating expenses had a direct impact on hospital executives targeting areas to lower expenses. Salary impact as a potential target 

caused adjustments in nurse staff-patient ratios, and supply cost 

reductions through materials management was the major targets. 

This drove the rapid growth of State and local group purchasing organizations. 

In 1974, I was hired by the Adventist Health System to organize 

and establish a collective purchasing program for 17 hospitals in 

the Western United States. This shortly led to the expansion of the 

program to all 84 Adventist institutions in North America. 

In 1986, I was hired by American Healthcare Systems to organize and develop a national group purchasing organization, which 

ultimately grew to 40 multi-hospital systems representing approximately 1,400 institutions. This growth and expansion was directly 

related to the continued pressure to lower operating costs. Also in 

response to competition from for-profit health systems in select 

markets throughout North America, American Healthcare Systems 

operated with approximately 60 employees and an annual operating budget of $10 to $12 million. 

Income was derived from annual dues from its members. Over 

time, dues were replaced by fees charged to a select group of manufacturers, at that time which we called corporate partners. Fees 

were not taken on all contracts. Instead, management time was 

spent on helping the select manufacturers reduce their costs of selling and passing it along to the hospitals. The elimination of dues 

was seen as an additional cost-cutting strategy. Other group purchasing organizations were already solely fee-funded from the medical manufacturing industry. 

Pricing of products was implied by medical manufacturers to be 

linked to the largest compliant customers. This, in turn, led to the 

consolidation of the marketplace. Local and State group purchasing 

organizations began to consolidate with larger national organizations in the quest for lower prices for their members. Today, less 

than a dozen group purchasing organizations represent the majority of the nation’s hospitals. Two, Novation and Premier, represent 

over 60 percent of the nation’s institutions. 

In 1995, American Healthcare Systems and Premier, a group 

purchasing organization out of Chicago, merged, and six months 

later, Sun Health merged to form what today is the new Premier. 

41

Novation was formed by the linking of the University Hospital 

Consortium and the Voluntary Hospitals of America. 

The outcome of mergers has led to large organizations with operating budgets in excess of $300 to $400 million. Diversity to be 

more than just a group purchasing organization has led to program 

expansions in e-commerce, data mining, business development, 

physician practice management, et cetera. 

Today, working as a consultant in GPO Concepts, we hear the 

same question from two sides of the marketplace, the medical manufacturers and the hospitals. The medical manufacturers are concerned about the value they receive from the fees paid. How much 

of it makes its way down to the hospitals is also a major concern. 

The hospitals are questioning where and how the fees are spent, 

and yet hospitals face even more pressure to continue to lower 

their costs. 

Probably the remaining question in today’s marketplace, are hospitals not competing for the same dollars that today go to the 

GPOs? It is a question the committees and GPOs have to face in 

the future. The solution rests in their management and with the 

marketplace demands upon how they function and how they behave. Thank you. 

Chairman KOHL. We thank you, Mr. Detlor. 

[The prepared statement of Mr. Detlor follows:]

STATEMENT OF LYNN R. DETLOR, PRINCIPAL, GPO CONCEPTS, INC. 

My professional career in health care began in 1972. Group purchasing in hospital 

health care was in its infancy. 

Hospital medical supply costs averaged 6 to 7 percent of annual expense budget 

as compared to today in a hospital where the expense for medical supplies could 

range anywhere between 23 to 28 percent depending on the acuity of care delivered. 

The growth in new technology has helped to expand the growth in supply costs. 

The political impact of Medicare legislation in the mid-70’s on operating expenses 

had a direct impact on hospital executives targeting areas to lower expenses. Salary 

impact as a potential target caused adjustments in nurse-patient staffing ratios and 

supply costs reduction through material management were the major targets. This 

drove the rapid growth of State and local group purchasing organizations to emerge. 

In 1974 I was hired by Adventist Health System West to organize and establish 

a collective purchasing program for 17 Adventist hospitals in the Western United 

States. This shortly led to the expansion of the program to all 84 Adventists 

throughout North America. In 1986 I was hired by American Healthcare Systems 

to organize and develop a national group purchasing organization which ultimately 

grew to 40 multi-hospital systems representing approximately 1400 hospitals. This 

growth and expansion was directly related to the continued pressure to lower operating costs. Also in response to competition from the for-profit health systems in select markets through North America, American Healthcare Systems operated with 

approximately 60 employees and annual operating budget of 10–12 million dollars. 

Income was derived from dollars. Income was derived from annual dues. Over time 

dues were replaced by fees charged to select group of manufacturers called corporate 

partners. Fees were not taken on all contracts. Instead, management’s time was 

spent on helping the selected manufacturers reduce their costs of selling and passing it along to the hospitals. The elimination of dues was seen as an additional cost 

cutting strategy. Other group purchasing organizations were already solely fee funded from the medical manufacture industry. 

Pricing of products was implied by medical manufacturers to be linked to the largest compliant customers. This in turn led to consolidation of the market place. Local 

and State group purchasing organizations began consolidating with larger national 

organizations in the quest for lower prices for their members. Today, less than a 

dozen group purchasing organizations represent the majority of the nations hospitals. Two, Novation and Premier represent over 60 percent of the nations hospitals. 

42

In 1995 American Healthcare Systems and Premier (A group purchasing organization out of Chicago) merged and 6 months later Sun Health merged to form what 

today is the new Premier. Novation was formed by a linking of the University Hospital Consortium and the Voluntary Hospitals of America. 

The outcome of the mergers has led to larger organizations with operating budg- ets in excess of $300–$400 million dollars. Diversity, to be more than just a group 

purchasing organization, has led to program expansions in e-commerce and data 

mining, business development, physician practice management, etc. 

Today, working as a consultant at ‘‘GPO Concepts’’ we hear the same questions 

from two sides of the market place, the medical manufacturers and the hospitals. 

The medical manufacturers are concerned about the value they receive from the 

fees paid. How much makes its way down to the hospitals is also a major concern. 

The hospitals are questioning where and how the fees are spent and yet hospitals 

face even more pressure to continue to lower costs. Are the hospitals now competing 

for the same dollars that today goes to the group purchasing organizations?

Chairman KOHL. Finally, we come to Elizabeth Weatherman, 

who is the Managing Director of Warburg Pincus, where she has 

been a member of the health care group since 1988. 

STATEMENT OF ELIZABETH A. WEATHERMAN, VICE CHAIR, 

MEDICAL GROUP, NATIONAL VENTURE CAPITAL ASSOCIATION AND MANAGING DIRECTOR, WARBURG PINCUS, LLC, 

NEW YORK, NEW YORK 

Ms. WEATHERMAN. Thank you, Senator Kohl, Senator DeWine. 

Yes, Warburg Pincus is one of the largest venture capital firms in 

the United States and, therefore, in the world, since the United 

States is the most vital community for venture capital. We have 

also been a leader in health care investing for over 30 years. I have 

been with the firm for 14 years, and for the last 13 of those have 

been actively investing in medical technology companies. 

I am also the Vice Chair of the medical group within the National Venture Capital Association and am here today on behalf of 

the more than 475 professional venture capital firms dedicated to 

stimulating the flow of equity capital to emerging growth and developing companies. Our members currently invest more than $36 

billion per year in such companies and have invested nearly $210 

billion in aggregate over the past 20 years, funding many of the 

most important technological and medical breakthroughs of that 

period across the fields of biotechnology, drug development, medical 

devices, and health care services. 

First, I would like to thank you, Senator Kohl, and your committee and your staff for bringing forth and taking the initiative to 

examine this very critical issue to the venture capital medical device industry and the medical community at large and patients and 

Americans at large. 

During the past 30 years, the venture community has financed over 1,300 innovative medical companies with more than $20 billion in start-up capital, including more than $4.2 billion last year 

alone. These companies now have sales of tens of billions of dollars 

and employ more than two million people, and most importantly, 

have revolutionized medical care for nearly all Americans. 

In fact, it is fair to say that virtually every U.S. citizen born during the last 30 years will benefit personally and significantly from 

one or more of the drugs or medical devices developed with venture 

capital. These include MR imaging, ultrasound, coronary 

angioplasty and stints, implantable cardiac defibrillators, spinal 

implants, pulse oximetry, and drugs for cancer, heart attacks, and 

43

anemia, to name a very few. Clearly, what these companies do is 

critically important to the well-being of the American public and 

the world at large. 

A second point is that bringing medical innovation to market is 

very hard. It entails taking enormous risks. These include refining 

and perfecting the technology itself, proving the safety and efficacy 

via well-conceived and executed human clinical trials, obtaining the 

FDA approval to market the technology, developing the means to 

assure high-quality manufacture of the technology, and obtaining 

an efficient means to sell and distribute it to the market. Like any 

market, it also entails for new entrants contending with established competitors who already have significant share with the customer base. 

Any one of these risks alone may lead to a venture-backed company’s failure, and many companies focused on medical innovation 

actually do fail. Venture capitalists accept these legitimate risks 

every day, while traditional financial institutions and governmentsupported programs cannot. It is the function of the venture capital 

community to take risks like this. 

However, it is our view that the anti-competitive practices of the 

GPO community as currently configured disrupts the already highly fragile and risky process of bringing medical innovation to market. The new reality is that GPOs are now financed, and therefore 

too controlled by, large medical products companies rather than by 

the hospitals they are intended to represent. 

GPO practices such as long-term contract exclusivity, substantial 

fee structures, and product bundling, if allowed to continue, will so 

constrict potential markets that product segments where these 

practices are widely adopted will simply not be considered for venture capital backing. This investment drain will result in a stagnation of product innovation and stymie improved patient care in 

these product segments. 

It is hard enough for a small company to overcome the power of 

a large entrenched competitor even in an open and competitive 

marketplace. It is nearly impossible when monopolistic producers 

collude with monopsonistic buyers, such as GPOs to suppress competition. 

While the government would not tolerate such practices in any 

other sector of the economy, for it to tolerate or even encourage the 

situation in medicine is very disturbing, because one of the clear 

effects is to impede innovation, certainly not the government’s intent. In medicine, as much if not more than any other sector, in 

contrast to any other sector, reduced innovation ultimately affects 

patients’ lives and health, and there is no doubt that patients’ 

health have suffered as a result of GPO activities. In light of this, 

the anti-competitive activities of the GPOs should be viewed with 

even more, not less, skepticism. 

Finally, the idea that GPOs save money for hospitals by extracting larger price discounts from manufacturers than manufacturers 

could achieve themselves is unprovable and most likely wrong, 

unprovable because no one knows what the real market price 

would be in a truly competitive market among producers in the absence of GPO gatekeeping. In fact, the product areas where GPOs 

collude with producers who already have virtual monopolies, the 

44

‘‘discounted’’ price, quote-unquote, that the GPOs claim to achieve, 

is almost certainly well above what the market price would be in 

an open and competitive marketplace. 

In summary, the venture capital community believes there are 

enormous opportunities to continue to improve the health of the 

American public through the development and application of new 

technology. These efforts are already very expensive and risky. Despite this, my community is committed to further investments in 

U.S. health care technology. However, the increasing powers of 

GPOs and their collusive and anti-competitive activities with larger 

entrenched medical companies threatens to undermine the open 

and competitive markets that have served the American public well 

by stimulating fair prices and vast technological innovation. We 

would strongly encourage the committee to correct these abuses 

and again open these markets to fair and vigorous competition. 

Chairman KOHL. We thank you, Ms. Weatherman. 

[The prepared statement of Ms. Weatherman follows:]

STATEMENT OF ELIZABETH A. WEATHERMAN, VICE CHAIR, MEDICAL GROUP, NA- TIONAL VENTURE CAPITAL ASSOCIATION AND MANAGING DIRECTOR, WARBURG

PINCUS, LLC 

Good Morning. My name is Bess Weatherman and I am Vice Chair of the Medical 

Group of the National Venture Capital Association. I am here today on behalf of 

the more than 475 professional venture capital and private equity firms dedicated 

to stimulating the flow of equity capital to emerging growth and developing companies. Our members currently invest more than $36 billion per year in such companies and have invested nearly $210 billion in aggregate over the past 20 years, funding nearly all of the most important technological breakthroughs of that period. A 

substantial number of these firms invest heavily in the life sciences field that includes biotechnology, drug development, medical devices and therapeutics and 

health care services. In 2001, the venture capital community invested more than 

$4.2 billion, or more than 10 percent of all venture investing last year, in these medical industries. 

Venture investment in the life sciences has given new hope to people who suffer 

maladies across virtually the entire spectrum of diseases and afflictions. In fact, 

without patient investment from venture capitalists, the biotechnology and medical 

technology industry, for example, would be virtually nonexistent. Almost every biotechnology product that has been approved for sale by the Food and Drug Administration has been financed by the venture capital community. The venture community also provided financing for many of the medical devices and therapeutics we 

take for granted today, including the entire interventional cardiology or stent industry. These now standard medical treatments allow patients to lead longer and 

healthier lives. The venture community’s dedication to the medical technology industry exists despite heavy government regulation and the longer-term investing 

strategy required for successful development of new medical technology, even when 

compared to other emerging market investments. 

Few can argue that what these companies do is critically important to the well 

being of the American public and the world at large. However, the results of the 

debate we are holding today on reforming group purchasing organizations to ensure 

a competitive and open market for all medical industry producers will directly affect 

the future of emerging life science companies and in turn impact the availability of 

the important medical products these companies are developing. 

Let me be clear, companies subject to, or potentially subject to, anti-competitive 

practices by GPOs will not be funded by venture capital. As a result, many of these 

companies and their innovations will die, even if they offer a dramatic improvement 

over an existing solution. Permitting this innovation stifling practice is unnecessary 

and counter to what we believe should be a fundamental role of the government: 

enhancing health by making new or improved products widely available as quickly 

and efficiently as possible. 

THE ROLE OF VENTURE CAPITAL IN IMPROVING AMERICA’S HEALTH

Venture capital plays an integral, often-unsung role in the development of medical 

technology. In fact, venture capital is the single most important source of early 

45

stage financing to new and emerging health-focused companies. During the past 30 

years, the venture community financed 1,324 innovative medical companies with 

more than $20 billion in startup capital. These companies now have sales of tens 

of billions of dollars, employ more than 2 million people and most importantly, have 

revolutionized medical care for nearly all Americans. It is fair to say that virtually 

every U.S. citizen born during the last thirty years has benefited or will benefit, in 

his or her lifetime, personally and significantly from one or more of the drugs or 

medical devices developed with U.S. venture capital. These include MR imaging, 

ultrasound, angioplasty/stents, implantable defibrillators, spinal implants, pulse 

oximetry and drugs for cancer, heart attacks, and anemia, to name a very few. It 

is also important to note that the real medical impact of venture investments is also 

significantly greater than even these numbers would suggest, since our investments 

are normally focused only on ground breaking or revolutionary technology by the 

very nature of our investment selection process. Many of these companies’ names 

are now synonymous with progressive medical technology including Guidant, 

Amgen, and Genentech. 

WHY MEDICAL DEVICE AND BIOTECHNOLOGY COMPANIES NEED VENTURE CAPITAL

Medical device and biotechnology companies need venture capital because their 

capital needs are so large, their time to market so long—due in large part to regulatory compliance—and their risks so high. There are enormous entrepreneurial 

risks in bringing medical products to market—risks that include proving product 

safety and efficacy, securing patent protection, securing a good distribution channel, 

facing entrenched competition, and possibly running out of money before the product 

can reach a significant portion of the market—to name just a few. Such characteristics make these young companies ineligible for bank financing or other sources of 

private capital. 

It is important to note that venture capitalists will accept these legitimate risks 

that traditional financial institutions and government supported programs cannot—

it’s part of our function. But, VCs do not, cannot, and will not accept unnecessary 

and unfair risks. We need to provide our investors with justification that substantial 

capital investment can result in successful product development and financial gain. 

Thus, we have no interest in products that can be blocked from fairly competing for 

a share of a market, even after a long, expensive and risky product development 

cycle. Simply put, venture capitalists will increasingly stay away from many investments in long-term, high-risk medical breakthroughs if the government continues 

to allow anticompetitive business practices to artificially limit access to medical 

market. 

STANDARD BUSINESS PRACTICES BY GROUP PURCHASING ORGANIZATIONS AFFECT

VENTURE CAPITAL INVESTMENT EMERGING MEDICAL COMPANIES, AND PATIENT CARE

GPO roadblocks have greatly diminished the attractiveness of medical device and 

biotechnology investments because they reduce the confidence of venture capitalists 

that they will have fair access to medical markets and thereby will achieve a return 

on very risky investments. To put this in perspective, between 1990 and 1994 at 

least 22 percent of all companies financed by venture capitalists were medical device 

or biotechnology companies, with medical device companies accounting for approximately 9 percent and biotechnology companies accounting for 13 percent of the 22 

percent. By comparison, during the period 1999 to 2001 these companies made up 

only 8.9 percent of all companies receiving venture capital financing. Of this 8.9 percent, device companies received 5.0 percent and biotechnology companies receive 3.9 

percent. 

These numbers dropped dramatically from 1999—2001 when 9.8 percent, 7.1 percent and 11 percent respectively of the companies funded were medical device or 

biotechnology companies. For these years, medical device companies dropped more, 

making up only 5.5 percent, 3.9 percent and 6.2 percent of the combined totals. 

One of the reasons for this relative decline new investment is a lack of market 

access brought about by the business practices and the increasing power of GPOs. 

GPO practices such as contract exclusivity, substantial fee structures, and product 

bundling, if allowed to continue, will so constrict potential markets that product segments where these practices are widely adopted will simply not be considered for 

venture capital backing. This investment drain will result in a stagnation of product 

innovation and stymie improved patient care across these product sectors. 

The arguments made by GPOs about the ‘‘administrative’’ savings they provide 

to members could be applied to every single sector of the economy and are virtually 

identical to the arguments made by the anticompetitive ‘‘trusts’’ of the early 1900’s, 

which led to the landmark Sherman Antitrust laws. The idea that the GPOs ‘‘save’’ 

46

money for hospitals by extracting larger price discounts from producers than they 

could achieve by themselves, is unprovable and most likely wrong—unprovable because no one knows what the ‘‘real’’ market price would be in a truly competitive 

market among producers (in the absence of GPO gatekeeping). In fact, in product 

areas where GPOs collude with producers who already have virtual monopolies, the 

‘‘discounted’’ price that the GPOs claim to achieve is almost certainly well above 

what the market price would be in an open and competitive marketplace. The impact of the GPOs in healthcare is equally anticompetitive and stifling of innovation, 

and there is no special reason why the healthcare system should be the only sector 

of the economy where such practices are tolerated. 

The venture capital industry exists, in part, because the antitrust philosophy of 

the United States prevents entrenched, unmoveable competitors from abusing their 

market power to unfairly restrain competition. By their very nature, virtually every 

company we finance is a ‘‘revolutionary’’ and a threat to the established order. The 

technological innovations they develop, whether in computers, electronics, software, 

telecommunications or medicine, are inevitably threats to some existing larger competitor who will use all means at its disposal to defend itself. It is hard enough to 

overcome that kind of power in an open and competitive market place. It is nearly 

impossible when monopolistic producers collude with monopsonistic buyers such as 

GPO to suppress competition. This is precisely what is now happening in 

healthcare. 

As the GPOs become more powerful and add more technologically sophisticated 

products to their portfolios (instead of the more commodity-like products such as 

rubber gloves, syringes and cotton swabs that they originally focused on) the adverse impact on innovation will increase. There will be fewer and fewer areas in 

which venture capital will invest. The current trend is not encouraging. 

The venture capital community believes that collusion between GPOs and providers of medical products to limit market access to competitors is extremely anticompetitive and not justified by any peculiarities of the medical sector. On the contrary, while the government would not tolerate such practices in any other sector 

of the economy, for it to tolerate (and even encourage) this situation in medicine is 

disturbing, because one of the clear effects of these practices is to impede innovation. In medicine, in contrast to any other sector, reduced innovation ultimately affects patients’ lives and health. There is no doubt that patients’ lives have been lost 

and other harm done as a result of GPO’s activities. In light of this, the special exemptions from the normal operation of the antitrust laws granted to the GPOs 

should be viewed with even greater, not less skepticism. 

CONCLUSION

The venture capital community believes that there are enormous opportunities to 

continue to improve the health of the American public through the development and 

application of new technology. These efforts are already very time consuming, expensive and risky, particularly given recent increases and uncertainties in the U.S. 

regulatory environment. 

Despite this, the venture capital community is committed to further investment 

in U.S. healthcare technology. We welcome open and competitive marketplaces, and 

we believe that competition has served the American public well by stimulating fair 

prices and vast technological innovation. The increasing power of GPOs, and their 

collusive and anticompetitive activities with larger medical companies, threatens to 

undermine the open and competitive markets that have produced such obvious benefits for the American public, not only in healthcare, but also across the entire economy. We would strongly encourage the committee to consider legislation to correct 

these abuses and again open these markets to fair and vigorous competition. 

Thank you.

47


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Chairman KOHL. Before I begin my questioning, Senator 

DeWine, who has to leave for another unavoidable commitment, 

has asked to make a comment. 

Senator DEWINE. Thank you, Mr. Chairman. I do apologize to 

the panel and to you for having to leave. Our voting schedule has 

thrown off my schedule a little bit today, but I look forward to 

hearing your comments and reading your comments, and I will, Mr. 

Chairman, be submitting questions for the record for the different 

panelists. 

I have found, Mr. Chairman, that the testimony of Mr. Kiani, Dr. 

Goldstein, and Ms. Weatherman to be extremely troubling, and I 

am anxious for Mr. Norling and Mr. McKenna, to hear their answers, because each one of us has benefitted from technology, medical technology. There is not a person in this room who has not, 

and the older we get, the more we benefit, but we also see it in 

our children and our grandchildren. 

So I am always alarmed if there is any possibility that any kind 

of practice that this Congress is permitting, which we have with 

the law that we passed a few years ago, that might impede that 

kind of research, might impede people taking changes with their 

money, might impede smaller start-up businesses that have an 

idea from getting a fair hearing, and more importantly to get a fair 

hearing, to get the opportunity to make that sale. 

So, again, I apologize to you, Mr. Chairman and the members of 

the committee. I think the testimony has been very good and I will 

take a look at the answers to your questions and the rest of the 

hearing and I will be submitting questions for the record. Thank 

you. 

Chairman KOHL. We thank you very much, Senator DeWine. 

Ladies and gentlemen, it is good to have you here. We think 

there is some opportunity to accomplish some significant things, 

not just today, but tomorrow, next week, and next month, and this 

whole area of GPOs and their impact on health care in our country. 

I was interested and satisfied, very pleased to hear you, Mr. 

Norling, say that you were willing and more than willing to be part 

of a group that is put together to study how we can improve, if possible, improve the practices of GPOs. I assume, or I would like to 

hope, Mr. McKenna, that you would be equally willing to be part 

of a group that would include not only your two companies, but 

perhaps some manufacturers, device manufacturers from hospitals, 

a small group, but a representative group of this entire industry, 

to do what we can collectively do to improve something that you 

would like to improve yourself, if possible, is that correct? 

Mr. MCKENNA. That is more than a fair statement, Senator. In 

fact, if you looked at my chicken-scratched notes, it said to add 

something at the end to acknowledge that——

Chairman KOHL. Right. 

Mr. MCKENNA [continuing]. In the crush of the schedule, I did 

not do that. But I overwhelmingly would be in favor of principles 

of operation, things that would make us better. We always have 

room for improvement. 

Chairman KOHL. Mr. Norling. 

50

Mr. NORLING. I reiterate my comments, Senator. Anything that 

is ultimately going to benefit patients, you are going to find us 

thoroughly supportive of. 

Chairman KOHL. So we will be able to discuss whatever the law 

permits us to discuss. I think that would be significant and I believe that that will result, and I say this not just optimistically, but 

I believe that it is your intention and your sincerity in wanting to 

run a business as well as you can, as clean as you can, and as efficiently and effectively as you can and you would be happy to discuss it. So I think that is a good start. 

Now, we would like to ask the two of you this question of financial interest in companies, either individually or corporately, that 

you do business with. I am sure you could understand how, at least 

on the surface if not far deeper, there is a concern on how, theoretically or in fact, you serve more than one master. So in advance of 

asking you to desist, we would like you to respond to our concern 

about financial interests, either as individuals or corporately, in 

companies with which you do business. 

Mr. McKenna, would you like to speak first, and then Mr. 

Norling? 

Mr. MCKENNA. Certainly, Senator. Thank you. We have a very 

specific conflict of interest policy and a code of ethics that we have 

provided and put into the testimony. So we have employees in our 

company that, like many companies, can own up to 1 percent of a 

public company. In regard to that matter, and what I personally 

own, as the only member of the senior management team that has 

individual stock holdings, I own at this point in time five stocks 

that would be medically related—actually, four medically related 

and one other, and the total holdings are 1,371 shares, with the 

highest holding being 249 shares. 

So what I would suggest in that regard, Senator, is that with 

good clinicians like Ms. Barrett next to me and the over 23 advisory councils that we have, they have no knowledge of my holdings 

nor would they have a need to. But they do not come into play relative to the decisions that our clinicians and others make relative 

to our contract process, which separates both the non-financial or 

quality criteria from the financial criteria. 

Chairman KOHL. Wait, wait, wait. You are saying you do hold 

stock in companies with which your company does business? 

Mr. MCKENNA. Yes, sir. 

Chairman KOHL. You are saying this is OK? 

Mr. MCKENNA. We have a code of conduct, an ethics policy for 

our company, and that policy allows for ownership in public companies of up to 1 percent. 

Chairman KOHL. Well, that may be your company’s policy. That 

is what we are discussing. 

Mr. MCKENNA. Yes, sir. 

Chairman KOHL. I would like to hope you could understand how 

people like myself and others would be skeptical about such ownership. In fact, if you want to be as clean as clean can be, then you 

might consider having a policy—after all, there are many stocks to 

own in this world——

Mr. MCKENNA. Certainly. 

51

Chairman KOHL [continuing]. You could own a plethora of bad 

stocks or good stocks. 

Mr. MCKENNA. That is true. 

Chairman KOHL. So why not just say, look, it is a bad idea. Some 

people who are reputable consider it to be questionable, so I and 

all of those with whom I am associated in my company will not do 

business stock-wise with companies that we buy from, or who buy 

from us. 

Mr. MCKENNA. Certainly, Senator. I think it is worth a review. 

We are in the process of looking at our code of conduct. It has 

served us well, we believe, up to now. We do not believe there is 

any conflict of interest. Even our advisors are asked to abide by the 

same conflict of interest as they make decisions for us. But I think 

taking a look at it certainly would be in order. 

Chairman KOHL. OK. Mr. Norling. 

Mr. NORLING. Senator, we also have a code of conduct/conflict of 

interest policy. It speaks to individuals, and we also have a practice 

with regard to corporate conflict of interest. 

As regards individuals, first of all, to clarify that policy, in any 

cases where an individual is appointed by Premier to any kind of 

an outside board, it is against our policy for those individuals to 

financially benefit. Very specifically, the policy suggests that any 

income earned through that sort of process, be they director’s options, director’s fees, or anything else, would accrue to Premier and 

thus accrue to Premier’s hospitals. So we are very specific on that. 

Cases have been reported in the media that suggest that practices have occurred otherwise. That dates back to the early history 

of the new Premier. There are no such cases at this time. Those 

cases that were reported are under investigation by our outside 

counsel. We are awaiting a comprehensive recommendation caseby-case as to what we ought to do in the four specifics that were 

noted. We have also been advised to maintain confidentiality of the 

individuals involved until we conclude our action. 

So specifically in that regard, as regards holdings by members of 

management in this area, our policy is clear. Some exceptions to 

that have been noticed. They are historic, but that does not mean 

that they are not significant. They are being dealt with in, I think, 

an appropriate way that once we learn about the conflict or the inconsistency of disclosure, we, in turn, pursue it. So with regard to 

that point, I think it is pretty clear. 

Regarding investments by employees in companies that we do 

business with or might do business with, our policy currently calls 

for disclosure, number one, and recusal, number two. I get a sense 

of where you are going here, and we are in the process of reviewing 

this policy. I can tell you that I personally, as regards employees 

in our company and having shares in companies we do business 

with, I am in personal support of a prohibition of that. So as we 

review our policies, we, indeed, will do that. 

Now, regarding board members, for example, who may have a relationship with a company in the medical area, our policy also calls 

for disclosure and recusal and I happen to believe that is appropriate. Board members serve a defined time period. More often 

than not, they come to the board with a set of experience, et cetera, 

and to say that to join this board, you must change your retirement 

52

account that might perhaps have X shares of some medical products company does not, to me, make sense. 

We think the policy of disclosure, and we do have a conflict of 

interest policy that requires full disclosure and the policy-related 

recusal should any issue come to the board regarding that, is an 

appropriate one, but as in all things, we are open to improving and 

we are open for dialogue in that arena. 

Chairman KOHL. Great. I think that is great. All right. 

Mr. Kiani, I am sure you would say, made some very strong testimony here today. He says he has an outstanding product. He says 

that he has sold that product to independent hospitals all across 

this country very successfully and the product is recognized as a 

legitimate, legitimate, very legitimate tool. 

Now, why would you not have him on your list? I mean, the man 

has tried to get on your list. He has clearly got a product that is 

on the list of many hospitals. He is not able to do business with 

you fellows. I would think that one of your sensitivities in your job 

is to recognize, as has been pointed out by people on this panel, 

how important innovation is, that one of your proclivities should be 

to bend over backwards to find ways to encourage innovation, 

which really means to get on your list. If they cannot get on your 

list, as they have pointed out, they are out of business. 

So here is one example of a man who has got a product which 

we would like you to comment on and perhaps tell us why, in your 

esteemed judgment, he doesn’t belong on your list. Who wants to 

be first? 

[Laughter.] 

Mr. MCKENNA. In our case, Senator, Mr. Kiani’s company did 

participate in our process. As I mentioned, it is open and fair and 

he went through the entire process along with two other companies 

that went through the bid process. This process involved an 18-

month period where we utilized over 40 hospital professionals from 

five of our advisory councils and also got research returned to us 

from 850 of our member organizations. 

Utilizing the process that our members have helped us develop, 

which is called low best bid, we separate out the non-financial criteria, very important, things to do with quality, safety, availability, 

education, and service, from the cost factors, and taking the entire 

submissions through that process, our clinicians overwhelmingly 

endorsed the company that we made an award to. 

Now, I would point out that 30 percent of our portfolio is offered 

on a dual or a multi-source basis, and so directly to your question, 

in this case, we found that this technology was different from the 

other technology that we selected. We did not find it at the time 

to be new or innovative, and, therefore, we looked at what value 

would we put on the table relative to the decision process, and once 

again, the task force that drove this decision, over 40 individuals 

strong, overwhelmingly came in favor of the company that we selected. 

We would, if we have not already submitted it into the record, 

would be happy to give a detailed report to you, Senator Kohl and 

all of the committee members, to review our process of cost divided 

by quality resulting in low best bid. 

53

Chairman KOHL. Before we ask Mr. Kiani and maybe Mr. Goldstein to respond to you, Mr. Norling, would you like to respond? 

Mr. NORLING. Yes, indeed. Thank you. First of all, I am not a clinician, so obviously I listen to a presentation both by Mr. Kiani 

and by Dr. Goldstein and it sounds very, very compelling. I will tell 

you very frankly, in the role I am in, I get the benefit of multiple 

inputs from multiple manufacturers, frankly, all of whom suggest 

their product is unique and differentiated and I am not one to 

make that determination. My role is to see that there is a fair and 

effective process, so let me speak to that. 

First of all, Premier facilities are free to choose Masimo’s product. Now, I would acknowledge that we do have a contract. It has 

a target commitment percentage, but there is plenty of room for the 

use of Masimo’s product, and if I could, Senator, I have a couple 

of letters from some very key institutions that speak directly to 

this and I wonder if I might be able to quote from those letters. 

Chairman KOHL. Sure. Go ahead. 

Mr. NORLING. Thank you very much. First of all, from St. Vincent Catholic Medical Centers in downtown Manhattan, an organization that really distinguished itself during the 9/11 tragedy, 

David Campbell is the President and CEO of that organization. He 

writes in a letter to the editor of the New York Times in response 

to a New York Times article, he wanted to highlight the positive 

relationship he had with Premier. He indicated that they internally 

estimate that they have saved 7 to 10 percent through that relationship. 

He highlights, ‘‘the flexibility within Premier’s contracts also 

allow us to choose those products that physicians require, whether 

or not Premier has arranged a group contract. There are instances 

when we have chosen to use products not on contract, such as 

Masimo’s pulse oximeter, to support our caregiver’s preference with 

no penalty from Premier. We currently,’’ as Mr. Campbell says, 

‘‘use Masimo’s technology in our hospitals, although,’’ and the rest 

speaks to the Times and their article. 

Likewise, I have a similar letter here from the Henry Ford 

Health System in Detroit, a large organization serving all of Southeast Michigan. I, frankly, could come up with additional letters, but 

there is certainly the opportunity for the Masimo product to enter 

Premier hospitals, and so I would take exception to the suggestions 

that that is not the case. I have two letters here and, frankly, could 

produce others over time. 

If you are willing, sir, I would submit these for your consideration in the record, and that is up to you, if you would like to do 

so. 

Chairman KOHL. All right. 

So now I would like to go to Mr. Kiani. I think I am hearing at 

least Mr. McKenna say that your product is not all that good in 

comparison to its competitor and that it does not belong on their 

list. Incidentally, Mr. McKenna, is the other product sole source? 

Mr. MCKENNA. In this case, it is a sole-source contract, Senator——

Chairman KOHL. Sole source, all right. 

54

Mr. MCKENNA [continuing]. It may have been as good, but just 

not—we did not find it to be—clinicians did not find it to be innovative, but just different technology. 

Chairman KOHL. Then the question that I would also like to keep 

on the table here is, recognizing your responsibility to be sensitive 

to innovation, I still wonder why the pulse oximeter, is that what 

it is? 

Mr. MCKENNA. Yes, sir. 

Chairman KOHL [continuing]. Should be a sole-source commodity, 

unless you can make the case, not only with respect to this product 

but many other products, that the alternative does not belong on 

anybody’s list. 

Mr. MCKENNA. Not at all, Senator. 

Chairman KOHL. Then why sole source? Before I get to Mr. 

Kiani, why sole source? 

Mr. MCKENNA. In this case, the differential in value is such, offered both in pricing as well as, more importantly, non-financial 

criteria, the clinicians overwhelmingly endorsed this product and 

found the technologies to be different, but not new and innovative. 

So when looking at then making an award, we went through our 

low best bid process and the greater value accrued to our membership by the decision that we had made. 

Mr. Kiani has a fine product, and as Mr. Norling has stated, in 

our organization, our members are free to choose. We have members that use us to a great degree. We have members that use us 

very little. Of the 70 percent of the products that we cover that 

members use, that means 30 percent we do not have contracts for, 

we probably have in the vicinity of a little over 50 percent, 50 to 

60 percent of their business. So about 60 percent is bought off-contract to begin with and 40 percent is bought on-contract, and then 

that level will vary. 

If I could, I sense Ms. Barrett has some information that could 

be helpful relative to——

Chairman KOHL. All right, and then we will hear from Mr. Kiani 

and Mr. Goldstein. 

Ms. BARRETT. If I could, I would like to take Mr. McKenna off 

the hot seat a little bit in that we who participate on the panels 

often discuss that issue as we see a marketplace of items. I have 

to again ask the committee to consider the fact that we, as individual professionals who serve on these councils, take that duty to 

look at innovation, look at the marketplace, consider patient safety, 

very heavily in our deliberations. 

In many cases, we will be advising the Novation staff whether 

we think what we have seen and reviewed warrants a sole source 

or dual source or, in some cases, triple source. We as individual 

members have to realize that when we make that advice to Novation, we probably will be giving up on some financial value, but 

those are decisions that we, as clinicians on these panels and councils, take very seriously. 

Chairman KOHL. OK. Mr. Kiani, then Dr. Goldstein and Ms. 

Weatherman? 

Mr. KIANI. Senator Kohl, if you do not mind, I would like to just 

make a few points. Number one, we do not disagree with Ms. 

Trisha Barrett that the advisory group that Novation has put toVerDate Mar 21 2002 14:00 Apr 11, 2003 Jkt 085986 PO 00000 Frm 00058 Fmt 6633 Sfmt 6601 C:\HEARINGS\85986.TXT SJUD4 PsN: CMORC
55

gether does meet and does diligently try to come up with the best 

solution, but we have reasons to believe that the advisory groups, 

when the votes are taken, they are not listened to and they are 

taking another way or format where people really know what all 

the people on the advisory group really want to do. 

Now that I have made that point, because I do respect UCSF, I 

do respect the advisory groups and the members. I have met with 

a lot of them. They are very good people. It is just not being listened to. 

I would like to address both Premier and Novation, if I may, of 

what has happened in those particular situations. First of all, Premier’s technology assessment team, which supposedly does technical evaluations for Premier and the hospitals, did come out with 

a report that said Masimo is a breakthrough and should be allowed 

and is necessary for certain types of patients. After completing this 

report, Premier stalled us for 2 years. In the meantime, Premier 

extended the sole-source contract with Tyco–Nellcor to 2007 without even asking us for a price. Now, I do not understand how they 

could be saving their members——

Chairman KOHL. Let me say this again, because I want to be 

sure. You are saying they came up with a conclusion that your 

product does represent a breakthrough technology? 

Mr. KIANI. Yes, sir. 

Chairman KOHL. Yet, at the same time, they extended the contract with their other supplier sole source? 

Mr. KIANI. Yes, sir. 

Chairman KOHL. To 2007? 

Mr. KIANI. To 2007. This contract has been in place since 1996 

and it was extended to 2007 and not once did they even ask us, 

what is our competitive bid, so they could use that to hopefully get 

a better price from Tyco–Nellcor. In fact, I have a chart that is in 

the back of your book that I could also put up. That price has been 

constant since 1996. 

Chairman KOHL. You are talking about independent hospitals 

where you have made a sale. How many hospitals are there? I 

think you said 44 percent, but I did not get the number. Did I miss 

the number of independent hospitals where your pulse oximeter 

is——

Mr. KIANI. Yes. I do have the exact number. It is probably in the 

area of about 60 to 70 hospitals where we were able to make sales, 

and the testament that Premier and Novation hospitals wish to 

have our product is that they buy our product, but they stay below 

the 5 percent compliance level, or the 5 percent exclusion level that 

Novation has and the 10 percent level that Premier has. 

Chairman KOHL. OK. 

Mr. KIANI. But if I may just take you through the Premier process, once they renewed it, then later Premier pronounced that because Tyco–Nellcor had purportedly a competitive product, it would 

not further consider Masimo as a breakthrough technology. Now, 

I do not want to take you through 50 clinical studies. I have charts. 

I do not think it is your—you are not here to decide if we are better 

or not. They are not capable of deciding that. It should be clinicians 

that decide what is best for the patient. 

56

I also mentioned that they also said we can get into hospitals. 

We know the Premier hospitals continue to petition Premier for exemptions to permit them to purchase Masimo technology. To date, 

all of these have been denied or not responded to. During the same 

period, at least two of our licensees who manufacture patient monitors with our technology were threatened by Premier to not even 

show Masimo to Premier hospitals. In fact, one of them refused 

and, maybe coincidentally, their contract was not renewed. 

Now, Senator Kohl, over 40 companies, companies like GE Medical Systems, Dataskove, Zoehl, they did their own evaluation. 

They decided Masimo SET was a breakthrough and they made it 

their standard product, but they cannot sell it into Premier and 

Novation hospitals because of these impediments. 

I would like to just briefly tell you about the Novation experience. Novation initially said it was not going to grant a sole-source 

contract for pulse oximetry. They said they were going to do a dual 

source. Masimo was told that many of Novation’s hospitals wanted 

our technology and had listed accuracy, motion performance, which 

is what we pioneered, and price as key to any decision. Now, not 

only did our product beat Tyco–Nellcor’s, respectfully, even though 

Mr. McKenna says we are just different, on accuracy and motion 

performance by 2- to 10-fold to 20-fold to 30-fold, depending on 

which study you look at—independent studies, not ours—but we 

have since learned that our bid price to Novation was 30 percent 

lower than Tyco–Nellcor, who got the contract. 

Now, here is a group purchasing organization that granted a 

sole-source contract, so frankly, Senator Kohl, we assumed Nellcor 

must have given a better price, but we gave a price that was 30 

percent lower, and I have a chart that I could show you if you 

would like me to. 

Chairman KOHL. All right. 

Mr. KIANI. One last thing. I am sorry. You asked a very important question. You asked, why was Masimo excluded? 

Chairman KOHL. Yes. 

Mr. KIANI. You asked why Masimo was excluded. We have been 

told that up until the sixth week of the 18-month process, this was 

going to be a dual source, and Tyco–Nellcor went in in the 11th 

hour and offered a kicker, more than $6 million more per year to 

Novation through an extra 10 percent fee for Novation to put their 

brand name on Nellcor–Tyco sensors and sell it. 

So if you ask why we get excluded, it is because of the payments 

that are being paid by these big suppliers who have learned how 

to manipulate the system to keep their competitors out. In fact, we 

actually believe they are paying between 12 to 23 percent kickbacks to Novation in order to get this exclusion, and if you would 

like, I even have letters from UCSF, I have letters from St. Francis 

Hospitals, and I would just like to read maybe even UCSF’s letter.

‘‘Dear Mr. Wilson.’’

Mr. Wilson is one of our clinical specialists,

‘‘We have evaluated the new Masimo Corporation pulse oximetry and found 

them superior to existing Nellcor monitors. I strongly recommend them for the 

pediatric intensive care unit as well as the operating room.’’

57

This is by Dr. Mohan Reddy from UCSF, which Ms. Trisha Barrett is at. 

Another letter from UCSF, Dr. Scott Soifer, who is the Professor 

of Pediatrics and Vice Chair of Clinical Affairs. He writes,

‘‘Dear Mr. Wilson, I would like to thank you’’

and this is October 12, 2001.

‘‘for the support Masimo provided during our evaluation of pulse oximetry and 

inquire about when we might be receiving new oximeters. After comparing the 

Masimo to the new Nellcor’’

this is the device they say is as good as ours and we are just different

‘‘and HP on dozens of patients, I am eager to see a Masimo at every bedside 

in the pediatric intensive care unit. I was impressed with the performance of 

your monitor on patients that presented challenges for the other monitors and 

feel that Masimo will help improve our ability to assess and treat our patients. 

Please provide me with an update on your progress toward supplying the pediatric intensive care unit at UCSF with Masimo monitors. If I can help the process, please tell me what is needed to move this along.’’

Ms. BARRETT. May I respond to that? I did not know that was 

going to be coming up today. As a result of some of the new technology coming our way, regardless of our contract situation, we invited both Nellcor and Masimo back into the institution just recently, as Mr. Kiani suggests. Both the pediatric intensivists as 

well as the adult intensivists as well as all of our respiratory therapists who have a stake in this hearing were invited to those presentations. There was about an hour-and–45-minutes allotted. Both 

manufacturers were provided the opportunity to make another 

presentation and come back for questions and answers. 

To that extent, that is still under consideration at our institution 

at this very moment. I think it speaks to the opportunity that we 

can make an individual decision. Should all of the stakeholders, not 

just the two that were mentioned, reach a consensus, we can do 

that, and if we choose to do that, we will take into account whatever value we are giving up in doing that, as well as I think one 

thing the committee has to consider in looking at what we are facing every single day in constrained costs, and that is considerable 

capital equipment to balance with rewiring the whole place. We 

had just instituted all new critical care units for the adult side. So 

that is not an inconsequential consideration for us as we move forward to try to standardize. 

I would also like to take this opportunity to make the point about 

standardization. A lot has been discussed here about innovation, 

and again, I am a health care provider who has worked in no other 

industry, waiting for new innovation every year of my nursing career, and so I am excited about innovation. I am worried about innovation and it getting to our patients for a lot of reasons. 

But I also have to consider the constant churn of new product 

and technology as it faces our clinicians, because with every new 

device, especially more complex devices, we face an enormous education, patient safety, and in some cases health care worker safety, 

and we have to make that balance. 

You, Senator Kohl, spoke very eloquently about some balance in 

decisions, and that is a balance that we are looking at continually 

as we meet that innovative part of our mission and discovery, as 

58

well as trying to standardize and make care for our providers as 

quick and efficient as possible, in the safest possible manner. 

Chairman KOHL. I want to just pose this question and maybe get 

some input from some of the other panelists, which hits on what 

we are talking about here. Why do we have so many GPO contracts 

that require hospitals to purchase the vast majority of their supplies in a product category from the manufacturer with the GPO 

contract in order to gain the GPO negotiated discount price? Sometimes this commitment, as you know, is as high as 90 percent. In 

fact, it may be in Mr. Kiani’s case. Why not give the hospital a 

choice? 

I do not understand this sole source, unless there is so little innovation, so few products that compare to the one you choose. I do 

not understand this business of sole source unless it is very rare, 

it almost never occurs, it only occurs where there clearly is no alternative. We are very sensitive to innovation. We bend over backwards to encourage innovation. That is why sole source never occurs or rarely occurs. 

But that is not our understanding here, that sole source is not 

an extremely rare occurrence. You hear all the other people on the 

panel say you have got to have, they have got to have access to you 

fellows or they are out of business or they are not even in business. 

Recognizing that, what is with this sole source? 

Mr. MCKENNA. First of all, Senator, all of these gentlemen do 

have access. I just would comment, the last meeting I had with Mr. 

Kiani was on an invite to come in when he did not get the contract 

award. We sat down and reviewed the process. Since that time, I 

have not heard from Mr. Kiani, and so I would be always openminded in our business practice to sit and meet with innovative 

companies. Seldom, if ever, do I ever get a call from a venture capitalist. I do not think my staff does, either. 

In regard to your direct question about sole source versus dual 

source, we have many multi source, which is more than two, and 

dual source arrangements where the value and the innovation, or 

the combination of both, is perceived, and, in fact, laid out by our 

clinicians and others that evaluate our products to bring them the 

best value. But in many of our contracts, after evaluation of the 

submitted bids on criteria that the clinician set prior to the bid 

going out and putting a weighting on it, in the evaluation coming 

back, looking at cost factors and quality factors and dividing cost 

by quality and looking at the differential that would be left, from 

one decision to standardize on a sole-source product that more than 

meets the clinical requirements, and going to two sources of supply, 

which would leave value on the table that would not be able to 

inure to people like Ms. Barrett and her organization, we go with 

a sole source. 

So we have a blend of both. Our members who we are here to 

serve and whose bidding that we do really drive those decisions. 

Chairman KOHL. Ms. Weatherman, do you want to make a comment? 

Ms. WEATHERMAN. Yes, I would make a couple comments. I think 

it is very important, as I have highlighted here, and I think everyone in this room would agree that medical innovation is important. 

But I think it is also important that innovation for innovation’s 

59

sake is not what we should be focused on. What we need to focus 

on is, is a new product or an existing product truly serving a clinical need? Is it delivering value to the marketplace? Maybe it is because it is cheaper. Maybe it is because it is better, it is more accurate, it is easier to use. I mean, there are a lot of criteria for value 

that hospitals would perceive in a new or existing product. 

I think it is important for the committee, and my suggestion 

would be to investigate or gather the information to try to understand what the total revenues are and the prices that TycoMallinckrodt-Nellcor charge for their sensors, how significant is 

that market and how much of a share do they own, and really look 

at, regardless of whether Mr. Kiani’s technology is the same or better—I think no one has said it is worse in terms of delivering or 

serving a clinical need—I think it is very important to look at the 

context of how big is Nellcor-Tyco’s position and what are their 

total fees that they have been paying over the years to Premier and 

Novation. It is a very important fact that needs to be looked at. 

I would contrast that, if you also wanted to investigate the situation with the given technology that was also highlighted, that in 

that particular situation, there is no significant incumbent that is 

being threatened by the entrance of that new technology. In fact, 

I would even ask you to look at what the true market potential is 

for that product. Where are the clinicians out there crying out for 

that technology to solve an unmet clinical need? I do not think you 

are going to find nearly the outcry or the market potential that you 

will see that Nellcor’s sensors currently enjoy in the U.S. market. 

Chairman KOHL. OK. 

Mr. Detlor. 

Mr. DETLOR. Yes. One of the things that several parties have 

said here, and it is one of the things that is a challenge to a GPO 

in general, the first thing is that incumbent clinicians in the sense 

of their historical experience deal with adult products. The products in this pulse oximetry were not, to Dr. Goldstein’s conversation, were not originally focused nor did they have the sensitivity 

or the capability to deal with the neonatal. So you have got a segmented market that has developed in the pulse oximetry issue. So 

the demands of what was used in an adult marketplace, there was 

very little product available that had any sense of accuracy in the 

neonatal arena. Masimo’s product bridges that type of issue, the 

change in technology. 

So if you go and survey in committees, which we used to spend 

months and hours with, what you would normally get out of a committee’s feedback, unless they are focused solely on new technology, 

is their historical experience with the existing market incumbents, 

their satisfaction, the shortcomings, the things they like, et cetera. 

It takes an extremely expensive proposition for a start-up company to put in a sales force that is going to equal what a Nellcor 

has established over decades, so to develop the same clinician exposure to new technology, which means somebody as a clinician has 

to stop what they are doing in patient care and spend a certain 

amount of time with new technology, it is a very difficult task in 

today’s health care environment. 

So all things being equal, from a process perspective, it does not 

surprise me that you wind up with these types of scenarios. People 

60

who sit on committees donate their time, et cetera. So many days 

out of a given year is all they can put in, at best. A good portion 

of that is going to be the historical experience, not the issue on future technology. They have not seen a salesperson. The companies 

do not have the kind of resources to make that type of intro and, 

therefore, it is very hard to have that be a 50/50 proposition, an 

equal footing, and I think you heard Dr. Goldstein kind of refer to 

that. 

The changes that are going to have to take place is the fact that 

in the breakout, if there is a neonatal niche for this technology, 

which has an undefined market—who knows the size of it, I think 

that is still one of the issues in the marketplace—then that has to 

be treated separately than the issue of what we do with adult pulse 

oximetry. Right now, it is lumped into one contract, and historically, the GPOs would do that, not because they meant to do any 

harm to anybody, but because of the commission input they have 

had historically, based on what they have used over years in the 

past. It has a tendency to favor the incumbent manufacturers. 

It is a process adjustment that has to take place. It is an issue 

that if we are going to look at more and more future technology, 

everyone has to guard against, the management team that chairs 

those committees of clinicians, et cetera, has to constantly challenge them not to take the shortcut, not to talk about what they 

have historically done, but take a look at what is new and current 

on the marketplace. It is not the clinicians are not willing, but they 

are also competing for their own day-to-day jobs and time and what 

they can give to the GPO. 

So, hopefully, out of this process, maybe both GPOs, and I have 

heard the comments and the commitments, which is understandable, you know, you have to go back and reengineer your processes 

to make sure these things do not happen in the future as you move 

forward. 

Chairman KOHL. All right. Dr. Goldstein, do you want to make 

a comment? 

Dr. GOLDSTEIN. Thank you. I certain can appreciate cost and cost 

savings incentives and I understand what GPOs are all about and 

I can appreciate efforts involved to save money, but I would really 

at this point like to let some of the clinical studies talk. If you 

would not mind, I would like to bring out some of the placards that 

we have prepared. 

This first one shows a study that was done in an NICU looking 

at false alarms, missed true events, that is where the saturation, 

the amount of oxygen in the blood went down and the oximeter did 

not appreciate it, and measurement failures of the oximeter. As I 

mentioned, this took place in a neonatal intensive care unit, which 

is certainly my focus population. But you can see clearly the demonstrable improvement that Masimo SET has relative to its competition in these particular areas. 

The next example I would like to bring up specifically looks at 

one institution’s experience with the Masimo SET oximeter with respect to retinopathy of prematurity, and in this, Dr. Sola, in a letter to Masimo, detailed his experiences with and without Masimo 

technology, looking at eye damage, that is, retinopathy of prematurity, as I alluded to in my statement, in this target presenVerDate Mar 21 2002 14:00 Apr 11, 2003 Jkt 085986 PO 00000 Frm 00064 Fmt 6633 Sfmt 6601 C:\HEARINGS\85986.TXT SJUD4 PsN: CMORC
61

tation. As you can see, in the group that received pulse oximetry 

through Masimo SET, there was no evidence of retinopathy of prematurity, and this is a very significant finding. 

The next study I would like to refer to is one—the Barker study. 

This is a study that I performed, as well, in my institution, again 

looking at Masimo SET, specifically with respect to heart rate variability and heart rate changes. In this, we found that at no point, 

more than 1 percent of the time, Masimo had problems with respect to heart rate variability tracking. Now, granted, this is in a 

target population, neonates, where you have a great deal of heart 

rate variability and, in general, in adults, you do not see as much. 

But again, it points out my focus, that the target population here 

is being ignored. 

Looking at the objective studies that have been done heretofore, 

notwithstanding studies that have been supported outright by 

grants from either Nellcor or Masimo, overwhelmingly, Masimo 

SET is superior to its competition. 

To that, I would like to kind of ask, I mean, in terms of talking 

to people who make these decisions to the GPOs, which of you have 

been in an NICU for more than an hour within the past 5 years? 

Ms. BARRETT. I have. 

Dr. GOLDSTEIN. You have? 

Ms. BARRETT. Yes. 

Dr. GOLDSTEIN. Have either of you been in the NICU for more 

than an hour within the past 5 years? 

Mr. MCKENNA. The clinicians that make our decisions certainly 

have. 

Dr. GOLDSTEIN. Personally, I am asking if you have been in the 

NICU for more than an hour in the past 5 years. 

Mr. MCKENNA. No, I have not. 

Dr. GOLDSTEIN. You at the end, as well? 

Mr. NORLING. I have not. 

Dr. GOLDSTEIN. OK. This is an important question, because in 

the interest of looking at cost and cost containment, we have to ask 

the question, what is the cost of a dead baby? What is the cost of 

a baby who has gone blind from retinopathy of prematurity? How 

do you explain this? What do you say to the parents in defense of 

this action? After all, we do have these overwhelming studies. 

Ms. BARRETT. Could I take the opportunity here to make an observation and ask a question to capitalize on your expertise in the 

field. One is that the studies that I just now saw before us were 

published, I think, in the peer reviewed literature either late 2001 

or one said 2002. So what we are aiming to do on many of the 

councils that I am involved with is look at evidence-based decision 

making, and in that, our best way of doing that is looking to the 

peer-reviewed literature database, which admittedly it takes a long 

time for the studies to work their way through, peer-reviewed studies, but we do try to have that guide us wherever that is possible 

and where we can. 

If I am not mistaken, the studies that are presented here may 

not have been available in a peer-reviewed manner at the time that 

this particular decision was made. I was not on that council. 

The other question that I have has to do with the fact that we 

were trying to relook at—many of your studies talk about a neoVerDate Mar 21 2002 14:00 Apr 11, 2003 Jkt 085986 PO 00000 Frm 00065 Fmt 6633 Sfmt 6601 C:\HEARINGS\85986.TXT SJUD4 PsN: CMORC
62

natal patient population. We also, in reconsidering this technology, 

wanted to see, was it applicable in adult population for the reasons 

that I am sure you are aware of. In hospitals, we do our best to 

standardize out of patient safety, because we have a cross-training 

that goes on for many of our physicians as well as our therapists, 

and having one standardized system they can use can become a patient safety issue. 

So my question is, to what extent do you think this technology 

is applicable to the adult ICUs, where it was also recently reconsidered by our adult therapists in that regard? 

Dr. GOLDSTEIN. With respect to the adult ICUs? 

Ms. BARRETT. Yes. 

Dr. GOLDSTEIN. Again, I am a neonatologist and I do not profess 

to practice adult medicine. I am addressing a segment of the population that is often ignored and often not, I guess you could say, 

recognized in terms of the significance that newer technologies 

bring to care of these individual patients. 

Mr. KIANI. Senator Kohl, if I could say something, although as 

the CEO of Masimo and the person who founded it, I am enjoying 

all this conversation about Masimo pulse oximetry, how it is better, 

this is not what this meeting is about, of course. 

We have a systematic problem where large companies like Tyco–

Nellcor have figured out how to use the, excuse the expression, almighty dollar to get large GPOs like Premier and Novation to exclude their competition. That is the problem, and we are just one 

example. There are adult examples right in the back of your hospitals you guys usually go to, unfortunately, where patients are 

being saved because of our technology and other stuff did not work, 

but that is not what it is about. 

I hope that there can be changes by the two groups sitting down 

and solving it, but I have to say that this is going to cause delay 

and delay means harm to patients and there needs to be something 

quick. It is not just about Masimo and this situation. 

Chairman KOHL. As you know, what we have concluded here this 

afternoon is that we are going to have an immediate forum composed of these two companies plus people like yourselves and we 

are going to get together on opening up this system, if we can, on 

eliminating all conflicts of interest, if we can, on trying to eliminate, if it is true, as you are suggesting, companies buying market 

share. They deny it, but if it is there, they are prepared to work 

on that problem, and getting this done in three months and reporting back in a public manner as to what we accomplish. 

So this, I hope, is not a hearing which, as so often on Capitol Hill 

hearings, there are hearings and then they vanish into history. I 

am very hopeful that this hearing will result in something that is 

a new and improved GPO system, and I do not find the principals 

who are here today, the two major principals in the industry, unwilling to engage in that process to see what improvements can be 

made. 

Mr. NORLING. Senator, can I speak to the question you asked, as 

I believe it has not been answered yet. You were speaking about 

sole-source contracts, and I do have some data for you that might 

be useful. 

Chairman KOHL. All right. 

63

Mr. NORLING. I would also like to, if I could, speak to a few of 

the other points that have been raised. Specifically, I think I mentioned earlier that Premier has contracts with about 450 different 

manufacturers and a total of 750 contracts. Of them, 377 are what 

you would call clinical. They essentially relate to products where 

there are a clinical use and, in effect, where physicians may have 

various degrees of preference. 

I think the issues we are talking about here are specifically in 

areas of high physician preference, where you do not have a commodity, in effect, you have got something where there are some of 

the agreements that, frankly, have surfaced here. So I think it is 

important to get at this issue, and I think Mr. Detlor, in some 

ways, was trying to get at that also, this issue of high clinical preference and what is to be done. 

Premier’s data is as follows. Of 377 clinical contracts, we have 

20 sole-source contracts. I can tell you that as we have looked at 

this process and as we have come to think about it more fully, and 

frankly, as the terms of some of our longer-term contracts have 

now reached the expiration dates, our conclusion is that in some 

of these areas, the idea of sole-source contracts in high clinical 

preference areas do not make a lot of sense. 

So in terms of a practice going forward from Premier, I expect 

what you will see in these areas is as existing in-force contracts 

reach their expiration date, and prior to that, as we begin to renegotiate them, and even prior to that, as successful applications 

of our breakthrough technology clause are pursued, what you are 

going to see is a movement away from any sole source in high clinical preference to dual source or, in some cases, not even a commitment target of any kind but a preferred contract. So that is a leaning in a direction that I think makes sense and is a good solid 

learning here. 

I would make a couple of points, and just for factual accuracy, 

Premier’s Nellcor contract expires in December of 2004. I do not believe that is 7 years from now, nor was it 7 years from the time 

that was quoted. 

Premier’s administrative fee with regard to this is 3 percent, no 

more. Very frankly, since there is some inference of decision making based on fees, we get greater administrative fees, because I do 

not believe the Nellcor 3 percent fee would change, if we contracted 

with Masimo, and if product flowed through that contract, we 

would actually get more administrative fees than we do now, and 

that is just a true economic fact of how this all works. 

Specific to the comment of being threatened by Premier members, I, frankly, have no knowledge of that. I have had no reports 

of that. If that were possibly true, I would agree that it was totally 

inappropriate. I seriously question whether it is true, but I will tell 

you that if, indeed, there is any inference of that, it would be totally inappropriate. 

I would also like to deal with this issue of the inference that Premier delayed the process for 2 years, and if I can, I would like to 

share with you a time line as I understand it. I have told you 

again, and I would acknowledge, Senator, that I have not been in 

a neonatal intensive care unit since I left active practicing as a hosVerDate Mar 21 2002 14:00 Apr 11, 2003 Jkt 085986 PO 00000 Frm 00067 Fmt 6633 Sfmt 6601 C:\HEARINGS\85986.TXT SJUD4 PsN: CMORC
64

pital administrator about four-and-a-half years ago, but I used to 

spend quite a bit of time prior to that. 

The time line, as I understand it, is this. In 1999, Masimo approached Premier and our technology assessment group with regard to the technology that they had in place. As it has been explained to me, and again, this is secondary, but again, I think it 

is accurate, is that what they had then was an algorithm, a calculation, if you will, and the related software. They did not have 

a stand-alone product at that time. Our technology assessment 

group said that this was an exciting looking technology and actually encouraged them to work with other manufacturers who have 

stand-alone products and encourage them to make that technology 

available to them, and it sounds like Masimo has been very successful in doing that, not with Nellcor, but certainly with others. 

As regards the time frame, that was the interaction with our technology assessment group. 

In January 2000, Premier received and was made aware of the 

Nellcor 395 pulse oximeter and contracted in January 2000 for that 

item. As I said, the contract goes with a term through 2004. 

In March 2000, Nellcor approached Premier, indicating that they 

would—excuse me, Masimo approached Premier, indicating that 

they did have a product, a stand-alone product that they intended 

to bring to the market and data from Masimo suggests that product was first commercially available in August 2000. So in March 

2000, we began the technology breakthrough process and the initial 

panel review suggested that this was worth further look, which is 

obviously you have to sort through all these requests to get to the 

absolute answer. 

We did bring together a panel, and at that time, based on the 

data that was available to our group and based on the comparison 

to the existing contract, namely the Nellcor 395, Premier made the 

distinction that this was not a significant breakthrough. Now, that 

does not mean that this is not a great product. I am sure it is. It 

does not mean that it is not particularly relevant in neonatology. 

Certainly, an expert here has suggested that it is. 

Our belief is that our contract leaves room for its use in that setting, and our other belief is, very frankly, that if, indeed, these additional studies suggest this kind of power as regards this particular product, particularly in neonatology, although I, indeed, 

want to explore its relevance elsewhere, that I would invite a resubmissions under the breakthrough technology program with that 

data, and I would tell Mr. Kiani that I personally will pay attention to this and make sure that process is expedited, because if, indeed, there is that kind of differential, there is no reason on earth 

that we would not want to have that kind of a product available 

for patients. 

Chairman KOHL. OK. We are going to wrap this up in a couple 

of minutes. I would like to just touch on two other areas. 

Is it true that some hospitals can go outside the GPO and get 

a better price on a particular commodity? 

Mr. NORLING. That is a fairly complex question. The answer is, 

often, that is true. The question is whether they can do it consistently and sustained and create value. 

65

Chairman KOHL. So you have suppliers who will give a hospital 

of some size a better deal than they are giving you? 

Mr. NORLING. In general, it would not be suppliers who work 

with us. It would be a situation where we would have a contract 

in place and a supplier who did not participate in that contract 

would come in and suggest that they would undercut the contract 

price. 

Chairman KOHL. So it——

Mr. NORLING. That, frankly, is the marketplace at work in a very 

productive way. 

Chairman KOHL. It is not the same product? It is not the same 

commodity? 

Mr. NORLING. It may be the same product, essentially, but it may 

be different manufacturers. Now, in some cases, you may get the 

same manufacturer doing some of that. It is pretty infrequent in 

our experience. But, in general, and specific to the GAO report, 

there are a number of other reports that I believe were much more 

thorough and comprehensive in what they cover, such as the recent 

Lewin study that was submitted as part of the Health Industry 

Purchasing Group Association submission, studies out of Arizona 

State University, a study by Mr. Muse that suggests pretty significant benefits from GPO contracting, to the tune of 10 percent. 

Senator, just to give you one good example of—again, I have been 

trying to stick to factual data here—we have a process we call portfolio analysis. We have a team of supply chain folks who go out 

into the hospitals and collaboratively with them ask them for a 

computer dump of everything they have bought for a year. Now, we 

do about 200 of these assessments every single year and we get a 

sense of, here is everything that ultimately was purchased. We go 

through them and particularly highlight purchases for items in 

areas where we have a contract but that were not purchased 

through our contracts. We look at those not to penalize but to suggest what the benefit might have been for using our contracts. 

When we itemize these routinely, and it is a very significant 

amount of money, we have found consistently over 2 years in more 

than 200 hospitals that they are leaving 9.5 percent on the table 

by using contracts, or by buying product outside of our contracts 

in areas where a comparable product is under contract. That tells 

me that the marketplace, in general out there, is certainly not as 

competitive as the group purchasing prices that we have in place, 

and it is a very large number of hospitals and it is a very large 

number of dollars. 

Chairman KOHL. You are estimating to the tune of maybe nine 

to ten percent? 

Mr. NORLING. Yes, I am. 

Chairman KOHL. Again, I want to ask this question. Is it possible 

that some hospitals go outside of the GPO and buy the same product with the same label for less? 

Mr. NORLING. My answer is sometimes. 

Chairman KOHL. So that can happen and probably does? How 

can it happen? 

Ms. BARRETT. I could shed some light on that. You are speaking 

about price. What we are looking for is a contract that offers us not 

just price, but some other value and quality criteria. So it is quite 

66

possible that a vendor may come in and give us a very low price, 

and yet when we ask, will they provide some educational support, 

will they provide some conversion support, then the price alone is 

not the only feature. So it is, indeed, possible for them to undercut 

us on item-by-item pricing, but indeed, we as the individual department materiel services managers have to look at the whole package 

that they might be offering, where price alone may not be the only 

thing that we need to look at. 

Chairman KOHL. Well, I want it to be just raw in my question. 

I am going to take Johnson and Johnson band-aids, which I do not 

know if it is on your list, but maybe it is. 

Mr. NORLING. Probably. 

Chairman KOHL. Is it possible for a hospital to get a better price 

on that item than is on your list? 

Mr. MCKENNA. I think it is possible. In our industry, there is a 

practice that we would call cherry-picking, maybe it is used in 

other industries, where, for the work that we do, and I think our 

numbers would be consistent with what Mr. Norling has pointed 

out for what is being left on the table, but if a member of one of 

our organizations chooses to leverage what we have already done 

and apply pressure on a supplier, there may be a supplier that will 

buckle and provide a better deal. 

But in the majority of instances, it is usually one of our members 

that perhaps would leverage our contract price and go with a company that did not get the contract award, which I think proves the 

point relative to it is an open system and the hospitals will make 

the decisions on their own. 

Chairman KOHL. OK, last question. In the past, we have been informed that GPOs return about 80 percent of their administrative 

fees to their member hospitals, keeping the remaining 20 percent 

to cover their expenses. Data that Premier has provided to our subcommittee shows that for Premier’s most recent fiscal year, Premier retained 63 percent of the administrative fee, instead of what 

we had understood to be about 20. It retained about 63 percent of 

the fee it collected from medical equipment suppliers, which was 

over $213 million. 

So we understand that GPOs—we assume, we are presuming 

GPOs are supposed to be merely nonprofit buying agents for hospitals and that they are supposed to return to their member hospitals the fees paid by suppliers less expenses. So where did all 

that money go, Mr. Norling? 

Mr. NORLING. Thank you for your question, Senator. I think that 

I will do my best to simplify this, because this has been sort of an 

ongoing dialogue, both with your staff and with the media. 

There are two sets of points that have been made. First of all, 

Premier is not just a GPO. We are an enterprise that is about a 

$500 million a year enterprise. About $300 million of that relates 

to GPO administrative fees. We are also in the business of comparative clinical data, which charges fees. We have a business of 

well over $100 million that repairs and maintains clinical equipment. We also have a business that helps underwrite excess layer 

professional liability, professional and general liability. So we have 

a series of other businesses that comprise Premier, the enterprise. 

That is the organization that I run. 

67

The piece of it called Premier Group Purchasing Services is actually run by this gentleman here, Howard Sanders, who is Senior 

Vice President of Premier for Group Purchasing. So to the degree 

that I may not have had all the exact clinical data, that is, in part, 

because I am running the larger aggregate enterprise. 

The numbers are as follows. We have returned, historically since 

Premier began, 80 percent of the net income of Premier back to our 

hospital owners. So 80 percent of the net income generated across 

all of those businesses cumulatively since Premier started has gone 

back to those hospitals. 

Now, if you will take the administrative fee portion of our revenues, which last year were about $300 million, and if you look at 

a combination of the dollars that we send back to all of our members, the dollars that go back to our hospitals and our affiliates and 

the incremental value of the equity, just the incremental value, not 

the in-place value, but the incremental value earned per year, we 

have returned last year 67.4 percent of the administrative fee dollar back to our members. 

So it is two different numbers. One is the percentage of net revenue in the aggregate and the other is a percentage of administrative fee revenue, which is a subset. I would be more than happy 

to document this clearly, to show you in our submissions to the 

committee exactly where those numbers come from, and those are, 

indeed, the numbers. 

Chairman KOHL. OK. Mr. McKenna? 

Mr. MCKENNA. Ours is a bit complex, but I will try to simplify 

it, Senator Kohl. We are owned by both VHA and UHC. After our 

expenses, everything that we have left goes to those organizations 

based on the way their members purchase, since they are set up 

as cooperatives. They, like as Mr. Norling has outlined, invest in 

other programs. There are benchmarking programs, clinical programs to assist local communities to reduce the risk of heart damage or stroke damage, and other services. After investing in those 

programs, which are board approved, they return—I am pretty 

sure this number is accurate for both alliances—100 percent of 

their net income. 

If you were to translate that into, going back to the GPO, I believe the numbers are, respectively, 32 cents and 40 cents on the 

dollar for both VHA and UHC, respectively. 

Chairman KOHL. OK. What I hope we have accomplished today 

is that we have seen on the part of the head of the two major GPOs 

a desire for a fairly extensive transparency with respect to your 

companies and how they function, a willingness to accept suggestions and comments from interested and sincere people who are 

here only to effect an improvement in the delivery of product and 

price and quality, and that we will get to work immediately on putting together this group of individuals, along with you all, who will 

work on achieving this end and expect to have a report with, hopefully, some positive results, inside of three months. 

If we can move forward on that, then I think we have achieved 

a lot and you will have demonstrated a sincere interest and willingness to work in the public interest, which is what this hearing was 

all about. 

68

So we thank you all for being here. You have made a real contribution. 

Before adjourning, I would like to insert in the record a number 

of documents. First, I would include statements from Senator Orrin 

Hatch and Senator Strom Thurmond. 

[The prepared statement of Senator Hatch follows:]

STATEMENT OF HON. ORRIN HATCH, A U.S. SENATOR FROM THE STATE OF UTAH

Thank you, Mr. Chairman. I commend you and Senator DeWine for holding this 

hearing, as well as for your continuing efforts to get to the bottom of the important—and extremely complex—set of issues that we are addressing here today. 

I believe we need to examine how Group Purchasing Organizations—or ‘‘GPOs’’—

affect the cost and quality of health care in America. Recent studies and media reports have called into question whether the GPO system has been effective in reducing costs without sacrificing the quality of products available to hospitals. However, 

GPOs, various academics, and certain industry participants continue to argue that 

GPOs offer high quality products at significant savings. 

I have received and considered numerous opinions from parties on both sides of 

the GPO debate, including health care specialists, academics, and industry participants both from my home State of Utah and around the nation. To say that there 

is widespread disagreement among the participants of this debate would be a considerable understatement. News sources, commentators, and industry analysts offer 

diverse opinions regarding whether the GPO system helps or harms hospitals, consumers, and competition. Well respected academics similarly disagree. 

Although I believe that the concerns raised by those who are critical of GPOs certainly warrant further analysis and consideration, I do not feel that we have sufficient information to reach any solid conclusions on the issues that have been raised. 

Despite the need for further investigation, I want to emphasize that—based on the 

information and analysis currently available—I have several serious concerns regarding certain actions and practices of specific GPOs, as well as the structure of 

the GPO system in general. Without going into detail, I would like to summarize 

some of these in the hope that we might address them as we go forward on this 

issue. 

I am deeply disturbed by allegations that GPOs may prevent superior technologies and products from being adopted by the hospitals they serve. 

These claims have arisen in several distinct sets of circumstances, all of which 

raise significant questions. I am concerned about recent press reports that senior 

executives have received or obtained stock or stock options from product suppliers, 

creating serious conflicts of interest that may have improperly affected GPOs’ purchasing decisions. Similarly, reports that large GPOs have favored products produced or supplied by entities in which they have invested raise serious questions 

as to conflicts of interest. 

I am also concerned about certain practices that may limit competition among 

small medical device manufacturers, leading to decreased competition and innovation. Allegations that large suppliers have effectively ‘‘bought’’ access to GPOs warrant further investigation to ascertain how widespread such activities are. Similarly 

worrisome are assertions that the products of favored suppliers are included in 

‘‘bundled’’ or ‘‘sole source’’ contracts that create strong disincentives for hospitals to 

purchase competing products, effectively shutting smaller competitors out of the 

market. 

Finally, I note that many—perhaps even most—of the alleged harms and abuses 

raised by GPO critics have pertained disproportionately to the nation’s two largest 

GPOs: Novation and Premier. The market shares of these two ‘‘super GPOs’’ dwarf 

those of the next eight largest GPOs. In fact, excluding Premier, Novation’s estimated market share is roughly equal to the combined market shares of its four largest competitors. With the obvious exception of Novation, Premier’s market share is 

almost three times that of its largest competitor. The enormous relative purchasing 

power of these two ‘‘super GPOs’’—especially when coupled with allegations that 

this power has been used anticompetitively—raises obvious concerns. At this point, 

although it is unclear whether and to what extent the market power possessed by 

Novation and Premier has enabled allegedly anticompetitive practices, this question 

warrants further consideration. 

I look forward to hearing from the witnesses testifying here today, and hope that 

they will address these important issues. I commend the members of this committee 

for their efforts to date, and hope that—in conjunction with the appropriate governVerDate Mar 21 2002 14:00 Apr 11, 2003 Jkt 085986 PO 00000 Frm 00072 Fmt 6633 Sfmt 6621 C:\HEARINGS\85986.TXT SJUD4 PsN: CMORC
69

ment agencies and with the help of industry participants—this committee will continue its attempt to get to the bottom of these important issues.

[The prepared statement of Senator Thurmond follows:]

STATEMENT OF HON. STROM THURMOND, A U.S. SENATOR FROM THE STATE OF

SOUTH CAROLINA

Mr. Chairman: Thank you for holding this important hearing today on hospital 

group purchasing and its effects on patient health and medical innovation. In particular, this committee should carefully examine the role that Group Purchasing Organizations (GPOs) play in bringing medical products to market. GPOs deserve antitrust scrutiny for two significant reasons. 

First, the organizations themselves are the result of hospitals banding together 

in order to increase buying power. Second, GPOs have merged and consolidated the 

industry significantly. The result is that two large corporations, Premier and Novation, control purchasing for approximately 60 percent of the Nation’s hospitals. With 

these two concerns in mind, we must determine whether the consumers of medical 

care, the patients, are being well-served by GPOs. 

The fundamental premise of a GPO is to allow hospitals to aggregate their purchases and thereby negotiate lower prices. GPOs are generally immune from antitrust scrutiny for an array of policy reasons. When hospitals band together, they are 

better able to counteract the significant market power of large manufacturers of 

medical supplies and equipment. Additionally, the lower prices procured by the hospitals enable them to maintain financial stability in the Medicare prospective payment system. This prospective payment system replaced fee for service plans and 

essentially resulted in caps on Medicare payments, limiting what the Federal Government would pay hospitals for medical services. 

In addition to the relaxed antitrust scrutiny, GPOs have another useful tool in 

procuring lower costs for hospitals. They are immune from anti-kickback laws. This 

allows the payments for services provided by the GPOs to be shifted from the hospitals, the buyers of the goods, to the manufacturers of the goods. Therefore, manufacturers of goods pay kickbacks, often called administrative fees, to the GPOs. Administrative fees are commonly 3 percent of the value of goods sold to the hospitals, 

and may be higher if disclosed in writing. These fees go the GPO itself, and portions 

are remitted to the hospitals. Due to this arrangement, hospitals realize lower costs. 

At first glance, the lower costs attributed to group purchasing power may appear 

to benefit patients. Indeed, group purchasing keeps prices low, and that is certainly 

desirable in the medical marketplace. However, a closer look at current policies reveals some disturbing consequences. 

Many smaller device manufacturers have voiced concerns that they cannot break 

into the marketplace due to the power of GPOs. For example, GPOs negotiate long 

term contracts, thereby making it more difficult to bring new and innovative products to market. Long-term contracts themselves would not generally be a cause for 

concern. Two business entities may enter into these contracts if they wish. However, 

due to the fact that hospitals have all joined together in the GPOs, large numbers 

of hospitals are committed to these long-term contracts. This scenario warrants antitrust scrutiny. 

Smaller manufacturers may also have a more difficult time paying the kickbacks, 

or administrative fees, required to sell their products to the GPOs. Furthermore, the 

anti-kickback exception invites the kind of abuse that anti-kickback laws were designed to stop. Larger manufacturers have an incentive to pay higher administrative 

fees in order to dissuade the GPOs from purchasing the products of smaller competitors. 

It is my hope that this committee will closely examine the antitrust immunity and 

anti-kickback exception that GPOs enjoy. We should not support policies that inhibit 

the abilities of smaller manufacturers to introduce innovative products into the marketplace. If patients are not benefiting from current practices, we should seek to implement reforms that free the marketplace to function unhindered by anti-competitive practices. 

Another concern associated with the GPO system is the consolidation of the industry. In many areas, one of the two dominant GPOs, Premier or Novation, serves all 

of the hospitals while the other is almost nonexistent. The result is a dominant 

buyer in the market, which has been referred to as a monopsony, or a buyer monopoly. For antitrust purposes, a monopsony may be just as troubling as a monopoly 

due to the distortions that it creates in the market. 

The buying power of the GPOs raises questions about the common practice of 

‘‘bundling’’ in contracts with medical manufacturers. A bundled contract provides for 

70

numerous products to be purchased in one order, benefiting the seller, who can sell 

more products, and allowing the GPO to negotiate lower prices. While this practice 

may lower hospital costs, it may also have the effect of keeping other manufacturers 

out of the market. Because hospitals must usually purchase a high percentage of 

their products through the GPO to take advantage of discounts, there is less of an 

incentive for hospitals to bypass the GPOs and negotiate with the manufacturers 

directly. 

Additionally, recent media reports have indicated that Premier invested in medical supplier companies, and then made contracts with them to provide supplies to 

Premier hospitals. I am greatly concerned about these allegations, and this committee should thoroughly study these potential conflicts of interest. If Premier has 

engaged in such activity, it has leveraged its buyer monopoly to procure goods from 

a company in which it has an interest, effectively blocking out legitimate competitors. 

Mr. Chairman, I appreciate your work on this matter, and I hope that we will 

learn more today about the role of GPOs in the health care industry. While GPOs 

have almost certainly led to decreased costs for hospitals, we should carefully examine whether patients benefit from the current system of group purchasing. If innovative and crucial technology is not reaching our Nation’s hospitals, we should consider reforming current practices. We should ask whether GPO immunity from general principles of antitrust law and anti-kickback law best serves those in need of 

medical care. I hope that our witnesses will address these important questions, and 

I look forward to hearing from them today. 

Chairman KOHL. I would like to insert the GAO report that has 

been referred to several times during this hearing, entitled ‘‘Group 

Purchasing Organizations: Pilot Study Suggests Large Buying 

Groups Do Not Always Offer Hospitals Lower Prices.’’

I would also like to insert a number of statements that have been 

submitted for the record. These are from Thomas J. Shaw, President and CEO of Retractable Technologies, Inc.; Larry Holden, 

President, Medical Device Manufacturers Association; Thomas V. 

Brown, Executive Vice President of Biotronik; Robert Betz, President and CEO of the Health Industry Group Purchasing Association; Paul Hazen, President and CEO of the National Cooperative 

Business Association; Einer Elhauge, Professor of Law at Harvard 

Law School; Jeffrey C. Lerner, President and Chief Executive Officer of ECRI; Dr. Augusto Sola, Professor of Pediatrics and Obstetrics and Gynecology, and Director, Division of Neonatal–Perinatal 

Medicine at Emory University School of Medicine; Frederick M. 

Valerino, Jr., President, Pevco Systems International, Inc.; and 

Julia Naunheim Hipps, a registered nurse from St. Louis, Missouri. 

This hearing is now adjourned. 

[Whereupon, at 5:00 p.m., the subcommittee was adjourned.] 

[Questions and Answers and Submissions for the record follow.] 

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

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