Medical Device Link.

Originally Published MX November/December 2002

COVER STORY

For Masimo founder and CEO Joe E. Kiani, the road to market adoption has been long, arduous, and strewn with unexpected potholes.

Interview by Steve Halasey

In early September, Premier Inc. (San Diego), the nation's second-largest hospital group purchasing organization (GPO), awarded a three-year contract to Masimo Corp. (Irvine, CA), a privately owned maker of pulse oximetry systems. The agreement permits Premier's 1500 member hospitals to purchase Masimo monitors within the scope of their purchasing contracts.

Medtech companies are awarded such contracts all the time—but this one is different. For Masimo founder, chairman, and CEO Joe E. Kiani, announcement of the Premier contract came as the culmination of years of struggle to overcome obstacles that had effectively prevented hospitals from adopting his company's products. Foremost among those obstacles were the policies and practices of the nation's GPOs, which included long-term sole-source contracts and pricing incentives for hospitals that purchased goods only from the bundles of products offered by approved vendors.

Masimo's difficulties came to public attention last March, when the New York Times published the first in a series of investigative articles about GPO influence over hospital purchasing. Kiani was subsequently invited to testify before a hearing of the Senate Judiciary Committee's subcommittee on antitrust, business rights, and competition. In his testimony, Kiani argued that "the two biggest GPOs (Premier and Novation), who control over 70% of the nation's hospital purchases, have discovered how to use kickbacks to work with the powerful companies to shut out their competitors. Their strategies maximize both the GPO's and their largest suppliers' mutual revenues, at the expense of other vendors, hospitals, patients, and payers."

It's not the end of the story, but the Senate hearings have resulted in a scramble to revamp the policies and practices of the nation's hospital GPOs. The Senate antitrust committee is continuing to follow up on the issue, with the possibility that a legislated solution may be required.

In this excerpted interview with MX editor-in-chief Steve Halasey, Kiani discusses how he became involved in the Senate's antitrust hearings and other steps that Masimo has taken to press forward its claims in the marketplace.

MX: As a matter of public policy, what went wrong to create the problems that you described in your testimony last April before the Senate Judiciary Committee's subcommittee on antitrust, business rights, and competition?

Joe E. Kiani: The problems that I outlined—elimination of competition and innovation, substandard technology in our hospitals, and increased cost to payers—were the unintended consequences of new laws that were intended to improve the bargaining power of hospitals. Instead, those laws ended up giving even more control to the largest megacompanies through multi-million-dollar fee relationships be-tween them and the group purchasing organizations (GPOs).

We had some tried-and-true laws governing business dealings that had been very good for competition, innovation, and our economy. But in the mid-1980s Congress approved payments from vendors to GPOs—which were essentially legalized kickbacks—and in the 1990s it eliminated competing vendors' recourse by exempting GPOs from antitrust scrutiny.

Did industry have input into that process?

I am not certain who was consulted. My understanding is that three things happened. First, the GPOs, who were small and regional at the time, brought in representatives from a few rural hospitals to meet with well-intending congressmen. Those hospital representatives expressed a concern about not having access to competitive pricing from the megacompanies.

Second, those congressmen talked to industry, which at the time was most likely represented by the Health Industry Manufacturers Association (now AdvaMed).

Finally, GPOs began turning into giant organizations with national reach. At the time when these changes in the law were first proposed, most GPOs were regional groups that were close to their member hospitals. They knew what their member hospitals wanted, and they really intended to do what was right for them. But as some of the GPOs got bigger, they became more impersonal and focused on their own agendas. I think they started worrying more about the fees they were getting from suppliers than about what was really best for the hospitals they were supposed to serve.

So there were also some market forces at play that nobody could have foreseen at the time?

Yes. Originally, it seemed reasonable to permit GPOs to charge vendors 2 or 3% on the products they handled, and that would cover the costs of doing contract purchasing. But the assumption was that GPOs were going to remain small, numerous, and competitive, benefiting small hospitals around the nation. I don't think Congress foresaw the hospital and GPO consolidation that occurred during the 1990s.

How prevalent were the problems you described in your April testimony? Can you estimate how many companies or products were affected?

It's probably easier to say who was not negatively affected by the GPO system as it existed. The groups that were probably not negatively affected would include the industry megacompanies and a small number of companies with niche products that the megacompanies either weren't interested in or hadn't yet got to.

Otherwise, the GPO system affected virtually every company making a product that would compete with those made by the market-leading megacompanies. Those smaller companies couldn't break into the market because of the combination of sole-source contracts and product-bundling arrangements made between the GPOs and the big companies. Together, those obstacles made it just impossible for smaller innovative competitors to sell their products. Other companies could offer to give their improved products away, and hospitals still wouldn't take them.

So my guess would be that the GPO system negatively affected hundreds, if not thousands, of companies and products.

Getting the Ear of Congress

How did the Senate hearings come about? How important was it for you and for industry to get the ear of Congress on this issue?

Over the past three to four years, the Medical Device Manufacturers Association (MDMA; Washington, DC) has worked very hard with practically no lobbying budget to bring to light the problems that our healthcare industry has been experiencing with the GPOs. The association has been instrumental in bringing this information to the attention of government officials.

But I think what made the hearings really come about was the investigative reporting of Walt Bogdanich and his team at the New York Times. Bogdanich is not new to investigating and breaking news like this. While he was with the Wall Street Journal, he won a Pulitzer Prize. So MDMA raised the points and the New York Times reporters drove them home with the incredible facts they dug up.

The GPO industry was reportedly spending a million dollars a month to lobby against any hearings or changes in the GPO system. So ultimately we owe the hearings to Senators Herb Kohl (D–WI) and Mike DeWine (R–OH) and their dedicated staffs, who were willing to dig in and understand what really was going on behind the façade. I seriously believe things would be no different today than they were last year if it had not been for the determination of Senators Kohl and DeWine.

Taking an issue to Congress is typically industry's last resort. Was this an issue that only Congress could address, or were other government agencies approached first?

We're all a little afraid of going before lawmakers and asking them to intervene. It really was a last recourse for us after several years of determined efforts.

When Masimo started calling on the GPOs, in 1998, we naively believed that they couldn't wait to see us and put our products on contract—for all the right reasons. We didn't know about these problems that were going to surface. But we were very persistent. We tried for several years to go through the GPOs to get a contract.

By the time we were contacted by Bogdanich and his team of investigative reporters, we felt we had already done everything else that could be done. Our choice was either to speak up—and face the possibility that there might be retribution against us—or hold our peace. We decided that speaking up was the right thing to do. And after we had done so, the senators and other people began to approach us.

I think one reason that the New York Times and the Senate focused on Masimo's experience was that there was overwhelming evidence that we had invented a revolutionary product that improved care and even reduced the cost of care. We had collected a large body of evidence to indicate that clinicians who had compared our technology to those of our competitors overwhelmingly preferred our technology. That evidence included at least 50 independent, objective clinical studies conducted by leading clinicians. And there was also evidence that use of our technology actually saved hospitals money. The decision of the GPOs to ignore that evidence was a pretty glaring indication that something was amiss.

As a result of the Senate hearings, the Health Industry Group Purchasing Association (HIGPA) has adopted a code for its members. In addition, the two largest GPOs—Premier and Novation—have each adopted codes of conduct to guide relations with their suppliers and member hospitals. And MDMA has proposed its own version of a code. How do these codes differ from one another?

The HIGPA code basically repeats the current practices of its members, and does nothing to change the existing situation. I think that's one reason that Senators Kohl and DeWine insisted that Premier and Novation come up with their own codes of conduct.

Premier's code of conduct is very good. It says in plain English that Premier is no longer going to do sole-source contracting or bundling for physician preference products, and there are no qualifiers to those statements. That should be a positive change for Masimo, for every company that's been affected negatively by this problem, and ultimately for every clinician and patient.

Novation's code of conduct seems to say the same things as Premier's code says—no anticompetitive contracting, no sole sourcing, no bundling of unrelated products—but unfortunately Novation's code is filled with qualifiers. And it's exactly those qualifiers that we have all too often seen used against what's best for competition and what's best for patients, and used instead to gain what's best for the megacompanies that pay the biggest GPO fees.

MDMA's code of conduct was written with a view toward protecting innovators, clinicians, and patients. It is far-reaching and idealistic. For example, it says that GPOs should not be remunerated in any way by any vendor—meaning no administration fees, marketing fees, or private labeling fees. MDMA felt that this would enable the GPOs to become focused on bringing value to their hospitals rather than to the megacompanies.

How close are the various codes that have been proposed to resolving the key issues?

I think Premier's code of conduct is a very good start, and I've seen a few recent examples to indicate that Premier is following through on the use of its code. So that code certainly seems to resolve some of the problems that have come about as a result of vendors paying fees to the GPOs.

Premier recently released a report by Kirk O. Hanson, executive director of the Markkula Center for Applied Ethics at Santa Clara University (Santa Clara, CA), entitled "Best Ethical Practices for the Group Purchasing Industry." Premier commissioned the report in order to get an independent evaluation of its practices and recommendations on how to improve them, and in some cases Hanson's recommendations go even further than the code of conduct that Premier submitted to the Senate in August. Premier has already stated that it intends to follow all of the report's recommendations. That's what I call courageous self-assessment and conviction to improve. This is an organization that is thinking constructively.

Is there still a need for Congress to take action, perhaps to resolve differences among the various codes of conduct, or to impose government oversight to ensure that GPOs adhere to those practices?

Yes, I believe there needs to be further action by Congress.

Because codes of conduct are voluntary, they could change with new management and new boards at the GPOs. Several years from now, some of the GPOs could decide that they don't want to follow these codes any more. We need the power of laws to make these reforms permanent.

The Legal Approach