Friday, November 25, 2005

The Investigation of Novation

The Fort Worth Weekly has an investigative report on the curious world of hospital group purchasing organizations, focusing on Texas based Novation.

Novation, and other group purchasing organizations (GPOs), were originally intended to help hospitals save money by banding together to negotiate better prices for hospital supplies and equipment. There are currently about 600 GPOs, "wielding control over $66 billion in healthcare supplies every year. Only about 30 have the size to negotiate significant volumes of sales, and the largest of them all is Irving-based Novation, a for-profit cooperative that claims to broker $24 billion in sales annually. Novation and Premier, the second-place company, together control about 54 percent of all hospital purchases."

"Novation came into existence in 1998, when two hospital networks — VHA of Irving and the University HealthSystem Consortium based in Illinois — set it up as a joint venture. VHA is a network of around 2,200 nonprofit hospitals and care organizations, including large hospitals like Baylor and Yale-New Haven. UHC has only about 200 members, but they include prestigious teaching and research hospitals like Parkland in Dallas."

Novation's business model is peculiar, to say the least. "In 1986, Congress passed legislation regulating GPOs, including the so-called 'safe-harbor' agreement that exempts GPOs from federal laws against kickbacks." Thus, although one might expect that a GPO's administrative expenses would come from its participating hospitals, instead, GPOs collect fees from the suppliers who wish to sell their wares to its hospitals.

Furthermore, "Since GPOs are set as up as cooperatives, their revenue from administrative fees is shared with member hospitals. Several sources told the Weekly that most hospitals bill insurance companies and Medicare or Medicaid for the full price of supplies bought through GPOs. When the hospitals later receive the fee income that provides a substantial discount on those prices, the resulting cost reductions are not passed through to those who were charged full price. Some question whether that practice constitutes insurance and Medicare and Medicaid fraud."

"With 2,400 hospitals as members, Novation controls access to close to a third of hospitals nationwide and claims to have saved its members $1 billion in 2003. But the company does not release information on its revenue. In fact, Novation’s reputation is one of extreme secrecy."

The Fort Worth Weekly documented several cases in which Novation's actions seemed to have denied hospitals access to the best products, or have increased, rather than ratcheted down the cost s of supplies and equipment.
  • An engineer named Tom Shaw developed a needle and syringe to reduce the likelihood of needle-stick injury to hospital personnel, "a syringe in which a spring mechanism retracts the needle into the barrel once the plunger is depressed, making reuse — and accidental pokes — impossible. He started Retractable Technologies to market the invention." But when Shaw tried to market his product, he found he " couldn’t even get in the door to show the products to hospitals, despite some clear advantages over competing products and the preference expressed by healthcare workers who had tried them. The reason, it turned out, was that the hospitals he tried to sell to were on GPO contracts — and were required to purchase from the large manufacturers that sold through the GPO, like $5 billion-a-year syringe giant Becton Dickinson, which controls 90 percent of the syringe market in this country." " 'If you pay anybody any fee, administrative or otherwise, to try to influence a purchase, that would put you in prison in any other industry,' he said. 'With the safe harbor [provision], the major manufacturers can pay GPOs to keep [other companies] out of the hospitals, and the GPOs make a lot of money.' When Novation finally looked at another of Retractable’s products — a safer device for taking blood samples — the GPO suggested to Shaw that it could carry his company’s product under its private label, Novaplus. Novation officials told him that by labeling the product as Novaplus, they could raise the price per unit to $1 from the 27-cent bid that Retractable had submitted, and the two companies would share the profits from the huge markup. According to the lawsuit Retractable eventually filed, a similar offer came from Premier, the second-largest GPO, which invited Retractable to attend a conference for suppliers, where $25,000 would buy Shaw not only advertising but also a 'private dinner' with Premier executives and a small-group meeting with hospitals." "Shaw and others said that his company’s experience makes it clear that the basic problem with GPOs won’t be fixed until the organizations are forced to stop taking fees from manufacturers. 'You work for the man who pays you,' Shaw said. GPOs aren’t really group purchasing organizations, working to help the buyer, he said — 'They’re group sales organizations. They’re moving sales for major manufacturers, who pay bribes they call administrative fees. Becton Dickinson pays to keep us out of hospitals — and that would put them in prison if they didn’t have a safe harbor provision.'" Retractable Technologies sued Novation, Premier, Becton Dickinson and Tyco, charging that they conspired to lessen competition and maintain monopoly power. Novation, Premier, and Tyco settled with retractable for an undisclosed sum.
  • Joe Kiani developed a pulse oximeter (oxygen measuring device that does not require drawing blood) for monitoring newborn babies, and founded a company called Masimo to market it. "Like Shaw, Kiani found that hospitals would not buy his product because Masimo did not have a contract with a GPO. According to court filings, when Masimo approached Premier, the GPO’s own product-review process concluded that the new oximeter was superior to Nellcor’s [a company owned by Tyco]. Nonetheless, Premier’s contract for pulse oximetry went to Nellcor — which, along with its parent company, was paying millions of dollars in fees to Premier and even investing in Premier’s 'Innovation Institute.' Nellcor also got a multi-year contract with Novation." Masimo sued Tyco for anti-competitive practices. "Masimo also alleged that Novation’s contract with Tyco gave larger discounts to hospitals that purchased at least 95 percent of their oximeters from Tyco. 'The most favorable price discounts,' the complaint stated, 'are not linked to sales volume, but ... to the exclusion of competition.' The complaint also alleged that Novation offered additional incentives to hospitals that purchased bundles of products from Tyco, leaving Masimo, which sold only oximeters, in an uncompetitive position while giving Tyco larger sales for many different supplies." "In March of this year, a jury concluded that Tyco owed Masimo $140 million in damages. Tyco has appealed this verdict."
  • Novation invested in Neoforma, a that would allow hospitals to order supplies online, whose fortunes had plunged after the bubble burst. "In 2000, Novation invested its member hospitals’ money in a deal that made Neoforma into Novation’s e-commerce partner for 10 years. UHC and VHA, the two hospital consortia that formed Novation, came to own 50 percent of a company that has bled more than $700 million in red ink since it came into existence." Neoforma continued to lose money. "Some Novation executives also owned shares of Neoforma — which hospital officials pointed to as a conflict of interest. Curt Nonomaque, chief executive officer of VHA and a board member of Novation, had personally invested $150,000 in Neoforma, although he sold that stock in 2001. When congressional pressures for reform caused GPOs to institute an informal code of conduct, GPO board members had to declare conflicts of interest, including investments in companies that did business with the GPOs. This resulted in several board members at Novation leaving the company rather than selling their stock. And Neoforma didn’t just hemorrhage money — it infuriated suppliers who alleged that forcing them to pay for Neoforma’s service was a double-dip by Novation." " Last month, Neoforma announced a merger with Global Healthcare Exchange, its only remaining competitor in healthcare e-commerce." "GHX is a privately owned enterprise belonging to Premier and 80 of the largest medical supply manufacturers, including Becton Dickinson and Tyco. The merger means Novation has jumped in bed with its largest rival. " One expert interviewed by the Weekly charged, "This is just another opportunity for Novation and Premier to get together along with all the large manufacturers and have meetings behind closed doors. By having GHX come and buy Neoforma, Novation executives look like geniuses to their member hospitals, although they’re really creating a monopoly. The GPOs are supposed to be fighting the manufacturers, but instead they’re openly getting in business with them." A law-suit, by Medical Supply Chain, "alleges that Novation and Neoforma, in conspiracy with manufacturers, distributors, and suppliers, have charged $100 billion in excess costs to hospitals since 2002."
Novation is now the subject of several investigations. Federal prosecutors in Dallas, TX, opened a criminal investigation of the medical supply industry, "with Novation at the center of it." The focus seems to be on rebates hospitals receive from GPOs. "'Hospitals get a big fat check once or twice a year from the GPOs,' explained one expert who is close to the investigation. 'No other deal gives free money to a hospital. And they can report checks not as a reduction in cost, but as miscellaneous income. This allows them to be reimbursed ... for the original price before they account for the money they get from GPOs and manufacturers. That’s what the investigation is about.'" The investigation has gone slowly, in part because two of the prosecutors involved died unexpectedly.
Novation also "came under scrutiny from Connecticut Attorney General Richard Blumenthal, whose office, he said, was 'very interested in potential undue influence exerted by vendors and manufacturers on individuals in positions to make healthcare purchasing decisions.'"
In summary, although GPOs were ostensibly set up simply to save hospitals money when purchasing supplies and equipment, these organizations have turned into huge, complicated and opaque entities whose actions are hidden, but which seem to be conveying large amounts of money back and forth among suppliers, hospitals, and the GPOs themselves. It is not at all clear that the GPOs save the hospitals money, nor get them the best possible supplies for the money they spend.
The leaders of the hospitals, including some of the countries most prestigious teaching hospitals, that own Novation and other GPOs ought to explain what these organizations really are doing, and particularly how they are supporting the hospitals' missions.
Again, this is another example of how opaque and unaccountable hospital leadership may be. But, the less transparent and accountable are health care leaders, the more the health care mission is at risk.

ADDENDUM (1 January, 2010) - In fact, questions were raised about Novation in 2002 in the New York Times:
Hospital Group's Link To Company Is Criticized, April 27, 2002.
Questioning $1 Million Dollar Fee in a Needle Deal, July 19, 2002.
Buying Group for Hospitals Vows Change, August 9, 2002.
It is a measure of the anechoic effect that I had not heard of this when I wrote the post above in 2005. 

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