[Senate Hearing 109-522]
[From the U.S. Government Printing Office]



                                                        S. Hrg. 109-522
 
                       HOSPITAL GROUP PURCHASING:
      ARE THE INDUSTRY'S REFORMS SUFFICIENT TO ENSURE COMPETITION?

=======================================================================

                                HEARING

                               before the

                       SUBCOMMITTEE ON ANTITRUST,
                 COMPETITION POLICY AND CONSUMER RIGHTS

                                 of the

                       COMMITTEE ON THE JUDICIARY
                          UNITED STATES SENATE

                       ONE HUNDRED NINTH CONGRESS

                             SECOND SESSION

                               __________

                             MARCH 15, 2006

                               __________

                          Serial No. J-109-65

                               __________

         Printed for the use of the Committee on the Judiciary



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                       COMMITTEE ON THE JUDICIARY

                 ARLEN SPECTER, Pennsylvania, Chairman
ORRIN G. HATCH, Utah                 PATRICK J. LEAHY, Vermont
CHARLES E. GRASSLEY, Iowa            EDWARD M. KENNEDY, Massachusetts
JON KYL, Arizona                     JOSEPH R. BIDEN, Jr., Delaware
MIKE DeWINE, Ohio                    HERBERT KOHL, Wisconsin
JEFF SESSIONS, Alabama               DIANNE FEINSTEIN, California
LINDSEY O. GRAHAM, South Carolina    RUSSELL D. FEINGOLD, Wisconsin
JOHN CORNYN, Texas                   CHARLES E. SCHUMER, New York
SAM BROWNBACK, Kansas                RICHARD J. DURBIN, Illinois
TOM COBURN, Oklahoma
           Michael O'Neill, Chief Counsel and Staff Director
      Bruce A. Cohen, Democratic Chief Counsel and Staff Director
                                 ------                                

   Subcommittee on Antitrust, Competition Policy and Consumer Rights

                      MIKE DeWINE, Ohio, Chairman
ARLEN SPECTER, Pennsylvania          HERBERT KOHL, Wisconsin
ORRIN G. HATCH, Utah                 PATRICK J. LEAHY, Vermont
CHARLES E. GRASSLEY, Iowa            JOSEPH R. BIDEN, Jr., Delaware
LINDSEY O. GRAHAM, South Carolina    RUSSELL D. FEINGOLD, Wisconsin
SAM BROWNBACK, Kansas                CHARLES E. SCHUMER, New York
        Peter Levitas, Majority Chief Counsel and Staff Director
                Jeffrey Miller, Democratic Chief Counsel


                            C O N T E N T S

                              ----------                              

                    STATEMENTS OF COMMITTEE MEMBERS

                                                                   Page
Brownback, Hon. Sam, a U.S. Senator from the State of Kansas, 
  prepared statement.............................................    49
DeWine, Hon. Mike, a U.S. Senator from the State of Ohio.........     1
Kohl, Hon. Herbert, a U.S. Senator from the State of Wisconsin...     3
Leahy, Hon. Patrick J., a U.S. Senator from the State of Vermont, 
  prepared statement.............................................    71
Schumer, Hon. Charles E., a U.S. Senator from the State of New 
  York...........................................................    17

                               WITNESSES

Bednar, Richard J., Coordinator, Healthcare Group Purchasing 
  Industry Initiative, Washington, D.C...........................     5
Leahey, Mark B., Executive Director, Medical Device Manufacturers 
  Association, Washington, D.C...................................     7
Sethi, S. Prakash, Professor of Management, Baruch College, The 
  City University of New York, New York, New York................     8
Ubbing, Mina, President and Chief Executive Officer, Fairfield 
  Medical Center Lancaster, Ohio.................................    10

                         QUESTIONS AND ANSWERS

Responses of S. Prakash Sethi to questions submitted by Senators 
  DeWine, Sessions, and Kohl.....................................    21

                       SUBMISSIONS FOR THE RECORD

Bednar, Richard J., Coordinator, Healthcare Group Purchasing 
  Industry Initiative, Washington, D.C., prepared statement......    33
Blumenthal, Richard, Attorney General, State of Connecticut, 
  Hartord, Connecticut, prepared statement.......................    45
Everard, Lynn James, Healthcare Strategist, prepared statement...    50
Hospital group purchasing organizations, joint statement.........    52
Kennedy, Daniel E., President and Chief Executive Officer, Riddle 
  Memorial Hospital, Media, Pennsylvania, letter.................    59
Leahey, Mark B., Executive Director, Medical Device Manufacturers 
  Association, Washington, D.C., prepared statement..............    61
LoBiondo, Al, Chairman, Health Industry Group Purchasing 
  Association, Chicago, Illinois, letter.........................    72
Novation, Mark McKenna, President and Chief Executive Officer, 
  Irving, Texas, letter..........................................    75
OhioHealth, David P. Blom, President and Chief Executive Officer, 
  Columbus, Ohio, letter.........................................    80
Premier Purchasing Partners, Susan D. DeVore, President, 
  Washington, D.C., letter.......................................    81
Retractable Technologies, Inc., Thomas J. Shaw, President & CEO, 
  Little Elm, Texas, prepared statement and attachments..........    84
Sethi, S. Prakash, Professor of Management, Baruch College, The 
  City University of New York, New York, New York, prepared 
  statement and attachments......................................    92
Ubbing, Mina, President and Chief Executive Officer, Fairfield 
  Medical Center Lancaster, Ohio, prepared statement and 
  attachment.....................................................   110


  HOSPITAL GROUP PURCHASING: ARE THE INDUSTRY'S REFORMS SUFFICIENT TO 
                          ENSURE COMPETITION?

                              ----------                              


                       WEDNESDAY, MARCH 15, 2006

                                       U.S. Senate,
Subcommittee on Antitrust, Competition Policy and Consumer 
                 Rights, of the Committee on the Judiciary,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 2:07 p.m., in 
room SD-226, Dirksen Senate Office Building, Hon. Mike DeWine, 
Chairman of the Subcommittee, presiding.
    Present: Senators DeWine, Kohl and Schumer.

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

    Chairman DeWine. Good afternoon. We welcome all of you to 
the Antitrust Subcommittee hearing on hospital group purchasing 
organizations. This is the fourth hearing in the last few years 
that the Subcommittee has held on these organizations, known as 
GPOs.
    I think it is fair to say that this is the most extensive 
investigation this Subcommittee has done, and I think to some 
of our friends in the industry it has felt much too extensive. 
But we have focused so much time and energy on it because of 
the importance of this industry to the health of our economy 
and, of course, to the health of our citizens.
    The purpose of this hearing this afternoon is to evaluate 
where we stand today. Is this industry competitive or is 
legislation required to inject competition into the industry? 
As we have discussed before, GPOs are simply organizations that 
manage purchasing of medical equipment and supplies for most of 
our Nation's hospitals. Their ability to combine the purchasing 
power of the hospitals makes them an important part of the 
health care market.
    Today, we will be evaluating current industry practices, as 
well as considering a number of legislative proposals for other 
ways that the industry could operate. I think a brief review of 
this Subcommittee's activity in this area will help to explain 
the various proposals.
    We held our first hearing on GPOs in April 2002. We did it 
because of complaints of ethical violations in the industry and 
also a more general complaint that the GPO system sometimes 
decreased the flexibility of hospital purchasing and made it 
difficult for doctors and nurses to get the best medical 
equipment. We found, unfortunately, that both of these 
allegations had some merit.
    During the course of our ongoing investigation, we also 
assessed a number of contracting practices, such as sole-source 
contracts, discounts based on high commitment levels, and 
bundling of clinical preference products with commodity 
products. All of these practices have positive aspects, but 
also may cause competitive difficulties.
    Our analysis of the industry has been complicated further 
by the so-called safe harbor that underlies this industry. GPOs 
have an unusual business model. They are funded not by their 
member hospitals, but rather by their suppliers. In other 
words, GPOs agree to purchase equipment and supplies from 
certain companies and as part of those contracts, the suppliers 
pay an administrative fee based on the size of the contract 
which is used to fund the existence of the GPOs.
    Under normal circumstances, this would be considered a 
kick-back, and so the GPOs require an exemption from the anti-
kickback laws. We have been told this safe harbor is what 
allows the GPO industry to exist in its current form. However, 
this relationship between the GPOs and the manufacturers have 
led many to distrust the purchasing decisions that GPOs make 
because, in effect, they benefit from larger contracts which 
are easier to sign with larger suppliers.
    Despite the complexity of these issues, our efforts have 
paid off. Senator Kohl and I worked with the industry to 
resolve the ethical violations we uncovered. We also made some 
progress in assessing the various contracting practices and 
worked with individual GPOs as they agreed to adopt voluntary 
codes of conduct. And the good news is that the voluntary codes 
of conduct helped matters somewhat.
    Smaller manufacturers seem to have greater access to the 
market, and the industry generally is more aware of the 
potential problems and has been taking steps to avoid 
additional problems. Under these circumstances, the 
Subcommittee has turned its focus to ensuring the permanence of 
the industry's reforms, and Senator Kohl and I introduced 
Senate bill 2880 last term as an effort to do that.
    Senate bill 2880 would have given oversight of this 
industry to the Department of Health and Human Services, 
charging it with drafting rules for this industry to ensure 
that each GPO conformed with principles of competition, ethical 
standards and the goal of maintaining access to products 
necessary for proper patient care. If a GPO failed to follow 
these rules, it could lose its exemption from the safe harbor 
under that proposed legislation.
    The GPO industry objected to this approach, and to address 
its concerns we agreed to hold off on introducing this 
legislation and allow them the opportunity to develop a method 
for ensuring their changes would be implemented effectively in 
a permanent way. The industry response is the so-called, quote, 
``Hospital Group Purchasing Industry Initiative,'' end of 
quote. This measure has been in place since July 2005, and it 
won't surprise our witnesses to hear some like it and some 
don't.
    So today we are holding this hearing to consider whether 
the initiative has been effective at promoting competition in 
the industry, and we will consider what future steps, if any, 
are necessary to ensure that the reforms will be permanent and 
actively enforced. To this end, we will look not only at the 
effect of the initiative, but also at S. 2880, as well as two 
other proposals.
    One of these proposals, which we are tentatively calling 
the individual code proposal, would empower Health and Human 
Services to codify and enforce the individual voluntary codes 
of conduct created by each specific GPO and set minimum 
standards for the codes. Another option is simply to repeal the 
safe harbor.
    Now, before I turn to Senator Kohl, I would like to add 
that throughout this ongoing process I have kept in close 
contact with hospitals in my home State of Ohio, and I think it 
is fair to say that nearly all the hospitals in Ohio that I 
have spoken with are confident that their GPOs are saving them 
money. In this era of skyrocketing health care costs, this is 
obviously a very critical consideration and one that this 
Subcommittee understands very well.
    Our goal has been and will continue to be to promote 
vigorous competition which will ensure that GPOs both save 
money and allow new and improved technologies to get to the 
market to help medical professionals better care for all of us. 
We must strike the right balance and we are committed to doing 
just that.
    Let me now turn to Senator Kohl, who has taken a very 
active role in this issue.
    Senator Kohl.

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

    Senator Kohl. Thanks very much, Mr. Chairman. Today, as you 
pointed out, we will consider what steps remain to be taken to 
ensure that competition prevails in hospital purchasing so that 
the abuses our Subcommittee uncovered in the last several years 
never return. We will need to carefully consider the industry's 
latest efforts at self-regulation. We will also examine 
possible legislative alternatives that we have drafted should 
the industry's efforts fall short.
    The last year has witnessed important developments for all 
of us who care about competition in hospital purchasing. At the 
behest of our Subcommittee, the industry has created a new 
organization to set standards and monitor the purchasing 
activities of hospital group purchasing organizations. The 
purpose of this new industry initiative is to ensure that GPOs 
do not engage in anticompetitive or unethical practices that 
freeze out new and innovative medical device manufacturers from 
the hospital market.
    The founders of this new industry initiative, the Nation's 
largest and most influential GPOs, are to be commended for 
voluntarily forming this organization. The goals of this 
organization and the goals of the work of this Subcommittee 
over the last 4 years are central to American health care, 
namely ensuring that physicians, patients and health care 
workers have access to the best and the safest medical devices, 
devices that can literally make the difference between life and 
death.
    The final question that remains for us to consider is 
whether the organization is strong enough to do the job. The 
founders of the industry initiative now argue that the creation 
of this organization means that we need to do nothing more, 
that we can rely entirely on the initiative to guarantee an 
open and honest marketplace. They argue that any further 
legislation is not necessary.
    In order to assess this claim, at least two vital questions 
must be answered. First, is this organization really up to 
monitoring what is taking place in this enormous multi-billion-
dollar industry? And, second, does this voluntary industry 
initiative contain sufficient sanctions to prevent wrongdoing 
and to penalize those GPOs that violate its founding 
principles?
    Any industry plan must include real and meaningful 
sanctions if any GPO violates ethical principles or the rules 
of free competition. In an industry as important to health and 
safety as the purchasing of medical equipment for critically 
ill patients, half-measures which do not assure that the best 
medical devices are available for patients are simply not 
acceptable.
    We have legislative tools available should we conclude that 
the industry initiative falls short. In the last Congress, 
Senator DeWine and I introduced the Medical Device Competition 
Act. This legislation will give the Department of Health and 
Human Services the authority to forbid GPO business practices 
which are anticompetitive or unethical.
    Other commentators have suggested an alternative approach, 
namely to forbid GPOs from receiving payments from hospital 
suppliers. Advocates of this approach argue that such a 
prohibition would remove an inherent conflict of interest in 
the present system. No longer would hospital vendors pay the 
very organizations that are supposed to negotiate with these 
vendors to get the best deal for their hospitals. We will 
therefore need to pay close attention to the testimony of our 
witnesses today as we evaluate whether we need to take any 
further steps.
    Before closing, I must express my disappointment that no 
representatives of the GPO industry accepted our invitation to 
testify here today. GPOs' willingness to provide us with candid 
answers is a factor we will evaluate in determining whether 
self-regulation will suffice. We do thank the witnesses who are 
testifying for coming here today to testify, and we look 
forward to hearing their views.
    Thank you, Mr. Chairman.
    Chairman DeWine. Thank you, Senator Kohl.
    Let me just say that I am also sorry that we don't have any 
of the GPOs here today. After this hearing, I would like to 
announce that we will send them each a letter from the 
Subcommittee asking for their input about each of the proposals 
that we will be discussing today. We look forward to their 
input. I think their input is very, very important. We will 
invite them to give us that input and their point of view on 
that.
    I have Senator Leahy's statement which I would ask at this 
point unanimous consent to make a part of the record, and it 
will be made a part of the record at this point.
    We will now turn to our panel. Richard Bednar is senior 
counsel in the law firm of Crowell and Moring and he currently 
serves as the coordinator of the Healthcare Group Purchasing 
Industry Initiative. He is also the coordinator of the Defense 
Industry Initiative on Business Ethics and Conduct, and has 
served on the U.S. Sentencing Commission.
    Mark Leahey is executive director for the Medical Device 
Manufacturers Association, the national trade association that 
represents over 200 manufacturers of medical devices, 
diagnostic products and health care information systems.
    Prakash Sethi is University Distinguished Professor of 
Management and President of the International Center for 
Corporate Accountability at Baruch College, at the City 
University of New York.
    Mina Ubbing is the President and CEO of Fairfield Medical 
Center, in Lancaster, in my home State of Ohio. She has been 
with the Fairfield Medical Center since 1979, serving in a 
number of roles, from internal auditor and accounting manager 
to currently serving as its CEO.
    We welcome all of you, and let me turn now to our first 
witness, Mr. Bednar.

 STATEMENT OF RICHARD J. BEDNAR, COORDINATOR, HEALTHCARE GROUP 
        PURCHASING INDUSTRY INITIATIVE, WASHINGTON, D.C.

    Mr. Bednar. Thank you, Mr. Chairman and Senator Kohl. Mr. 
Chairman, I think you have adequately summarized my current 
position with the law firm and with the industry associations 
that I work with as a coordinator.
    I have been the coordinator of the Healthcare Group 
Purchasing Industry Initiative for 3 months, but I must add 
quickly that I have had well over 30 years of experience in 
working with other organizations in helping to develop 
organizational compliance and ethics programs. And I am very 
pleased to be with you today and to give you assurance that the 
Healthcare Group Purchasing Industry Initiative is off to a 
strong success.
    The initiative was launched in May of 2005 by the CEOs of 
nine leading GPOs. The initiative is a permanent, all-
voluntary, self-governing organization committed to the highest 
level of ethical conduct and providing the best and safest 
products to patients, doctors and health care workers at 
competitive prices. For brevity, I will refer to this 
initiative simply as the GPO initiative or the initiative.
    The GPO initiative has three main purposes. First, it is 
intended to nurture and promote an ethical culture of 
compliance within every organization in the GPO industry. 
Second, the initiative promotes self-governance as the means by 
which each GPO's top-level commitment to abide by ethical 
standards is controlled. Third, the initiative enforces a 
requirement that each member of the organization share best 
practices in dealing with ethics and business conduct issues. 
This sharing of practices is done both informally by regular 
communication among the compliance officers as issues arise and 
by participating in an annual best practices forum.
    To achieve these purposes, each GPO has pledged, first, to 
follow six core ethical principles; second, to report annually 
on adherence to these principles by responding to a public 
accountability questionnaire; and, third, to participate with 
other GPO representatives and interested parties in an annual 
best practices forum. The initiative is governed by a steering 
committee of the nine founding GPOs, who are, in effect, our 
board of directors.
    Each signatory is required to follow six principles: first, 
to have and adhere to a written code of business conduct which 
establishes high ethical values and sound business practices; 
second, to conduct learning within the organization as to 
personal responsibilities under the code.
    Third, each signatory is committed to work toward the goals 
of high-quality health care and cost-effectiveness. Fourth, 
each signatory is committed to work toward an open and 
competitive purchasing process, free of conflicts of interest 
and undue influence. Each signatory is responsible to each 
other to share best practices in implementing the principles, 
and each signatory, importantly, is accountable to the public.
    The public accountability process requires that each member 
organization annually respond to a detailed questionnaire, 
which responses are displayed publicly on our website. And I 
must add that we have done that with the responses to the first 
annual questionnaire which were posted on our website for all 
to see a bare 2 months ago, and in that bare 2 months we have 
had over 26,000 visits to that website, to those postings, 
indicating a very strong public interest in what the GPO 
companies are about.
    On January 11, 2006, the GPO initiative held its second 
steering Committee meeting. All nine of the founding GPO CEOs 
were there. I was there to witness it and I was there to see 
their enthusiasm and the energy that they manifested for this 
initiative. Then on January 12th and 13th, the initiative held 
its first best practices forum, about which I have described in 
greater detail for the record.
    In the future, Congress can expect sustained, extensive 
transparency from the GPO initiative, and significant open 
debate about its practices. This self-governance process will 
work. The CEOs believe in ethical leadership as the best way to 
introduce ethical business conduct within their organizations. 
The CEOs do not believe in out-sourcing this responsibility. 
Already, participation in the initiative--
    Chairman DeWine. Mr. Bednar, could you close? We have a 
vote at three o'clock and we are going to lose this entire 
hearing, so everybody has 5 minutes.
    Mr. Bednar. Thank you, Mr. Chairman. We do believe that the 
voluntary effort will serve the goals that have been 
articulated by this Committee and that no legislation is 
required. I look forward to your questions.
    [The prepared statement of Mr. Bednar appears as a 
submission for the record.]
    Chairman DeWine. We appreciate it. Thank you very much, 
sir. Thank you. I thought you were getting close.
    Mr. Leahey.

STATEMENT OF MARK B. LEAHEY, EXECUTIVE DIRECTOR, MEDICAL DEVICE 
          MANUFACTURERS ASSOCIATION, WASHINGTON, D.C.

    Mr. Leahey. Mr. Chairman, Senator Kohl, on behalf of the 
hundreds of innovative medical technology manufacturers MDMA 
represents, I want to thank you for your continued efforts to 
ensure that patients and caregivers have access to the best 
technologies at the best price. This industry is founded on 
physicians and engineers working together to enhance the 
quality of care. Unfortunately, patients and caregivers don't 
always have access to these products.
    When this Subcommittee held its first hearing in October 
2002, witnesses testified about troubling GPO practices, 
including but not limited to exclusive contracts, excessive 
fees and corporate conflicts of interest. At that time, we 
heard the GPOs say we can reform ourselves. Yet, today we find 
ourselves back in this hearing room for the fourth time in as 
many years.
    And while I would like to testify that the GPOs have 
corrected their exclusionary practices, this is simply not the 
case. GPOs continue to bundle unrelated products and companies, 
execute long-term sole-source contracts, award no-bid 
contracts, collect excessive fees, and police the markets for 
the dominant suppliers in a way that excludes innovative, cost-
effective technologies. And as a result, patients, caregivers 
and the American taxpayer are all suffering.
    Now, despite the steadfast efforts of this Subcommittee, 
significant problems remain. Just last year, the Health and 
Human Services Inspector General looked at this very issue and 
the results were staggering. The IG found that six GPOs 
collected $2.3 billion in administrative fees from the vendors, 
and their operating expenses were a whopping $725 million.
    These GPOs, I remind you, manufacture no product, nor do 
they distribute any product. You may ask where the rest of the 
money goes. Well, the GPOs would have you believe they return 
that back to their member hospitals. But the IG found 
otherwise. The IG found that GPOs siphoned off nearly $500 
million for their own purposes, including for-profit business 
ventures. The IG also found that the hospitals receiving these 
funds--the majority of them did not reflect these admin fees in 
their cost reports to Medicare.
    GAO reports and court evidence also challenge the premise 
that the GPOs are focused on getting the best products at the 
best price. And why would they, given the current fee 
structure? The more a hospital pays, the more money the GPO 
makes.
    In addition to the fact that the current fee structure 
creates a disincentive to lower costs, it also provides select 
dominant suppliers the opportunity to buy exclusivity. In a 
recent antitrust case, it was shown that the president of a 
supply company met with a GPO executive in May of 2003 and this 
vendor executive stated that his company did $345 million in 
business with the GPO in the previous year and they paid the 
GPO $31 million in administrative fees. Now, that is nearly 9 
percent, well above what the GPOs would have you believe they 
collect. And as an attorney said in the court case, when you 
tip the doorman that well, he is sure to keep folks out of the 
building. And unfortunately this is happening with the GPOs.
    Documents in this case also showed that suppliers pay fees 
above and beyond the administrative fee. In fact, in a 
particular product category the dominant supplier paid the GPO 
15.5 percent in fees for an exclusive contract for a sole 
source contract. However, if the markets were opened up and 
they needed to compete, the vendor was only willing to pay the 
GPO 4 percent in fees. This scenario is precisely why the GPOs 
are tempted to enter into exclusive contracts with dominant 
suppliers. They are prisoners to the fees. And, remember, the 
$31 million payment was from one vendor to one GPO for 1 year. 
Imagine what the impact is nationally to health care costs.
    Now, GPOs claim that they can fix this problem among 
themselves, when evidence suggests otherwise. So long as the 
GPOs are allowed to sell restricted access to dominant 
suppliers by collecting payments from the largest vendors, 
patients, hospitals and taxpayers all lose out.
    The GPOs will also claim that they need more time. 
Unfortunately, patients, caregivers and the American taxpayer 
don't have more time. But thankfully, Mr. Chairman, Senator 
Kohl, there is a solution. If you repeal the GPO safe harbor 
that Congress created nearly 20 years ago under much different 
circumstances, you will restore competition back in the 
marketplace and ensure that the GPOs are working for the best 
interests of their member hospitals and not the dominant 
suppliers who fund their activities. And if you do so, this 
will ensure that patients, caregivers and the American taxpayer 
suffer no longer and the future is much brighter for the health 
care system.
    Thank you very much and I look forward to answering any 
questions you may have.
    [The prepared statement of Mr. Leahey appears as a 
submission for the record.]
    Chairman DeWine. Mr. Leahey, thank you very much.
    Professor, you are next.

STATEMENT OF S. PRAKASH SETHI, PROFESSOR OF MANAGEMENT, BARUCH 
  COLLEGE, THE CITY UNIVERSITY OF NEW YORK, NEW YORK, NEW YORK

    Mr. Sethi. Thank you, sir. For the record, I don't 
represent any industry or any interest group. I am here on my 
own behalf. I had to pay my own fare to come here.
    Chairman DeWine. Senator Kohl wouldn't pay for you?
    Mr. Sethi. No. I asked them, actually. They said they had 
no budget, and it embarrassed my university when I asked them 
for the money to come here.
    Anyway, I speak here only in my capacity as a university 
professor and president of the International Center for 
Corporate Accountability. This is a research organization based 
in the university and we do primarily work in the area of codes 
of conduct, how they are created, how they are managed, and 
essentially how they are implemented. I have spent a large part 
of my 30-year academic career on this work.
    Before I talk about the GPO initiative, let me briefly 
offer you an overview of industry codes and discuss briefly the 
methodology we use at the ICCA for evaluating the substance, 
viability and efficacy of these codes.
    Based on our research and field work in monitoring code 
compliance, we have identified eight conditions that must be 
met for an industry-made code to demonstrate measurable and 
credible compliance. Let me briefly summarize those eight 
points.
    One, the code must be substantive in addressing broad areas 
of public concern pertaining to the industry's conduct. Two, 
code standards must be specific in addressing issues embodied 
in those principles. Three, the industry must create an 
independent governance structure that is not controlled by the 
executives of the member companies. And, four, there must be an 
independent external monitoring and compliance verification 
system, which is absolutely necessary to engender public trust 
and credibility in the industry's claims for performance.
    Before addressing the GPO initiative, it is necessary to 
examine briefly the current GPO business model. Mr. Leahey 
mentioned something about that and so I do not need to repeat 
it. Based on our own analysis, it is evident that the current 
GPO model has built-in structure flaws and its financial 
incentives are so perverse that the GPO initiative cannot 
possibly remedy the situation.
    We cannot talk seriously about a meaningful GPO initiative 
until Congress realigns the financial incentives so that the 
hospitals and not the vendors are once again the GPOs' only 
clients. As long as vendors continue to pay fees to the GPOs, 
any attempt to create, implement and enforce a voluntary code 
is doomed to failure. It would not improve the situation, but 
actually it would worsen it.
    Let me now discuss the findings of our study of the GPO 
initiative. Over the last 6 months, my colleagues and I at ICCA 
have reviewed virtually all of the public records on the GPO 
issue and have evaluated the GPO initiative against the 
principles referenced above. This is the customary process and 
a necessary pre-condition for drawing objective and unbiased 
conclusions.
    In my professional opinion, the six principles of the GPO 
initiative fail to measure up even at the very minimal level to 
any of the eight criteria we indicated. There is a total lack 
of independence in the initiative's governance structure, which 
is entirely controlled by the top executives of the member 
companies. Although the initiative includes a coordinator, the 
coordinator has no real authority.
    The principles are essentially a statement of intent. All 
measures of substance are left entirely to the member 
companies. Industry members also set their own criteria with 
regard to compliance, performance evaluation, implementation 
assurance and public disclosure. Reduced to its bare 
essentials, the final product of this process becomes nothing 
more than a compilation of the reports provided by the member 
companies based on their own self-evaluation.
    The governance structure of the GPO initiative does not 
provide any mechanism for independent external monitoring and 
verification of member companies' self-reported performance. 
Instead, it expects the public to accept this self-reported 
performance at face value. Such an assertion would be a dubious 
proposition under the best of circumstances. It would be 
untenable, given the industry's current record.
    In summary, the GPO initiative is encumbered with a lack of 
specificity, non-existent performance standards and an 
internally controlled and self-serving governance structure, 
and an absence of genuine independent external monitoring. 
Furthermore, so long as GPOs continue to be funded by the 
vendors, meaningful and lasting reforms will not be possible 
because of the inherent conflict of interest that exists.
    However, once this conflict is eliminated and all parties--
namely hospitals, the GPOs and the suppliers--are actively 
committed to the principles and implementation conditions 
listed above, an industry code may prove a worthwhile exercise.
    Thank you very much.
    [The prepared statement of Mr. Sethi appears as a 
submission for the record.]
    Chairman DeWine. Professor, thank you very much.
    Ms. Ubbing, thanks for joining us.

    STATEMENT OF MINA UBBING, PRESIDENT AND CHIEF EXECUTIVE 
       OFFICER, FAIRFIELD MEDICAL CENTER, LANCASTER, OHIO

    Ms. Ubbing. Thank you. I would like to thank Chairman 
DeWine and Ranking Member Kohl for inviting me to testify 
today. It is a special pleasure to be here before a fellow 
Ohioan, Chairman DeWine. I have some brief comments and would 
ask that my full written statements be put into the record.
    Chairman DeWine. They will be made a part of the record. 
Thank you.
    Ms. Ubbing. Thank you.
    I am pleased to speak about the way in which the health 
care supply chain operates, having spent 27 years in the field 
of health care finance. In 2001, I was appointed president and 
CEO of Fairfield Medical Center, and before that served as 
Fairfield's CFO. We are a 222-bed hospital, not-for-profit, in 
a community, and we have become a major referral center serving 
the health care needs of southeastern Ohio.
    I bring to this hearing my perspective not only as FMC's 
CEO, but also as Chair of a four-hospital Ohio Valley hospital 
consortium. I am also on the board of the Ohio Hospital 
Association, and in that sense I believe I speak for all 170 of 
that association's member hospitals and health systems.
    As the members of this Subcommittee are undoubtedly aware, 
America's health care systems are under tremendous pressure to 
deliver health care at affordable prices and to do so without 
undermining the financial well-being of our delivery systems. 
In addition to providing top-flight health professionals, we 
must maintain an inventory of state-of-the-art technology, as 
well as goods and services, enabling us to provide the highest 
quality of care to every surgical patient, emergency room 
visitor, expectant mother and every individual seeking medical 
testing.
    At Fairfield Medical Center, we purchase tens of thousands 
of goods and services, and have relationships with more than 
1,600 vendors. While ours is a strong and well-respected 
hospital, we are relatively small and our power in the enormous 
health care purchasing marketplace is modest. That is why we 
have long been a member of health care group purchasing 
organization, or GPO.
    For 22 years, FMC has been a proud member of Amerinet and 
we have reaped great benefits from that relationship by 
leveraging Amerinet's market expertise and power. The hard-
dollar savings to FMC directly attributable to participating in 
Amerinet are roughly $1.1 million per year. These savings do 
not reflect the many other values that we get from being part 
of Amerinet, including education, assistance in negotiating for 
non-Amerinet products, and benchmarking FMC's performance 
against our peers.
    Without the contracting services we get from our GPO, FMC 
would need to add at least five new professional purchasing 
staff at annual cost of some $400,000. Without the nationwide 
knowledge of products and prices our GPO maintains, we would be 
at a great disadvantage in negotiating our own contracts, which 
would further erode our pricing power.
    Yet, not all our purchasing is through our GPO. To the 
contrary, only 63 percent of FMC's purchasing occurs through 
Amerinet. Of the top 500 items we purchase, only half come from 
GPO contracts. We buy the remainder directly from vendors. GPOs 
do not make purchasing decisions for hospitals. Rather, such 
decisions are driven by a variety of factors, including 
clinician preferences, our own comfort level with certain 
products and services, and the knowledge that our purchase is 
cost-effective, not just low-cost. Ultimately, if we are 
required to have it or if our clinical staff demands it, we try 
to purchase it at the best possible price. It is as simple as 
that.
    One example of an item that our clinical staff required but 
we did not purchase through our GPO is a technology produced by 
a small Dublin, Ohio company that makes a gamma detection 
device used for cancer surgery. When we couldn't buy this item 
through our GPO, we went directly to the manufacturer and 
established a vendor relationship.
    Sometimes, items can't be accessed through our GPO because 
the manufacturer will not sell to a GPO. This is often the case 
in items that are patented. It may be a legitimate new 
innovation and we will have to buy directly from the vendor.
    That said, whenever we consider buying a new item, we rely 
on a wide array of resources to guide our decision, including 
input from clinicians, outside experts, manufacturers, 
consulting firms and our GPO. Fairfield Medical Center has a 
value analysis Committee to review all new technologies, 
whether they come to us at the request of a physician, through 
a trade show, or direct appeal from a vendor. Each prospective 
purchase is subjected to a 16-point value inspection to measure 
clinical benefit and cost-effectiveness.
    The technological needs of our hospital are constantly 
changing. We can count on health care consumers to demand 
access to the best new technologies, just as our clinicians 
demand use of the same. We must be able to respond to these 
demands and that is why we have a system in place at FMC to 
identify and evaluate new medical technologies and to acquire 
them when doing so is the right clinical and financial decision 
for our hospital.
    GPOs do provide immense value to FMC and other health care 
systems, even though they hardly control our purchasing 
decisions. The GPO model of charging administrative fees to 
suppliers and providing cost savings and other important 
benefits to FMC and its other members is critical for any 
health care system in today's economically challenging 
environment. This is particularly the case for small and rural 
systems like ours which have the least market power and the 
most to lose from margin pressures.
    Over the nearly three decades I have been a hospital 
administrator, I have seen many unintended consequences of 
well-intentioned but misguided efforts to better control 
business practices in the health care sector. Where GPOs are 
concerned, I believe that any restrictive legislation would 
have a dangerous or ripple effect on America's hospitals--
adverse consequences that would be felt more severely by small 
and rural systems such as ours.
    I ask you to join me in recognizing the value GPOs bring to 
the hospital marketplace, and that, while important, these 
entities do not control the purchasing marketplace, but rather 
help to make it more robust, competitive and cost-effective in 
an informed environment.
    [The prepared statement of Ms. Ubbing appears as a 
submission for the record.]
    Chairman DeWine. Thank you very much.
    Senator Kohl.
    Senator Kohl. Thanks a lot, Mr. Chairman.
    Mr. Bednar, as the industry initiative coordinator, you 
know that we have said many times that for self-regulation to 
work it must contain meaningful sanctions for non-compliance, 
or in other words it must have real teeth. As I understand the 
industry initiative, the only sanction available if a GPO fails 
to live up to its obligations is the possibility of suspension 
by the steering committee of the industry initiative.
    The steering committee, as you know, is made up of the CEOs 
of the GPO members of the initiative. So is the possibility of 
suspension really an adequate sanction to ensure compliance 
with the principles of the initiative? What would it really 
matter if a GPO was suspended from a private, voluntary 
organization such as this one? A hospital could still use the 
services of that GPO to buy products. So what difference would 
it make?
    Mr. Bednar. Thank you, Senator Kohl. I think that is a good 
question to ask, and the answer is that there will be enormous 
peer pressure for conformance. This industry initiative is in 
perfect harmony with some of the best thinking about how 
organizations should govern themselves, and I refer 
specifically to the organizational sentencing guidelines, 
chapter 8. I refer to the rules of the New York Stock Exchange. 
I refer to the regulations of a number of Federal agencies that 
are involved in acquisition. All of those believe in the 
principle of self-governance as the best approach to assuring 
compliance and the development of an ethical culture.
    Insofar as the sanctions are concerned, this initiative is 
not designed to tee up penalties for misconduct. It is designed 
to encourage ethical conduct. It is designed with the best 
interests of the industry involved, the health care industry.
    I have witnessed the commitment and the sincerity of the 
CEOs who have formed the initiative and I believe that the 
initiative will soon grow. We have already attracted four 
additional GPOs even in the short period of time that I have 
been the coordinator. I think as the industry sees and 
perceives and understands the value that this initiative adds 
to the health care supply chain that others will try to emulate 
it, or will certainly emulate it.
    Specifically, if a GPO does not comply with the ethical 
expectations to which it is committed, I think there will be 
enormous pressure on that particular organization to fall into 
line. That pressure will come not only from the other members 
of the GPO, but from me as well, as the person responsible for 
reviewing the responses. Also, I think it is important that all 
of the activities of the GPO are displayed for the public to 
see on a website. Transparency itself is a strong enforcement 
mechanism.
    Senator Kohl. Dr. Sethi, in your view, is the sanction or 
the suspension of the industry initiative sufficient to ensure 
that GPOs comply with the principles, or is it really much too 
little?
    Mr. Sethi. With all due respect, I don't think this 
initiative amounts to much, if anything. If you look at the six 
principles, it simply says thou shall be good, thou shall not 
lie. But they were supposed to do all those things in the first 
place. The fact that we are here and the initiative is here is 
because we wanted to, and they expected us to seek 
improvements.
    But there is nothing in these principles or governance 
mechanism that provides any assurance that changes will take 
place. They are reporting what they want to report, not what we 
want to hear. There is no external monitoring mechanisms. Are 
they actually reporting what they are supposed to be reporting?
    In an industry setting, best practices is an oxymoron 
because all they are doing is supporting each other so that 
nobody gets out of line. Where is an idea that there is a 
better practice and then we ask the industry whether or not it 
is complying with it? We have no specifics of what ethical 
standards they are talking about, we have no specifics about 
what type of report they would make, and we have no specifics 
about how do we know whether or not that report is accurate. I 
rest my case.
    Senator Kohl. I will ask one more question and then we will 
turn it back to the Chairman.
    Mr. Bednar, a key part of your job will be to address GPOs' 
compliance with the charter of the initiative. You will depend 
on information submitted to the initiative by the GPOs in 
response to a questionnaire to make the assessment. How will 
you verify that the information provided by the GPOs is 
accurate? Will there be any independent audit of the GPOs or 
will you rely entirely on the information that the GPOs supply 
to you?
    Mr. Bednar. Thank you, Senator Kohl. My role as the 
coordinator for this initiative is comparable to the role I 
have held with the defense industry initiative; that is to say 
I am the coordinator of that initiative as well. By experience, 
it is very easy to tell the sincerity and the commitment of the 
responses to the annual questionnaire.
    First of all, there is an instruction that the company has 
to be very detailed in preparing its responses. Second of all, 
the questions themselves are very penetrating. Third, the 
responses require documentation and reference to organizational 
supporting documents, policies and practices. Fourth, the 
responses are displayed publicly for all to see on our website 
and for all to judge on our website.
    Finally, we have now planned in future best practices 
forums to invite in outsiders to participate with us in the 
annual best practices forums so that there will be additional 
witnessing of the sincerity and the commitment of this 
organization.
    Senator Kohl. Well, we will come back to it, Mr. Chairman.
    Chairman DeWine. Thank you, Senator Kohl.
    Ms. Ubbing, I was interested in your testimony about the 
fact that you purchase items outside the GPOs. Could you give 
us an estimate of what percentage of your purchases are outside 
the GPOs?
    Ms. Ubbing. Yes. All of our purchases outside the GPOs 
amount to about 37 percent of purchases; 63 percent are within 
the GPO.
    Chairman DeWine. And what would those generally be? Can you 
give us a--
    Ms. Ubbing. Outside the GPO?
    Chairman DeWine. Sure.
    Ms. Ubbing. It could be anything from sutures to 
technology. It could be information technology, as opposed to 
clinical devices. It could be a medication. It could be any 
type of purchase.
    Chairman DeWine. And why do you purchase outside the GPOs, 
then, in each one of those cases? I mean, in general, why?
    Ms. Ubbing. OK. Quite often, that is driven by clinical 
preference of our practitioners who are using the devices. 
Particularly with physicians, if they have been trained to use 
one type of a device and the GPO contract calls for another, it 
is their time and it is our risk as well as theirs for them to 
have to go into a procedure with equipment that they are not 
comfortable with.
    Another reason is availability of connectivity. Take IV 
pumps. If all our IV tubing has come from one company and the 
contract with the IV pumps is from another, the conversion and 
the cost to our organization would be huge to have to change 
things that aren't broken to replace something that we want to 
update.
    Chairman DeWine. Would you say that Fairfield Medical 
Center is typical in that sense? Do you think most hospitals 
would be about one-third outside?
    Ms. Ubbing. I would think so, sir. I am not absolutely 
positive of that. I do not have data to support that, but 
certainly I know other hospitals go outside. And particularly 
your children's hospitals and some of those hospitals would 
have to go outside simply because the products are not in the 
contracts.
    Chairman DeWine. Mr. Leahey, why wouldn't Ms. Ubbing's 
testimony refute your argument? The hospitals are exercising 
judgment. They can go out and find other innovative products.
    Mr. Leahey. Again, I think if you look at the market power 
of the GPOs, $80 billion or whatever it is they bring through, 
they are the gatekeeper. And while there may be a small 
percentage--
    Chairman DeWine. Her testimony is they are not the 
gatekeeper for her. She would say that, look, when we see a 
product and our doctors say we want a product, she goes out and 
buys the product, if their internally is need for the product.
    Mr. Leahey. With Amerinet, I have one of their contracts in 
front of me here and they do allow a supplier to sell directly 
to the hospital, but it is interesting that Amerinet requires a 
waiver in order for this to happen. You would think that if it 
was really in the best interests of the hospital, the vendor 
should sell directly to them without needing a waiver from 
Amerinet.
    And again when you look at the market-leading GPOs--
Novation, Premier and others--they have tremendous influence in 
the marketplace and they do not always permit other products to 
get to the market.
    Chairman DeWine. Well, I am still trying to understand. Of 
course, this is not the first panel we have heard from and we 
have heard from other panels who have told us that--other 
witnesses have told us that innovation has been stifled and we 
have had some pretty strong testimony in this area. So this is 
the background, but as far as just the testimony we are hearing 
today, Ms. Ubbing is telling us that at least in her hospital 
she has been able to exercise the ability to go outside the 
contract. She doesn't seem to be too stifled by it.
    Mr. Leahey. Well, again I could give you dozens, as I have 
for the staff as well--dozens of companies who are still 
excluded from the marketplace. One, in particular, here that I 
think is very important--this is a syringe; I don't know if you 
see it. It has a needle at the top. When you press the plunger, 
the needle goes in; there are no needle sticks. It saves 
caregivers lives here. They are offering this at 10 cents a 
syringe to Premier hospitals. The competitive product is about 
28 cents. This is still getting locked out of the market.
    And when you talk and you read about some of the company's 
call sheets, they say that Premier didn't let their hospitals 
know about this. And why would they, when the GPO model 
incentivizes them to do otherwise? They make more money the 
higher the price of the product. It is not in their best 
interest currently to allow for the better product at a cheaper 
price to enter the market.
    So I think, you know, there are real problems here that we 
need to address. And, you know, some of the issues about the 
cost of bringing new staff in--5 new staff, $400,000--we are 
not saying the GPO model needs to go away. Any efficiencies 
that currently exist in the market will still exist and the 
providers and suppliers will still enjoy those. We are simply 
saying modify the revenue stream, realign the incentives of the 
GPOs so that they get the best products at the best price for 
their hospitals and aren't worried about policing the market 
for their dominant suppliers.
    Ms. Ubbing. May I comment?
    Chairman DeWine. Sure.
    Ms. Ubbing. With respect to an item like Mr. Leahey has 
shown, in our organization we actually had a vendor fare to 
look at the different devices that would protect our health 
care workers from needle sticks. As a result of that, the GPO 
was not the gatekeeper of what vendors came forward for us. We 
make those decisions. We are not bound by a contract with the 
GPOs not to look elsewhere.
    Chairman DeWine. Could one make the argument that if a 
hospital was not as aggressive as your hospital that it would 
be certainly easier to go with whatever the GPO had?
    Ms. Ubbing. I don't think so. We have got too many cost 
constraints and too many problems to do that. In fact, when we 
work with our GPOs, quite often we ask them to go look at 
different product brands on our behalf and we name the product 
brands.
    Chairman DeWine. Ms. Ubbing, let me ask you another 
question. I don't really quite understand the economics of this 
and maybe you can help me with it. You have stated that if you 
were to repeal the safe harbor and hospitals had to pay for 
GPOs directly, costs would go up. I don't quite understand 
that. Do you want to explain that to me?
    Ms. Ubbing. Certainly.
    Chairman DeWine. I mean, it seems to me that a cost is a 
cost is a cost. I mean, somebody is going to pay for it.
    Ms. Ubbing. And I think that exactly comes into play, but I 
think the reality is if the GPOs incur expenses, incur other 
activity opportunities that are no longer paid for by the 
vendors, those costs are going to invariably get back to the 
hospital. Consequently, those may or may not be allowable costs 
for us on our cost report. Therefore, you are going to lose 
reimbursement from your Medicare and Medicaid payers. 
Ultimately, we will lose in terms of items and services that we 
are allowed to get through our GPOs, particularly on the 
services side.
    Chairman DeWine. So what you are telling me is that this is 
a Federal reimbursement issue, actually.
    Ms. Ubbing. It has the potential to be. Our Federal 
reimbursement is capped, as you know, by the Medicare DRG 
system, prospective payment system. And at the same time, 
vendors are not capped from what they charge us. Certainly, we 
can enter into a GPO contract that for a period of time we will 
retain a price. But anything that is new or anything that is 
innovative that we want to go to, drug-eluding stents being a 
classic example of this, the Medicare provisions did not 
initially allow--when drug-eluding stents were finally 
approved, did not allow an increase in our reimbursement for 
the use of those, and the difference in price was significant.
    Chairman DeWine. Mr. Leahey.
    Mr. Leahey. Mr. Chairman, if I may, again I think it is--
    Chairman DeWine. Let me just say we have two other 
witnesses here. Anytime you two want to jump in, don't be 
bashful. You know, this is kind of like ``Hardball.'' The only 
way you are going to get in is just jump right in. Or 
``Crossfire'' maybe is a better thing, so you just jump in.
    Mr. Leahey. This absolutely is a cost issue and a Medicare 
reimbursement issue. Again, I think as the HHS IG pointed out, 
when you have many hospitals not reflecting this in their cost 
reports, there is an issue here. And I think it is fantasy to 
think that somehow these GPO fees are free money. No supplier 
is going to absorb these costs.
    Chairman DeWine. Well, somebody is paying for it.
    Mr. Leahey. Absolutely, and there is a margin that needs to 
be made. So if the companies have to pay the GPO on the top, 
they have to pass the costs on to ultimately the customer or 
the hospital, or more importantly Medicare, who pays 46 cents 
on every dollar.
    Chairman DeWine. Ms. Ubbing, this controversy just keeps 
going on and on and on, and the critics of this system keep 
beating you all over the head with it. I mean, sometimes you 
just want to take an issue off the table. It seems to me that 
just paying out for a service is sort of the American way, 
isn't it? I mean, paying directly for a service is sort of what 
we do everyday. If I want to buy something, I pay for it. This 
kind of back-door payment is not really the way we usually do 
things in this country, is it?
    Ms. Ubbing. I think I would draw an analogy for you of 
this: If I have the opportunity as a hospital to buy at a Sam's 
Club or someplace where the items have been bought in bulk and 
I can take advantage of the same pricing that a larger hospital 
or a larger system could also get because of the volume 
involved there, that is great. If I have to go out one-on-one 
and negotiate a price, and the price is going to be different--
I know this from ongoing activities--from hospital to the next, 
that is putting a lot of burden on me and is not lowering the 
cost of health care.
    Chairman DeWine. Sam's Club does have a membership fee, I 
think.
    Senator Schumer.

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

    Senator Schumer. Thank you, and I am sitting here and I am 
burning up. Here we have industry people who are making record 
profits. We have most of our hospitals in New York losing 
money. They try to get together and form an organization that 
will save them money and give them some bargaining power and 
they end up looking like the bad guys. This is ridiculous.
    Why would hospitals want to pay more money? They don't. I 
know hospital executives throughout New York. Most of them are 
non-profit and they have to lay off people everyday and they 
have to cut back services everyday. One of the few things they 
can do, as Ms. Ubbing said, is band together so they might have 
some bargaining power because they don't have the ability like 
a company to hire 20 salesmen and go knock on doors and sell 
their product. And we want to not let them do that?
    There may have been abuses in these GPOs, but I will tell 
you something. I sure as heck don't want to see them 
eliminated, paralyzed, handcuffed so that some businesses can 
make even more money. This is getting to the point of absurdity 
here, to the point of absurdity.
    We have the same thing with hospital reimbursement rates. 
In New York, we have got 25 percent of our hospitals close to 
bankrupt because the insurance companies have the bargaining 
power, because there are 30 different hospitals and only 4 or 5 
different providers and we are not getting the health care we 
need.
    The idea that hospitals, Mr. Leahey, would want to pay more 
for an item, unless something is crooked, makes no sense. And 
the idea that ten of them can bargain with you instead of one-
on-one bargaining with you is a good idea, not a bad idea, and 
it will bring your price down on your thing from 10 cents to 8 
cents. You may not want that, but I want that, Medicare wants 
that, Medicaid wants that, the Government wants that and the 
consumer wants that.
    So I mean I didn't come in here intending to make such a 
fuss, but as I sit here--it is not my way, of course.
    [Laughter.]
    Senator Schumer. But as I sit here, you know, sometimes 
governments take an excess, which there was, and then they 
throw out the baby with the bath water. And for the next 10 
years we are underwater, suffering, and that is what I fear is 
happening here.
    I have looked into this a little bit. I have seen that the 
GPOs are really now making an effort to self-police and bring 
down costs, and it is in their interests. I just spoke with the 
head of a--not on this issue, but with the head of a major New 
York hospital 2 hours ago, a huge system, and he is a decent 
person. I have known him for 25 years. He is agonizing about 
what to cut. He is agonizing about who to lay off, after they 
have had such pride in all this. He is not going to play a game 
and pay 28 cents for an item that he can get for 10 cents.
    And the theory of GPOs makes sense and we ought to make 
sure that the actuality makes sense, and I think most of the 
time it does. The purchasing initiative that they have, I 
think, a large number of hospitals are participating in, and 
again it is just common sense. A company that makes syringes 
will have its only mission to sell as many syringes as it can 
at the best price it can. That is your job. But a hospital 
can't equal that energy for every product in every area and do 
as good a job. So the idea of people coming together and saying 
let's find one expert to buy syringes for all the hospitals in 
Ohio or New York or somewhere else and bring the price down is 
what makes sense.
    You know, we didn't do that in the Medicare bill. We didn't 
allow Medicare to bargain with the pharmaceutical industry. 
Guess who was happy? The pharmaceutical industry. Guess who 
lost out? A lady I just spoke to in Buffalo who can't afford a 
cancer drug. Her $2,000 is up. She will never get past the 
donut hole because she won't pay $5,000. She is in agony, she 
is in pain.
    Chairman DeWine. Senator, let me--
    Senator Schumer. I am sorry.
    Chairman DeWine. I have an advantage over you. I can see 
the screen and I know a vote just started. That is the only 
advantage I have.
    Senator Schumer. I am sorry. But, anyway, I just hope we 
don't take this too far. That is all.
    Chairman DeWine. Well, we are not going to take it too far, 
and let me just say neither Senator Kohl--I don't speak for 
Senator Kohl, but neither Senator Kohl nor I have any 
intention--no one is talking about doing away with these at 
all. You know, the question is how it is fine-tuned and how we 
move from here.
    Senator Kohl.
    Senator Kohl. Right. We are not talking about trying to do 
away with GPOs. They are a good thing and we want to ensure 
that they operate in a most effective and fair way. I mean, 
that is the point.
    Some of our concern, Senator Schumer, is that the GPO sets 
up its organization and then hires a person whom they pay and 
whom they can fire to be the administrative executive of that 
organization. You know, we are here to look at things and look 
at the surface and look behind the surface, and finally as a 
result of all the work we have done we would like to set up 
something that polices itself, but really gets the job done 
effectively.
    Senator Schumer. Well, I am for that.
    Senator Kohl. And you don't disagree with that.
    Senator Schumer. I agree with that.
    Senator Kohl. None of us disagrees with that.
    My own personal concern is not that you are not a fine 
person. That is not the issue. They hire you, they can fire 
you, and you are going to be a part-time administrator. To us, 
having put in all this work and all this time and all this 
effort--we don't know anything about you as a person; you may 
be great. But in my own mind, I am concerned about this 
initiative coming to us and saying you can now, Congress, go 
away because we are setting up this organization and we are 
going to hire the executor and we are going to police him and 
then we will fire him for any reason we want. That, to me, 
doesn't sound like the kind of oversight that we have been 
trying to organize and get settled.
    But I have said my piece and perhaps you want to talk.
    Mr. Bednar. Well, with all due respect, Senator--
    Chairman DeWine. OK. Now, we are going to give you 30 
seconds and we are going to give Mr. Leahey 30 seconds.
    Senator Schumer. The Chairman just asked him to say 
something a few minutes ago. Now, he is.
    Chairman DeWine. No, no, no. Here is the problem. We have a 
vote now and this is going to end, so we are going to be out of 
time.
    Mr. Bednar. We believe the initiative has picked up exactly 
in the way that this Committee had advised the industry to pick 
up. And I am only a small player in this; I am just the 
coordinator, the executive director, if you will. The real 
energy and the real commitment comes from these nine CEOs who 
formed this initiative and they are the ones who are 
responsible for setting the tone from the top in a way that I 
think will eventually prove to be very, very successful. Give 
us time to prove that to you.
    Chairman DeWine. Mr. Leahey.
    Mr. Leahey. Thank you, Mr. Chairman. Well, this is the 
fourth hearing in as many years, and again we understand there 
is a potential value in the GPO model. We are not against 
hospitals aggregating their volume. And again our members are 
not the J&Js, the Medtronics, the Guidants. They are the little 
guys who are innovating products at a better price.
    Aggregating volume absolutely makes sense. We are not 
against that. The problem we have here is the funding 
mechanism. The hospitals aren't looking to contract for more 
expensive products either. The problem is the GPOs, who are the 
middlemen--there is the perverse incentive in place. They are 
the ones who are receiving more money the higher the price of 
the product is. So I don't think this is a hospital issue.
    So long as the GPOs are funded by the vendors whose 
products they are charged with independently evaluating on a 
cost-plus model, this is not going to provide the Medicare 
system savings. I think that is exactly why the Department of 
Justice has an ongoing criminal investigation into these issues 
about Medicare fraud.
    Chairman DeWine. We are going to submit to all of you some 
written questions. One of the written questions will be for 
your comment about all the four proposals. I wish we had the 
opportunity to do this in open session and listen to your 
comments. We would appreciate you all getting back to us in 
writing.
    Also, this Subcommittee has received letters on this issue 
from a variety of interested members of industry, including 
eight from Ohio--the Ohio Hospital Association, Mercy 
Children's Hospital, Lima Memorial Hospital, Akron General 
Health System, MedCentral Health System, Upper Valley Medical 
Center, Ohio Children's Hospital Association, Catholic Health 
Care--and several other letters as well. We will put all of 
these in the record.
    Any additional comments? My colleague from New York.
    Senator Schumer. I will be very quick. I heard you read a 
list of hospitals in Ohio. I have hospitals in New York. I 
mean, they are not dumb. They sort of know what they are doing 
and they know they have to lower costs. So I would need a lot 
of evidence to show that the GPO, which is sort of set up and 
run by the hospitals, isn't doing what is good for the 
hospitals. Now, if that is the case, we ought to change it, no 
question about it.
    But it seems to me the hospitals, which are sweating every 
minute over every nickel, at least in New York, would have a 
pretty good idea if they are getting rooked. And they wouldn't 
be so much for these organizations if they are as bad as some 
people are saying.
    Chairman DeWine. Well, I would just point out to my 
colleague that because of what this Subcommittee has done, we 
have made some substantial changes. And I don't think there are 
too many people in the room who don't think we have made some 
substantial changes.
    Senator Schumer. Mr. Chairman, I agree with that.
    Chairman DeWine. We have come a long way.
    Senator Schumer. I just think what seems to be happening 
now with all the new awareness, the self-policing--they are 
much tougher on it--seems to be working. And I just sort of 
smell out there that at least there are some people who would 
want to make the GPOs unworkable, not on this Committee, 
obviously, but some people who would think they would do a 
better job without the GPOs bargaining with each hospital.
    Well, we want to thank all the members of the panel who 
have come in. We appreciate it very much. We know you have 
taken your time and in some cases your money to get here, and 
we appreciate all of you being here. Thank you very much. It 
has been very helpful.
    [Whereupon, at 3:10 p.m., the Subcommittee was adjourned.]
    [Questions and answers and submissions for the record 
follow.]

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