Senate Panel Weighs Tighter Rules for Hospital Suppliers

WASHINGTON, Sept. 14 - The Senate is considering legislation that would give the Department of Health and Human Services greater power to regulate the medical products industry's methods for selling drugs, supplies, medical devices and equipment to America's hospitals.

After hearing testimony on Tuesday from health care and antitrust specialists who argued that the industry should not be left to regulate itself, members of the Senate antitrust subcommittee said they thought legislation was necessary to end abusive practices and circulated a draft bill for discussion.

"This hearing centers on perhaps the most important work of our subcommittee in the past few years," said Senator Herb Kohl of Wisconsin, the ranking Democrat on the subcommittee. "Ensuring that physicians, patients, and health care workers have access to the best and safest medical devices - devices that can literally make the difference between life and death."

If enacted, the bipartisan bill would call upon the secretary of health and human services to issue new regulations for the way medical supply manufacturers do business with hospital purchasing companies - for-profit companies set up by groups of nonprofit hospitals to negotiate the purchases of billions of dollars worth of supplies each year. The original idea was to pool the hospitals' purchasing power to negotiate better prices than a single hospital could achieve.

Under current federal law, the purchasing companies have been granted a special exemption from the health care anti-kickback provision, allowing them to receive payments from the medical supply manufacturers whose products they are supposed to evaluate and recommend to the hospitals. The payments were supposed to be limited, but the law had no mechanisms for oversight or enforcement.

Over the years, some purchasing companies have begun to develop questionable financial ties to the medical supply industry, and to engage in improper business practices, which were the subject of an investigation by The New York Times in 2002.

Tuesday's hearing was the third time in the last two years that the antitrust subcommittee of the Senate Judiciary Committee heard accusations that some purchasing companies have favored suppliers willing to make the biggest payments, thereby reducing competition in the hospital supplies market. Senator Mike DeWine, an Ohio Republican and the subcommittee's chairman, said he thought some hospital purchasing companies had abandoned past abuses, like awarding contracts to medical-supply companies that they, or their executives, owned stock in.

But he and Senator Kohl expressed doubts that all abuses have been eliminated and fear that the abuses might return without continued oversight.

"There may be backsliding," Senator DeWine said.

The draft legislation would instruct the secretary of health and human services to work with the United States attorney general and the Federal Trade Commission to issue regulations specifying the hospital purchasing practices that violate antitrust laws or other ethical standards. The Department of Health and Human Services would also be called upon to review the hospital purchasing companies annually and certify that they complied with the new requirements.

The bill would also put tighter limits on the payments hospital purchasing companies may receive from manufacturers, although it would not bar them outright.

Specifically, hospital purchasing companies would be allowed to accept payment for "those reasonable costs associated with the procurement of products and the administration of valid contracts." They would not be permitted to accept payments for costs they might incur by marketing selected products to their hospital owners.

A ban on so-called marketing fees would conflict with a longstanding business practice of the nation's largest hospital purchasing company, Novation, which is based in Irving, Tex. Novation achieved its size and dominance in the industry, former executives say, in part by promising manufacturers that it would actively market their products to its member hospitals. The marketing service allowed Novation to charge manufacturers higher fees than it would for merely administering contracts.

Novation has also accepted what are known as conversion fees - payments from manufacturers that ostensibly cover the costs hospitals incur when they switch from one brand to another. Such payments have raised eyebrows because they are made at the start of a new contract and give the appearance that the hospitals' business is being bought.

"I was in a meeting where a manufacturer offered a substantial payment for conversion," said Michael Bohon, a retired hospital purchasing director who said he was the chairman of a Novation product-selection council at the time. In an interview, Mr. Bohon, said "Their argument was, 'We know this is going to be a difficult conversion, and you'll lose some of your fees; we know you're going to have some of the old product left over. So we are going to offer you $200,000.' I didn't feel comfortable hearing that. I said, 'Let's take this off the table, I'm not going to consider it at all.' "

Mr. Bohon, who now works as a health care consultant with the firm Perigon, declined to name the company that offered the payment.

In addition to banning such conversion and marketing payments, the draft legislation would bar "any other payment intended to unduly or improperly influence the award of a contract, based on factors other than the cost, quality, safety or efficacy of the product."

Executives of Novation and other hospital purchasing companies did not testify at the hearing. The president of the industry's trade association, Robert Betz, appeared and testified that the industry was already improving its business practices and did not need new government regulation. He warned that regulating the industry could lead to higher health care costs.