http://www.nytimes.com/2002/03/04/business/04BUY.html
March 4, 2002
2 Powerful Groups Hold Sway Over Buying at Many Hospitals
By WALT BOGDANICH
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Stephanie Diani for The New York
Times Although Dr. Mitchell Goldstein says an experimental
device helped save a child, the product's maker says it has effectively been
blocked from selling to many hospitals. |
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Amid a tangle of wires and worried faces, the brief life of Joshua Diaz was
slipping away, and Dr. Mitchell R. Goldstein knew he must soon make an
agonizing decision.
For 30 minutes, Dr. Goldstein's emergency team had medically assaulted the
2-week-old baby with lifesaving measures, none of which appeared to be working.
Worse, a device called a pulse oximeter failed to detect a pulse or show how
much oxygen Joshua's blood was ferrying to his vital organs.
"I had the nurse and respiratory therapists asking me, `Why are we
doing this?' " said Dr. Goldstein, of West Covina, Calif. Some feared they
were just torturing the baby. But the doctor pressed ahead after attaching a
second, experimental monitor that showed encouraging signs: Joshua's blood was
taking on more oxygen.
Today, Joshua Diaz is a healthy 7-year-old living in Ontario, Calif.
"We probably would have given up," Dr. Goldstein said, were it not
for the second monitor.
But seven years later, its inventor, Joe E. Kiani, says he still cannot sell
his oximeter, regardless of the price, to many American hospitals, even though
medical experts say it helps the most fragile of patients — premature infants.
The reason, Mr. Kiani says, is that he has effectively been locked out — his
much larger competitor has secured exclusive contracts to sell its device to
thousands of hospitals, in part by paying fees to two national purchasing
groups that largely determine which products many hospitals buy.
These two private groups act as middlemen for about half the nation's
nonprofit hospitals, negotiating contracts last year for some $34 billion in
supplies, from pharmaceuticals to pacemakers, bandages to beds.
Each group has the same basic mission: to use the market power of its more
than 1,500 hospitals to find the best medical products at the lowest prices.
But many in the medical world — Mr. Kiani among them — question whether that
mission is being compromised by financial ties that the groups, Premier and
Novation, have to medical supply companies, ties that, according to an
investigation by The New York Times (news/quote),
are both extensive and highly unusual.
The problem begins with this simple fact: The buying groups are financed not
by the hospitals that buy products but by the companies that sell them. In
other words, the groups take money from the very companies they are supposed to
evaluate objectively. Each year, companies pay Premier and Novation hundreds of
millions of dollars in fees that represent a percentage of hospital purchases.
The more hospitals spend on medical supplies, the more dollars Premier and
Novation get from the suppliers.
In a few cases, Premier or some of its officials have also received stock or
options from companies with which Premier contracts.
Critics say such conflicts of interest can mean that the buying groups do
not always choose the products that are best for patients, hospitals or the
taxpayers and insurers that pay their bills.
"It's just like payola," said Paul Lombardi, head of contracts for
the Swedish Medical Center in Seattle. Buying groups are "getting
paid" to buy certain products, said Mr. Lombardi, whose hospital system
dropped Premier in 1996.
In Mr. Kiani's case, his small company says it could not compete against an
industry giant, Mallinckrodt, whose many products generate large fees for the
buying groups. Nor, Mr. Kiani says, can he afford to do what that company did —
help finance Premier's private venture-capital fund and contribute $1 million
to a Premier research service.
Premier did not give Mr. Kiani's company a contract even though the buying
group's own evaluators had privately concluded in 1999 that its oximeter was
superior to what was then on contract. Premier says that review was not
conclusive.
R. David Nelson, who leads the Institute for Supply Management, representing
purchasing managers or buyers from 11,000 companies, said he was surprised to
learn that buying groups were financed by suppliers.
"I had no idea that the kind of things you're talking about were going
on," Mr. Nelson said. If such practices occurred in the industries he
knows, "red flags would go up all over the place," he added.
When suppliers finance buying groups "you get the tail wagging the
dog," Mr. Nelson said.
Premier and Novation, which say their contracting decisions are untainted by
supplier payments, release no public accounting of how much each supplier pays
them, or the terms of individual contracts.
"Billions of dollars are being controlled by two companies, and nobody
knows who they are," said Larry R. Holden, president of the Medical Device
Manufacturers Association, a Washington-based group of mostly small companies.
"Nobody looks at their books. Nobody knows what companies they are
investing in."
The big buying groups "are like a form of government," said Peter
Vincer of the Technology Management Group, an equipment maintenance company in
Oak Creek, Wis. "They say who can play and what it costs to play."
An Industry Is Transformed
Buying groups became popular more than two decades ago as a way for
hospitals to seek better prices for goods and services, which account for about
a quarter of their costs. The groups identify good products and negotiate
contracts for them, but member hospitals do the actual buying.
Initially, there were no dominant buying groups, and hospitals, not
suppliers, often financed them. Much has changed, however. Not only did the
groups consolidate, but in 1986 they also convinced Congress that money could
be saved if legislators allowed suppliers to pay their costs.
As a result, Congress exempted the groups from federal antikickback laws.
The agency now called the Centers for Medicare and Medicaid Services was
supposed to monitor the fee payments "for possible abuse, particularly
those in excess of 3 percent" of sales, according to a Congressional
committee report.
Novation and Premier may have gone well beyond what legislators envisioned.
Novation acknowledges that about 30 percent of its contracts exceed 3
percent of sales, and a hospital official who buys through that group complains
that some fees are now "up in the teens." Novation said its hospitals
approved those fees.
Premier accepts virtually no fees above 3 percent, but it has sometimes
accepted stock in supplier companies in lieu of or in addition to cash
payments. It has also invested in a number of companies in the medical supply
field.
Just three months ago, American Pharmaceutical Partners, based in Los
Angeles — a company that Premier helped start and steered hospital business to
— went public. At that time, the buying group's stake was worth $46 million.
Premier said it invested in suppliers to encourage competition, to promote new
technology and to make money for its hospital shareholders.
Some of Novation's hospitals are angry that tens of millions of dollars of
supplier fees were invested in a publicly traded, money-losing electronic
commerce company, Neoforma Inc. (news/quote)
Several hospital officials contend that Premier and Novation have become
preoccupied with increasing revenue, rather than negotiating the best deals on
products. Instead of being returned to hospitals, some of that revenue goes to finance
programs that have little to do with negotiating buying contracts.
Some top buying group executives have found other ways to profit personally.
Richard A. Norling, Premier's chairman and chief executive, was allowed to
retain and continue collecting a supplier's stock options that he converted
into a $4 million profit in 2001.
Mr. Norling received those options while serving as a director of one of
Premier's predecessor buying groups and as Premier's top official.
Mr. Norling said he recused himself from any buying group decisions
involving the company, Express Scripts, that gave him the options as one of its
directors.
Premier officials say they did not know until an inquiry by The Times that
another of its executives, William J. Nydam, received stock options as a
director of a Premier contractor, American Pharmaceutical Partners. The options
were worth about $1.2 million when the company went public late last year. Mr.
Nydam has since left Premier.
Nor did the buying group know — until The Times asked — that another
official, Palmer Ford, had received options from the same contractor after he
left Premier, the group said. Neither man agreed to be interviewed.
Not every company has opened its doors to Premier. Michael Dalton, the head
of Norfolk Medical of Skokie, Ill., said an executive of his small medical
device company told him that around 1996 he was approached by a Premier
official who suggested that Norfolk could "move to the head of the
line" in the contracting process if it allowed the buying group to invest.
Premier said it knew of no such comment.
Mr. Dalton said he had rejected the suggestion, but another company in the
same field did give Premier securities. In 1998 that company, Horizon Medical
Products (news/quote)
of Manchester, Ga., issued Premier a warrant for up to 500,000 shares of its
stock "in partial compensation" for Premier's business, records show.
A top Premier contracting executive also got stock options as a member of
Horizon's board.
Premier and Novation say they use member hospitals to help them select
products based on quality and cost, and not on other financial considerations.
"We use a competitive bid process," said Novation's president, Mark
McKenna. Novation said that in 1998 it began de-emphasizing the role of fees in
awarding contracts.
Mr. Norling, Premier's chief executive, said his members "would not use
our services" if they thought fees and stock, rather than cost and
quality, determined who got contracts.
Supplier fees finance not just the cost of negotiating contracts, but also
other programs, including ones to improve medical care.
Some of the unused money goes back to the hospitals that own the buying
groups in annual disbursements, though some members complain that not enough is
returned. Other hospitals that buy through the groups but do not have an
ownership stake get no cash back.
Praise From Some Hospitals
Maurice W. Elliott, a former chief executive of Methodist Healthcare in
Memphis, said Premier saved his organization money, provided a "database
to encourage quality" and helped him find minority contractors.
Novation is also highly praised by many of the hospitals that use it.
The two major buying groups say they are accountable only to those hospitals
that own them.
At Premier, which is based in San Diego, the owners include more than 200
hospital systems, among them prominent New York institutions like Mount Sinai
Hospital and North Shore-Long Island Jewish.
Novation, based in Irving, Tex., negotiates contracts on behalf of its two
owners — VHA Inc., a group of mostly community hospitals, and the much smaller
University HealthSystem Consortium, representing many academic hospitals.
Supplier fees go to VHA and the consortium, which use them to finance various
programs.
"We answer the membership on every given day," Mr. McKenna of
Novation said.
But the answers do not satisfy everyone. Larry Dickson oversees purchasing
through Novation for Providence Health System in Seattle. He says he cannot get
specific information on fees, despite the critical role he plays in supplying
his hospitals.
"Why is this so secret?" Mr. Dickson asked. "There is an
accountability question that is very much concerning a lot of people in health
care. And if you ask, and the response you get is, `That's none of your
business,' that raises more questions than it answers."
An Inventor's Frustration
Joe E. Kiani, an Iranian immigrant, was a 24-year-old electrical engineer in
1989 when he helped found a company called Masimo in a garage in Mission Viejo,
Calif. Using $175,000 in loans and a second mortgage, he set out to solve a
problem that had long eluded the makers of pulse oximeters: how to eliminate
false readings caused by sudden patient movement.
A pulse oximeter, which is clipped to a finger or toe, measures blood oxygen
levels. It works best when patients are lying still, as during surgery. But the
jerky movement of an infant or trauma patient can skew the readings. Nor did monitors
work well in newborns, who have low blood flow in their hands and feet.
When readings fall outside normal limits, either because of a sudden patient
movement or a true emergency, an alarm sounds. With a false alarm, nurses may
unwittingly give babies too much oxygen, heightening the risk of eye damage in
premature infants, experts say.
Moreover, when there are too many false alarms, as is often the case in
neonatal units, hospital workers may become immune to the real ones. In such
cases, brain damage can occur.
By the mid-1990's, Mr. Kiani was convinced his new oximeter had solved those
critical problems. And over time, many in the medical field would agree with
him. Several hospitals that compared Masimo's device to conventional oximeters
concluded that Masimo's was better.
"If it was my baby or my daughter's baby, absolutely I would have
Masimo on it," said Joseph Nigl, a respiratory therapist at Covenant
Health Care in Saginaw, Mich.
The Cedars-Sinai Medical Center in Los Angeles found Masimo's device played
a critical role in helping to virtually eliminate certain infant eye damage,
said Dr. Augusto Sola, formerly head of the neonatology unit.
Even Masimo's chief competitor, Nellcor, said that the device was "very
good" and that it had "raised the performance bar," according to
what Masimo said were internal Nellcor documents filed as part of a patent
dispute. Nellcor, a unit of Mallinckrodt, said those statements were taken out
of context.
Nellcor's device is highly regarded, but some clinicians said it was ripe
for a challenge in the late 1990's.
Dr. Goldstein, who saved Joshua Diaz, says Masimo's product was a
significant advance. Masimo paid the cost of his traveling to present his
research.
For all the benefits of Mr. Kiani's oximeter, many hospitals would not buy
it. And some would not even allow his sales staff to demonstrate how it worked.
A reason: Masimo did not have a contract with Premier or Novation. Both had
awarded "sole source" contracts to Nellcor, which meant that hospitals
were given strong financial incentives to buy Nellcor oximeters.
Mr. Kiani said he had not known that manufacturers were expected to supply
the money that finances the big hospital buying groups. "I didn't think
this kind of system existed," he said.
It was a system that the big buying groups had creatively nurtured. Premier,
for example, invited suppliers to attend a 2000 conference with this written
offer: for $25,000, a company could buy not only advertising at the conference,
but also a "private dinner" with two Premier vice presidents, and a
"small group meeting" with hospitals. Premier has said money does not
help any company get a contract.
One invitation went to Retractable Technologies (news/quote),
a small maker of safety syringes in Little Elm, Tex. The company's chief
executive, Thomas J. Shaw, says the dinner offer sounded to him like a bribe.
"The initial $25,000 is just for the appetizer," Mr. Shaw said.
"The entree is in the millions."
Retractable has sued Premier and Novation in Texas, accusing them of
restraining trade — a charge both groups deny.
The entree Mr. Shaw referred to is what suppliers pay to sell their products
through the big buying groups. The payments take different forms. Some include
stock or options in the supplier, or have clauses where the fee percentage
rises in proportion to sales. And buying groups often collect twice on the same
product — from the manufacturer and from the company that delivers the product
to hospitals.
Suppliers have also sweetened contracts by agreeing to pay some fees before
sales are made. The inspector general of the Centers for Medicare and Medicaid
Services issued a legal advisory in 2000 stating that payments of that type
could pose "a significant risk of fraud and abuse."
Both groups say they have stopped taking such payments, and they declined to
identify the companies that made them, or the size of the payments.
Mr. Kiani's company had limited ability to pay fees because, like other
small firms, it had a single product line. Nellcor had no such problem, because
its corporate parent, Mallinckrodt, sold many other medical products through
the buying group.
Nor did Mr. Kiani know, when Masimo approached Premier in 1998, that
Mallinckrodt had paid $1 million to belong to Premier's Innovation Institute.
That unit promised to find ways to get new technology into hospitals.
Mallinckrodt was also one of 12 limited partners investing millions in
Premier's venture capital fund, the Premier Medical Partner Fund. Some of the
limited partners had Premier contracts.
Premier says suppliers got no special favors by financing either the
institute or the fund. But, several small manufacturers say, the money
solidified an already close relationship that big suppliers had with Premier.
Unaware of these arrangements, Masimo officials had a favorable first
impression of Premier. "We walked out of there thinking we had made it,"
one of them said.
Device Gets Good Reviews
Indeed, Premier's technical staff had high praise for Mr. Kiani's
technology, called Masimo SET.
That staff's 1999 report reads like a Masimo sales brochure: "Clinical
trials conducted and published by well-respected physicians in the U.S.
indicate that Masimo SET has significant clinical advantages to neonates and
some highly critical adult patients."
The report added, "We can conservatively say Masimo technology will
remain superior" to Nellcor through the remainder of 1999.
Masimo says it never saw the internal report. Instead, Premier told the
company that more study was needed, then took nearly two years before finally
rejecting Mr. Kiani's oximeter.
By then, Nellcor had come out with its own improved model.
"They basically stonewalled us," Mr. Kiani said. Premier said the
long delay was due to staff turnover and Masimo's slow response to information
requests.
Shown a copy of Premier's confidential report praising his product, Mr.
Kiani said he believed that not only is he a victim, "but they are lying
to their members and the hospitals they are representing."
Premier officials said they based their rejection of Masimo's device on a survey
of member hospitals. Most of the medical personnel surveyed were unfamiliar
with Masimo but were pleased with the Nellcor device.
Still, of the 20 that were familiar with Masimo's product, 15 said it was
"more accurate than other pulse oximetry devices or eliminates false
alarms," Premier's records show.
Premier said that its survey and its conclusions were fair, and that it also
took into account what few scientific research papers existed on the topic.
Novation said it awarded a contract to Nellcor, rather than Masimo, for
financial and clinical reasons.
Both groups say hospitals can buy products from anyone, but there are
financial penalties for buying too many supplies from outside the group, like
lost discounts or less money back at the end of the year from their buying
group.
What happened to Masimo, Mr. Kiani says, underscores why more innovative
medical devices are not getting into hospitals. "I doubt a company like
Masimo could ever get funded now," he said.
Mr. Norling of Premier disputes that. "We do not know of any company
with a truly innovative and market-ready product that does not have a contract
with Premier, if the company wants one," he said. Premier now runs a
program it says has helped smaller companies with new technology get contracts.
As for Mallinckrodt, its new corporate parent, Tyco International (news/quote),
said Nellcor had won contracts for one reason: its oximeter was superior.
"Nellcor competes vigorously, fairly and ethically to earn and retain the
business of Premier" and other buying groups, John H. Masterson, a Tyco
lawyer, said in a statement. Neither Mallinckrodt nor Nellcor agreed to
interviews.
But Dr. Sola, the doctor who said Masimo helped reduce eye damage in
infants, says the battle he had to fight just to get the device in his hospital
caused him to question the whole group buying process.
"In a country with freedom of choice, this was the hardest thing for me
to understand," said Dr. Sola, who is from Argentina. "If the baby
was choosing consciously, we know what the baby would choose."
A Big Company Loses Out
Questions about the fairness of Premier's selection process have also been
raised by other companies, and not all of them small.
St. Jude Medical, a large manufacturer of pacemakers, wanted a Premier
contract, but two principal competitors — Medtronic (news/quote)
and Guidant (news/quote)
— already had it. Premier required St. Jude to demonstrate that its pacemaker
had medical advantages the other brands did not; in Premier's words, that meant
showing "breakthrough" technology.
To help evaluate St. Jude's claims, Premier formed an expert panel of six
cardiologists, including Dr. Anne Curtis at the University of Florida.
Dr. Curtis said St. Jude claimed it could operate a pacemaker on less
electricity, meaning the implanted battery would last longer. "When the
battery runs down the patient has to come in for replacement surgery," Dr.
Curtis said.
On Sept. 19, 2000, the panel concluded: "In light of the increased
device longevity and ease of use, the expert panel agreed unanimously that St.
Jude's breakthrough claim is substantiated."
But that is not what Premier reported to its contracting committee. Instead,
it said the experts had found only a "theoretical breakthrough
potential," and never mentioned the unanimous expert conclusion.
"Why did we bother?" said Dr. Curtis after being shown a copy of
how Premier represented her panel's findings. "Was it just going through
the motions to say you had an expert panel so then you can do what you
want?"
Another panel member, who requested anonymity, said, "This is not an
honest process."
Last March, Premier's contracting committee rejected St. Jude's request
after concluding that the product's battery did not last appreciably longer
than others.
Asked how it represented the experts' report, Premier said it did so
"accurately."
But St. Jude does not agree. "Premier's conduct makes no sense from the
perspective of offering the best patient care at a fair price," said Peter
Gove, a company spokesman. "We can only speculate as to whether ulterior
motives could be driving Premier's behavior."
Some Hospitals Seek Alternatives
For all the criticism, Premier and Novation enjoy much support among the
nation's hospitals. One reason is the annual checks, some totaling hundreds of
thousands of dollars, that are their share of what manufacturers pay the buying
groups.
"A lot of health care folks at the end of the year say, `Geez, we're in
the hole! Oh, wait a minute, we've got this money coming back,' " said Mr.
Dickson of Providence Health.
Hospitals have also slashed their purchasing staffs, leaving them with
little expertise to oversee their buying groups or to find better deals on
their own.
"Waste and inefficiency in health care is every bit as bad as everyone
says it is," said Trevor Fetter, the chairman and chief executive of
Broadlane, a smaller buying group.
No one knows how much money the buying groups save hospitals. Eugene S.
Schneller, a professor at Arizona State University who has studied the issue,
said the groups do provide benefits, although some hospitals can get good deals
on their own.
Some hospitals are now questioning the wisdom of staying in the big buying
groups.
Premier returned about 22 percent of its revenue last year to member
hospitals. VHA returned 20 percent last year and Novation's other affiliated
group, University HealthSystem Consortium, typically returns about 40 percent.
The rest went for overhead, salaries, investments, and various programs.
"No, we are not satisfied with the amounts we are receiving," said
Dennis A. Hall, the chief executive of the Baptist Health System in Birmingham,
Ala., which buys through Novation.
Consorta, a smaller buying group, says it returns about 68 percent of its
revenue.
While smaller buying groups also accept fees, they say they operate differently.
John Strong, Consorta's chief executive, said his group does not invest in
suppliers because that "may affect the willingness of organizations to
rigorously evaluate all competitors and all product options." Consorta
limits fees to 3 percent.
Mark Moyer, vice president for marketing for Amerinet, another smaller
buying group, said his executives cannot sit on supplier boards. "We
aren't going to line any pockets here," Mr. Moyer said.
Premier suffered a major blow last summer when Trinity Health of Novi,
Mich., whose chief executive, Judith C. Pelham, had been on Premier's board,
decided to stop using the buying group.
"We wanted to reduce the cost of our supplies," said Stephen
Shivinsky, a Trinity spokesman. "As a Catholic nonprofit, we believe we
have a responsibility to be good stewards of our resources."
Nicholas C. Toscano, who oversees purchasing for Virtua Health in New
Jersey, says his hospitals do their own buying, and save money. "There are
no administrative fees in the contract," he said. And that means cheaper
prices, he added.
"We just gave our nurses some significant increases in salaries,"
he said. "We're expanding our emergency rooms. We're improving our
operating rooms."
Senator Patrick J. Leahy, Democrat of Vermont, said hospitals, not
suppliers, should pay for buying groups. "The hospitals are going to be
even more attentive to how they're performing," he said. "Because,
after all, they're paying for it."
Later articles will examine who benefits from the decisions of hospital
buying groups.
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