Medical Device Link.

Originally Published MDDI March 2002

NEWS & ANALYSIS

Robert Drummond

Larry Holden

The Medical Device Manufacturers Association (MDMA) is charging group purchasing organizations (GPOs) with creating an unfair playing field for device manufacturers, making it increasingly difficult for small, innovative firms to get their products to market. Led by Larry R. Holden, MDMA's president, the organization is pressuring Capitol Hill to examine the GPOs' practices and policies.

Holden believes there are no two ways about it: "GPOs are controlling access to the marketplace and stifling innovation." He insists that—despite his association's traditional allegiance to smaller companies—this is not a big-company, small-company issue. It is a "medical health issue," he argues, a fight against "a controlling force, a force that is unhealthy."

In an effort to keep healthcare costs down, Congress created a safe harbor under the Social Security Act for GPOs to act as intermediaries between hospitals and vendors, and to charge a fee for doing so. HHS set the fee at 3%. Since then, mergers and acquisitions among GPOs have created two very large organizations, Novation and Premier, which control two-thirds of hospital purchases in the United States, according to Holden.

"When Congress [offered safe harbor], they had no idea what was going to happen in the marketplace," Holden says. "So what we have today is a system where manufacturers are being held hostage by these large organizations."

Though he admits that solid data is hard to come by (as private organizations, GPOs are not required to open their accounting records to public scrutiny), Holden estimates that the GPOs are doing over 90% of their purchases with fewer than 20 companies. This locks out small manufacturers, who are unable to produce in the massive quantities and for the low prices GPOs require. At the same time, however, the trend at the larger firms of late has been to cut R&D budgets drastically, leaving innovation to the smaller manufacturers and start-ups. Large corporations "are doing their R&D through mergers and acquisitions," Holden says.

The problem with that is that the cost of a medical device firm is rising exponentially. According to MDMA, the average cost of a firm 10 years ago was $7 million; today it is $77 million. Holden's fear is that, if the cost keeps rising at such a steep rate, the industry will reach the point of diminishing returns. "The big guys aren't going to pay $500 million to buy a company," Holden says. "So our concern is: where, then, will innovation come from?"

Holden admits that the GPOs serve a purpose and do keep costs down on commodity items. "They're great if you're talking about gauze or surgical gloves," he says. "But when you're talking about life-saving, innovative technologies, they are stifling the ability of the small corporation to get their products to market."

So what would Holden like to see happen? "We want to see what their books look like," he says. Novation's annual report for 2000 boasts that members bought $15.6 billion in products and services through them, Holden says. "In this age of Enron, how is there a system [in which] organizations that have $15 billion flowing through them are not required to reveal where their money comes from, or where it's going?"

"Our bottom line is very simple," he says. "We're not trying to close the door on the GPOs. We're not saying they're evil. What we're saying is that any company needs to have a level playing field when it hits the marketplace. The market should not be skewed by an organization that is meant to keep the cost down in healthcare."

MDMA has has been successful in getting its argument to Capitol Hill. According to Holden, the General Accounting Office is looking into GPO practices for a Senate antitrust subcommittee hearing, which will take place in April of this year. Also, in its 2002 agenda, the HHS office of inspector general has included the examination of GPO administration fees.

Holden says that many manufacturers, large and small, are becoming wary of the growing GPO control of their industry, but that those companies that have contracts with the GPOs "don't want to see the apple cart knocked over."

"The current GPO business model is not conducive to small and innovative technologies coming to market," Holden says. "It just isn't." For him, it is a David and Goliath fight that David must win. "And we're right," Holden says. "What they're doing is just wrong."

Copyright ©2002 Medical Device & Diagnostic Industry