In GPO probe, will hospitals be named?

Materials Management in Health Care

Group purchasing organizations recently have become the target of just about every possible kind of investigation – from the U.S. Senate, to the U.S. Department of Justice, to the Connecticut attorney general, to various civil lawsuits.

So far, very few of these probes have named hospitals, but hospitals are not off the hook, says Michael Bohon, director of supply chain for Parigon, a supply chain consulting company based in Chicago

Bohon maintains that “ hospitals are the eventual target” in a new criminal investigation by the U.S. attorney's office in Dallas .

The probe came to light in August, when Novation, the Irving, Texas-based GPO, announced that it had received a subpoena requesting unnamed documents. Similar subpoenas have also been issued to several major hospital suppliers, including Franklin Lakes , N.J.-based Becton, Dickinson and Wauskesha, Wis.-based G.E. Healthcare, a subsidiary Fairfeld, Conn.-based General Electric Company .

Hospitals have not reported receiving any subpoenas, but Bohon thinks it's only a matter of time.

“The subpoenas issued so far are a way to get records from the manufacturers to find out what the hospitals were awarded,” he maintains. “Once of the feds have compiled a list of who was paid what by which company, they'll go after the hospitals.”

The probe is in its earliest stages and investigators are not revealing any details. But federal codes cited in the subpoenas show they are seeking evidence of health care fraud, including violations of the federal antikickback law, a 1986 amendment to the Social Security Act.

Bohon believes investigators are focusing on the rebates that GPOs and their contracted vendors pay hospitals for their business, which can amount to hundreds of thousands of dollars a year to a large hospital. He says federal law requires that hospitals reimburse a portion of the rebate to the Medicare and Medicaid programs, based on these programs' share of total hospital income.

Bohon, who dealt with such payments when he was director of supply management for a hospital system in Arizona , maintains that many hospitals improperly report the payments because they do not understand the federal requirement.

He says hospital finance offices tend to record the rebate check as miscellaneous revenue, but under federal law, it must be reported as part of the hospital's net costs, as his hospital system did. The net costs then must be reported to federal authorities.

John E. SiedIinski, president and CEO of Materials Management Consultants, based in Naperville , Ill. , agrees that figuring out the federal share of GPO payments can be confusing but he maintains that the federal criminal investigation will not spread to hospitals.

“Hospitals aren't responsible for the conduct of GPOs, so they should not be subpoenaed,” SiedIinski said. “When Novation says we will give you a rebate check of so-and-so much, the hospital doesn't have a choice in the matter.”

Although Novation is the only GPO to be subpoenaed so far, many observers believe that its competitors will follow. The company, which brokers $20 billion a year in medical products and services, is the market leader and has figured prominently in debates about the GPO industry's market power during the past few years.

But Bohon argues that GPOs are not the target at all. He thinks many observers haven't made a distinction between the Justice Department investigation, which focuses on potential violations of the antikickback law, and a more public investigation of GPO market power by the U.S. Senate Judiciary Subcommittee on Antitrust, Competition Policy and Consumer Rights.

Members of the subcommittee, who held a public hearing on the matter on Sept. 14, are concerned that by limiting the number of vendors and requiring administrative payments from vendors, GPOs make it hard for small vendors to get cutting-edge medical equipment into the market.

Subcommittee members circulated draft legislation, which they said could be altered or even dropped, that would more tightly regulate GPO contracting. For example, it would instruct federal regulators to restrict sole-source contracts, which allow only one contractor per product category. But the subcommittee does not seem interested in regulating hospitals.

Bohon maintains that just as hospitals have a back seat in the Senate inquiry, GPOs have “no culpability at all in the criminal investigation, as long as they inform their customers or their vendors about what was paid.”

In a statement, Novation also questioned whether the company or its contractors are targets of the investigation.

“ These subpoenas can be issued without any finding of misconduct,” Novation stated. “It would be wrong to assume that Novation, or any of its constituents or vendors, has violated any of the statues referenced in the subpoena.”

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