Ethics Standards Overhaul Urged for Hospital Buying Groups

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October 24, 2002

Ethics Standards Overhaul Urged for Hospital Buying Groups

By Barry Meier


A noted specialist in corporate ethics urged yesterday that companies involved in helping the nation's hospitals buy billions of dollars in supplies, drugs and medical devices adopt sweeping policy changes to avoid conflicts between their own profit-making interests and the needs of the hospitals they are supposed to represent.

In a report commissioned by Premier Inc., one of the nation's biggest hospital purchasing groups, the expert, Prof. Kirk O. Hanson of Santa Clara University, said that such groups should, among other things, stop seeking competitive bids from medical suppliers on the sales commissions. He also urged that the groups publicly disclose their financial results and top executive salaries, and that each group require employees to divest themselves of stock in companies with which the group does business.

Mr. Hanson's recommendations go significantly beyond those adopted this summer by Premier and the other of the nation's two biggest buying groups, Novation, after Congressional scrutiny into whether contracting decisions made by the groups were entangled by conflicts of interest and self-dealing.

Premier, which hired Mr. Hanson in March to produce his report, said yesterday that its board had agreed to adopt all his recommendations. Novation, however, said it did not plan to do so.

Angela M. Bolivar, a spokeswoman for Novation, said that the company, which is owned by two hospital groups, did not plan to disclose its financial results publicly. She also said the group would not adopt Mr. Hanson's suggestion that buying groups set fixed sales commissions, rather than have manufacturers bid on what they will pay as a fee during the contract award process.

"We believe that the fees we have now in place serve the best interest of our members," Ms. Bolivar said. "We see it more as a business practice, not an ethics issue."

Mr. Hanson said that allowing companies to bid on fees even up to a fixed limit, as Premier had, could unfairly tilt the contracting process toward the interest of the buying group. Hospitals, however, might benefit from dealing with a supplier with an innovative product that is willing to sell it at a lower price but offers the buying group a lower sales commission. Setting sales fees before soliciting bids, he said, was the only way to insure that the buying group's "interests do not supplant the interests of hospitals and the interests of patients."

A staff member of the Senate Judiciary Committee's antitrust subcommittee, which held hearings this spring on the buying groups' practices, said the panel was very pleased that Premier had agreed to adopt Mr. Hanson's recommendations. But she noted that few of the country's half a dozen other groups had embraced such sweeping reforms. "Today's study provides even further evidence that reform is necessary if the industry wants to meet ethical standards and to promote rather than hinder innovation in the medical device field," she said.

Robert Betz, president of the Hospital Industry Group Purchasing Association, a trade group, issued a statement declining to comment on Premier's decision. But he said his group "fully supports and encourages our members to exceed the principles" laid out in a new set of policy practices issued by the trade group in response to the Senate hearings.

In his report, Mr. Hanson said that he was hired by Premier to look into the ethical practices under which hospital buying groups should operate after The New York Times began a series of articles raising questions about the practices of groups like Premier and Novation.

Previously, Mr. Hanson had been hired by numerous companies to undertake studies of their corporate practices, producing most notably a review that criticized some of the practices of the Body Shop International, a cosmetics company. In the case of Premier, however, Mr. Hanson, who was paid around $225,000, said he was asked to review improvements in its future practices, not its past activities.

He said that buying groups must operate with greater disclosure and transparency, more like nonprofit foundations, in part because their hospital members often use public funds to buy products.

"They are playing a quasi-public function just as nonprofit hospitals do," Mr. Hanson said.

He also said it was essential for all employees to divest themselves of stock in a vendor to avoid potential conflicts, and for hospital officials who serve on advisory boards that select products to disclose their industry ties fully.

On the question of stock divestment, "they have to be cleaner than clean," he said. "Our experience with Chinese walls in recent years is not great."

In a statement yesterday, Richard A. Norling, the chief executive of Premier, discussed his group's decision to hire Mr. Hanson as public scrutiny of the group intensified.

"It was clear to me that even the innuendo of ethical wrongdoing at the company could not and should not be tolerated by our employees and the hospitals that we serve," Mr. Norling said. "We are committed to implement Professor Hanson's recommendations and to making the inner workings of Premier more transparent."