Hospital Network's Switch Is Blow to Novation

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November 23, 2002

Business/Financial Desk

Hospital Network's Switch Is Blow to Novation

By Mary Williams Walsh (NYT)


In a blow to Novation, America's largest purchasing agent for hospitals, several prominent hospitals and clinics in San Diego have decided to buy their medical supplies through a smaller, younger company that contends it is a cheaper and a more ethical alternative.

Scripps Health of San Diego, a $1 billion network of five hospitals and about 40 clinics, said it would begin buying supplies through MedAssets, a privately held company founded last year in St. Louis.

MedAssets is also in talks with other hospital networks that are re-evaluating their relationships with Novation and other purchasing companies.

Hospital purchasing agents contend they save hospitals money by pooling purchases and by negotiating group discounts with makers of medical products. But questions have been raised about the business practices of the purchasing companies -- particularly their close ties to manufacturers, which finance them.

In addition, with health care costs spiraling upward, critics in the hospital industry and government are questioning whether Novation and similar companies really save hospitals money.

After a series of articles in The New York Times earlier this year, Novation and another purchasing company, Premier Inc., drew sharp, bipartisan criticism from the antitrust subcommittee of the Senate Judiciary Committee. After a hearing in which Novation and Premier were accused of self-dealing, freezing out competition and other abuses, the Senate panel warned that if the two companies did not change, Congress would impose new controls.

In August, Premier and Novation both pledged publicly to raise their ethical standards. Since then, however, people close to the subcommittee have expressed doubts about how well Novation was living up to its promises. ''We've got uncertainties and nagging questions regarding the timing and the full effect of Novation's changes,'' one of these people said, adding that the panel's inquiries would continue ''full bore'' next year, even though control of the Senate is changing hands.

In addition to monitoring Premier and Novation, the subcommittee recently began reviewing the practices of several smaller hospital purchasing companies, including MedAssets.

Makers of medical devices have complained openly this fall that Novation has not carried out its promised changes fast enough.

''It's foot-dragging and game playing,'' said Larry Holden, president of the Medical Device Manufacturers Association, an industry group.

When asked to comment on the accusations of foot-dragging, Novation responded with a statement saying that ''much progress has been made, and we report regularly to the Senate.''

Novation cited the naming of a compliance officer, the creation of a compliance committee and a greater willingness to award contracts to more than one supplier as evidence of its changes.

Amid this year's controversy, MedAssets began promoting itself as a purchasing organization unencumbered by the sort of problems that The Times reported. It took out advertisements saying, for instance, that MedAssets could get hospitals ''the best price available'' without embarrassing them by ''appearing more frequently in the press than in person.''

MedAssets says it will limit the amount of money it receives from medical supply companies and report all such payments to the hospitals that use its services. It also says it will not bundle any manufacturer's product lines together in a single contract and require hospitals to buy the entire package to get the lowest price.

Such bundled contracts are a particularly sore point with hospitals that buy their supplies through Novation. They complain that the bundled contracts often force them to buy at least one product that their clinicians do not like, if they want to get the best price.

Gary Johnson, vice president for marketing at MedAssets, said that overhead at MedAssets was lower than at its larger rivals and that it was organized in a way that allows a more arms-length relationship with hospitals.

''We don't own the hospitals, and the hospitals don't own us,'' he said. ''It's a much more traditional hospital-supplier relationship.''

John Armstrong, Scripps's vice president for supply management, said Scripps expected to reduce its supply costs by $20 million to $25 million a year by working with MedAssets. The hospital network now spends $212 million a year on supplies.

Mr. Armstrong said Scripps began questioning the value of Novation's purchasing services in the mid-1990's, focusing on the fees that Novation collects from medical supply companies -- typically a percentage of the hospital's purchases.

Scripps suspected that the fees were adding an extra layer to the cost of each product, Mr. Armstrong said. Officials said they thought that buying supplies directly from manufacturers, could cut out the middlemen and save money.

Scripps experimented first with a combination of self-contracting and buying through Novation, he said, but found the mix did not work well. So, earlier this year, Scripps began revising its methods again, comparing proposals from both MedAssets and Novation.

Scripps ultimately chose MedAssets, he said, because it offered Scripps more flexibility to keep negotiating its own contracts. In addition, Mr. Armstrong said that ''the way their business model works, we feel that the administrative fees are going to be lower.''

''That savings is essentially passed on to us,'' Mr. Armstrong said. ''We can use that savings to put back into our contract-management department.''

In its statement, Novation noted that ''hospitals have the freedom to choose how they purchase supplies,'' and that it believed that its member satisfaction was ''at historical highs.''

Mr. Armstrong said that Scripps would continue its relationship with Novation's corporate parent, VHA Inc., which offers services other than purchasing.