More Hospitals Change the Way They Buy Drugs And Supplies

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December 28, 2002

Business/Financial Desk

More Hospitals Change the Way They Buy Drugs And Supplies

By Mary Williams Walsh (NYT)


Amid rising concern about health care costs, a growing number of hospitals are reconsidering their use of two companies that have long dominated the buying of drugs and medical supplies but have recently come under government scrutiny.

Over the last year, more than 100 hospitals have ended or reduced their dealings with the two companies, Premier and Novation, for-profit private companies that negotiate to buy drugs and medical supplies on behalf of nearly 4,000 hospitals.

In November and December alone, 11 health care networks -- including more than 40 hospitals, and many more clinics, hospices and other facilities -- have begun breaking longstanding ties with Premier and Novation.

At the beginning of this year, Premier and Novation negotiated supply contracts for nearly two-thirds of American hospitals. The core mission of both companies is to pool the purchasing power of thousands of hospitals to negotiate for better prices from manufacturers, and for better products, than each hospital could get on its own.

But because both Premier and Novation are financed by the very manufacturers whose products they evaluate and select, questions have been raised about whose interests they really serve and about whether the contracts they negotiate really save hospitals money.

Earlier this year, articles in The New York Times examined the potential conflicts of interest at both companies. The business practices of Premier and Novation have since become the subject of six separate government investigations.

Consultants, market-research companies and others who monitor the medical-supply business say these inquiries -- unusual in a sector accustomed to little or no public or regulatory scrutiny -- have prompted many hospitals to take a closer look at the way they handle supplies, starting with their purchasing companies and the manufacturers that finance them.

Earlier this month, University Hospitals Health System, a large network of hospitals and clinics in northern Ohio, announced that it was gradually switching to contracts negotiated by MedAssets, a young purchasing company that has been marketing itself as a more flexible alternative to Premier and Novation. ''I don't think I could have done what I just did a year ago,'' said Steven Standley, senior vice president of University Hospitals.

University Hospitals spends about $300 million a year on drugs, medical devices and other supplies. Mr. Standley said University Hospitals expected to save $4 million to $4.5 million a year in each of the first five years it worked with MedAssets. In the past, it bought most of its supplies through Novation.

Industry experts say more such departures are being negotiated. Officials at hospitals making the changes say they need to save money at a time when fast-changing technology is driving supply prices upward, and government payments to hospitals are being sharply reduced.

Officials of Premier and Novation deny that the departures will add up to an exodus from the large buying companies, known as group purchasing organizations, or G.P.O.'s.

''Hospitals regularly review their G.P.O. relationships,'' said Novation's president, Mark McKenna, in a recent letter to the purchasing and pharmacy directors of member hospitals. Hospitals that use Novation choose to continue with his company ''the vast majority of the time,'' he said.

The precise number of hospitals changing their purchasing arrangements is difficult to determine, because most are making the changes gradually, and many are reluctant to discuss their plans. Changing a hospital-supply portfolio is a slow and arduous process, often involving the breaking of longstanding personal relationships and approvals by cautious boards of trustees.

Because Premier and Novation are owned by their member hospitals, those institutions that want to opt out must first negotiate the withdrawal of their capital, further slowing the process. Premier requires departing hospitals to wait five years before removing their capital, which can be several million dollars for large hospital networks.

After articles in The Times raised questions about potential conflicts of interest at both companies, the antitrust subcommittee of the Senate Judiciary Committee held a hearing in May at which senators from both parties sharply criticized the buying groups and demanded that both organizations change or face new government regulation.

Five other federal or state investigations have followed.

In August and September, Premier and Novation came out with new codes of ethical conduct. The Senate antitrust subcommittee has said it will monitor their compliance with these codes.

More recently, the Senate panel has begun looking into the practices of a number of smaller hospital purchasing companies, including MedAssets, Consorta, Broadlane and AmeriNet. The senators have asked that these companies -- which also receive fees from manufacturers -- adopt codes of conduct, as well.

Mr. Standley, like other executives of large hospital systems, said he had begun to doubt that manufacturers were really giving their lowest prices to the vast, diverse networks of hospitals that make up Premier and Novation.

''Imagine what happens when you're trying to deal with 3,000 hospitals,'' he said. ''You get a very vanilla, lowest common denominator approach. If you know anything about negotiations, you know that's not going to get you the best deal.''

He said he thought University Hospitals could negotiate lower prices on its own, but found few manufacturers willing to do business with him one on one. The manufacturers thought that cutting a low-cost deal for a Novation member would alienate Novation -- and few companies wanted to jeopardize a business relationship that could be worth hundreds of millions of dollars a year.

In the end, University Hospitals signed an agreement allowing MedAssets to negotiate most of its supply contracts, and that has made manufacturers more willing to reduce prices, Mr. Standley said. University Hospitals continues to be a shareholder in one of Novation's two parent companies, University HealthSystem Consortium, however.

Other hospital networks are experimenting with other ways of buying supplies. Caritas Christi Health Care, a network of six Catholic hospitals in Massachusetts, began working with a smaller purchasing organization -- Consorta -- last July, for example.

Pat Zemanek, Caritas's corporate director of materials management, said Caritas chose Consorta because of its small size. She said that because Consorta consisted of just 13 hospital networks, it could offer each organization a greater say in the selection of medical products.

''Our biggest goal was input, rather than just having a piece of paper come across our desk, saying, 'Use this,' '' Ms. Zemanek said.

Caritas spends about $110 million a year on supplies. Ms. Zemanek declined to project anticipated cost reductions but said the hospital network had saved more than $500,000 in the five months it had been buying through Consorta.

Still other hospitals have been building up their own purchasing staffs in an effort to eliminate purchasing companies altogether and negotiate directly with manufacturers themselves.

All of these initiatives are a departure from the way hospitals have tried to pare costs in the past -- usually by cutting staff, because labor costs are typically a hospital's single largest expense. Supplies usually make up the second-largest expense, but few hospitals have wanted to evaluate products, negotiate prices and keep track of inventories themselves.

''Most people are so intimidated by the complexity that they don't even want to look at it,'' said Lynn Everard, a hospital consultant in Florida who works on supply-management issues. ''But it can be done. People are doing it.''