Leaders of Discredited Financial Rating Agencies as Leaders of Health Care

This is the latest in our informal series on the cross-linkages between the thinking and leadership that lead to the global financial collapse/ great recession and that current in health care.  Last month, a US Senate sub-committee held hearings on the role of the rating agencies, actually for-profit corporations that evaluated securities, including derivatives, in the collapse. 

The Fundamentally Conflicted Rating Agencies

To briefly provide some background, these agencies were hired by the firms that created these securities to evaluate them.  Because the securities were complex, they were hard for investors to evaluate.  Investors had become used to using the rating agencies' evaluations as benchmarks for the quality and riskiness of complex securities.  Many did not seem to realize that the agencies themselves were for-profit corporations, or subsidiaries thereof, which made more money the more securities they rated.  The rating agencies gave many of their highest ratings (AAA) to securities that later failed.  (See an informal video discussion by corporate governance expert Robert A G Monks here.)

Some key quotes from the news coverage follow.

Former credit rating agency officials said on Friday that the quest for market share fueled a drive for short-term profits, sacrificing credit quality in the process.

Eric Kolchinsky, who was in charge of the Moody's (MCO.N) unit that rated subprime CDOs, or collateralized debt obligations, said that people 'across the financial food chain, from the mortgage broker to the CDO banker, were compensated based on quantity rather than quality,' according to testimony prepared for a Senate panel.

'The situation was no different at the rating agencies.'

from Reuters

Former Moody’s Investors Service and Standard & Poor’s employees said they were excluded from assessing mortgage bonds if they questioned Wall Street’s conclusions and that credit-rating companies focused on protecting business at the expense of accurate grading.

Richard Michalek, a former managing director in Moody’s structured products derivatives group, told the Senate Permanent Subcommittee on Investigations at a hearing today that managers said he was 'not welcome on deals' involving certain banks.

Eric Kolchinsky, who led the Moody’s group that rated collateralized debt obligations made up of mortgage bonds, said he was berated by his boss when the company lost business after implementing more conservative ratings.

S&P wrongly concluded that its increasing profits amid an inflated U.S. housing market was based on 'superior management skill and insight,' said Frank Raiter, a former managing director at the company. In reality, regulators had made the firm part of 'an oligopoly' by requiring investors to hold assets it rated, Raiter said.

per Bloomberg

The documents show, sometimes in excruciating detail, the conflicts of interest that many claim lie at the heart of the ratings business model and the concerns of employees about what was happening inside the companies well before the crisis broke.

One employee at Standard & Poor's, the world's largest rating agency, said its handling of awkward questions in the summer of 2007 made it 'sound like the Nixon White House'.

And,

As one Moody's managing director wrote to his superiors in 2007, the company's errors, made it look 'either incompetent at credit analysis, or like we sold our soul to the devil for revenue, or a little bit of both'.

per the Financial Times

The two companies targeted by these hearings were Moodys, and Standard & Poors (a subsidiary of McGraw-Hill Inc).

Overlaps with Health Care Leadership: Moody's Corporation

Perusal of the roster of the Moody's board of directors in 2008, per that year's proxy statement, reveals the following overlaps with health care leadership, of its 8 directors.

Connie Mack - is also on the boards of EXACT Sciences Corporation (a biotechnology company), and Genzyme.  He is the chair of the H. Lee Moffitt Cancer Center.

Henry A McKinnell Jr - was chairman of the board and CEO from 2001-06 of Pfizer Inc.

Basil L Anderson - is a member of the board of directors of Becton Dickinson.

Overlaps with Health Care Leadership: McGraw-Hill Inc

Via the company's 2008 proxy statement, of 12 directors:

Sir Winfried Bischoff - is a director of Eli Lilly and Company.

Linda Koch Lorimer - is Vice President and Secretary of Yale University, and a Director of Yale-New Haven Hospital.

Kurt L Schmoke - is a Trustee of the Howard Hughes Medical Institute

Sidney Taurel - was chairman and CEO of Eli Lilly and Company.

Summary

So, in summary, the 20 board members of one for-profit "ratings agency," and of the corporation of which the other major "ratings agency" was a subsidiary, served on the boards of 2 biotechnology corporations (EXACT Sciences Corporation and Genzyme), one medical device company (Becton-Dickinson), one pharmaceutical company (Eli Lilly) , 2 major academic medical centers (Moffitt Cancer Center and Yale-New Haven), and one medical research institution (Howard Hughes).  Two were recent former CEOs and chairmen of the boards of 2 of the world's largest pharmaceutical companies (Pfizer and Eli Lilly). 

Most of these health care organizations have been involved with cases we have discussed on Health Care Renewal (see links above).

Given the serious concerns about the conflicts of interest that became the core of these corporations' business models, and their central role in the global financial collapse, one has to wonder why so many of the directors who presided over them still have such influential positions in health care organizations?

As we have pointed out, as the world economy was driven to near ruin by "masters of the universe," some of the same also became leaders of academia and academic medicine in their spare time. Maybe this made sense 10 or 20 years ago, but why does it still make sense? On the other hand, now that we understand how bad the leadership of finance really was, it is a little easier to understand why the leadership of health care has become so bad. It seems reasonable to hypothesize that some of the problems of academia, and particularly the problems of medical academia, may have been at least enabled by leadership more used to working in an increasingly amoral marketplace than to upholding the academic mission. The failures of the leadership and governance of finance thus suggest we need to re-examine the leadership of health care.

Post Title → Leaders of Discredited Financial Rating Agencies as Leaders of Health Care

Again, Defending Conflicts of Interest with Logical Fallacies

The latest version of the argument that we are all getting too worked up over conflicts of interest in health care has appeared, this time in a scholarly, peer-reviewed journal. (Hirsch LJ. Conflicts of interest, authorship, and disclosures in industry-related scientific publishing: the tort bar and editorial oversight in medical journals. Mayo Clinic Proc 2009; 84: 811-821. Link here.) The major point of the paper seems to be that payments to physicians, particularly academic physicians by pharmaceutical, biotechnology, and device companies are necessary for medical progress, so instead of perseverating about them, we all should pay far more attention to the evil of payments made for expert testimony by physicians who serve as expert witnesses in litigation against such companies.

In the Hooked: Ethics, Medicine and Pharma blog, Dr Howard Brody addressed this main argument, while dismissing the bulk of the article as merely "illogic and innuendo." I think that Dr Brody failed to grasp the educational opportunities that the Hirsch article presented. It offers a true cornucopia of logical fallacies, making it ideal teaching material for the sort of course in logic and evidence that should be taught in all our medical schools, but is not.

So let me use this "teachable moment" to address just some of the many logical fallacies that Dr Hirsch so enthusiastically employed, in order of their first appearance in his article.

Appeal to Ridicule

There is a politically correct herd mentality that ascribes to the concept that objectivity is forsaken by medical companies that seek profit (and by their employees) because of 'conflict of interest.'

Also,

These overt restrictions on researcher communications in today’s climate of political correctness on COI are causing more than policy debates among various stakeholders....

In both these examples, concerns about conflicts of interest are deemed mere "political correctness." Thus, this is an appeal to ridicule.

Yet today there is a McCarthyesque reaction to the term, conflict of interest, with an unstated presumption of guilt until proven innocent.

Here instead the term of ridicule is "McCarthyesque."

Straw Man Fallacy

There is a politically correct herd mentality that ascribes to the concept that objectivity is forsaken by medical companies that seek profit (and by their employees) because of 'conflict of interest.'

This single sentence employed two fallacies for the price of one. I would challenge Dr Hirsch to provide a credible example that any thoughtful figure in the conflict of interest discussion has dismissed the objectivity of all for profit health care corporations, and all of their employees. He apparently has constructed a straw man argument which he has attributed to his opponents, one that is either to strike down than their real arguments.

Appeal to Authority

Previously, the president of the Association of American Medical Colleges emphasized that the term indicates a state of affairs and not a behavior, that COIs are ubiquitous, and that despite their inaccurate portrayal by the media, COIs do not indicate the occurrence of any improper behavior, much less scientific misconduct, analogous to a state of potential energy

If he said it, was he right? Is he still right today? Obviously, because someone with a distinguished title expresses an opinion does not mean it is true. Thus, this is an appeal to authority. (Note: since the reference appended to this sentence appears to have nothing to do with the content of the sentence, it is not even clear that the authority in question made such a statement. Link here.)

Appeal to Common Practice

Publication bias (preferential publication of studies with positive outcomes vs trials with negative, neutral, or ambiguous outcomes) has been reported for more than 2 decades,....

Publication bias clearly extends to government- and nonprofit-funded research....

The thrust here was clearly that publication bias is common and has been around for a long time, so why worry? This is an appeal to common practice, which equates a statement that a pheonomenon is common with the assertion that it is reasonable, justified, ethical, optimal, etc.

Special Pleading

For the 2008 article that was critical of Merck’s authorship practices by Ross, Hill, Egilman and Krumholz, the entire disclosure statement was, 'All of the authors have been compensated for their work as consultants at the request of plaintiffs in litigation against Merck & Co, Inc, related to rofecoxib.' Only in the middle of the Comment (Discussion) portion of the article was it mentioned that the authors had served as paid expert witnesses for plaintiffs’ attorneys in rofecoxib litigation. The terse disclosure statement seems at odds with JAMA’s stated policy in its Instructions for Authors that financial COI disclosure must be complete. Regardless, the information provided hardly conveyed that, as of January 2007, Krumholz had received more than $300,000 for his consulting from plaintiffs’ attorney Mark Lanier (no relationship to Mayo Clinic Proceedings Editor-in-Chief William L. Lanier, MD), which only became public in a letter to the editor of BMJ that responded to a previous article critical of Merck by Krumholz et al.

Krumholz’ remuneration seems substantial until it is compared to that of another coauthor of the JAMA authorship report,16 David Egilman. Egilman has testified for Mr Lanier and other attorneys in more than 100 tort cases (nearly always for plaintiffs) for approximately 2 decades and, by his own estimate, has earned $20 to $25 million for such testimony.

[Note: this discussion appeared in the midst of a long tirade against the editorial policies and practices of JAMA, especially in relation to controversy about the drug rofecoxib (Vioxx), the now withdrawn Merck Cox-2 inhibitor. Dr Hirsch apparently was responsible for Merck's publication policies about this drug. Further note that there are major questions about whether the figures supplied by Dr Hirsch are correct. Appended to the post in Dr Brody's blog post is a categorical denial by Dr Krumholz that he was paid, as asserted by Dr Hirsch, over $300,000, and evidence against the assertions by Dr Hirsch about Dr Egilman's pay.]

While Dr Hirsch alleged that the disclosures by the authors of this article were incomplete, he did not compare them to the disclosures made by authors of other articles in JAMA. In fact, I have never seen an article in JAMA which included disclsoure of dollar amounts, and could not find any such disclosure in spot checks of the latest issue.

On the other hand, here is the disclosure Dr Hirsch made in his own article:

Dr Hirsch was an employee at Merck & Co from 1988-2006 and managed the Medical Communications Department for clinical research publications from late 2001 to mid-2006. He currently is employed at a medical device and technology company that has no financial interest in any matters related to rofecoxib or the resulting tort litigation involving Merck & Co. Dr Hirsch owns mutual funds with stock from a variety of pharmaceutical and device companies, including Merck, and some shares of Merck and other medical product companies.

He did not disclose dollar amounts connected with any of these activities. He would not name his current employer on the grounds that it has no interest in rofecoxib and related litigation. However, his article is ostensibly about the broader issues of conflict of interest, authorship, etc which may relate to the interests of Becton Dickinson, which currently employs Dr Hirsch in the capacity of Worldwide Vice President of Medical Affairs, BD Diabetes Care. He did not name the "medical product companies" whose shares he owns.

Thus, Dr Hirsch argued that Dr Krumholz and Dr Egilman were wrong not to disclose the details of their financial arrangements with plaintiffs' attorneys (setting aside the likely inaccuracy of Dr Hirsch's contentions about the specifics of these arrangements), even though the detail they provided in their disclosures was similar to that provided by other JAMA authors, and even though Dr Hirsch did not find it necessary to himself disclose in such detail. Thus, Dr Hirsch was advocating a double standard, and in this case, his argument amounts to a special pleading, since the standard he advocated for others was not the same he felt obliged to uphold.


Appeal to Fear

[standards regarding COI] are beginning to affect the willingness of prominent researchers to interact with industry in any manner that involves even minimal compensation for their time and efforts.

Also,

There are serious negative implications for the future of medical product development if top academic researchers are shamed into ceasing any type of compensated interactions with industry.

Dr Hirsch implied that medical progress would be greatly endangered if industry no longer paid practicing physicians and full-time academics to work on the side, and that such payments would no longer be possible were COI disclosure requirements to be made more strict. Such dire warnings, without evidence to support them, amount to appeals to fear.

Summary

So Dr Hirsch has provided yet another example of an apologia for conflicted physicians and academics based on a panoply of logical fallacies. We have offered several other examples of fallacious defenses of conflicts of interest, compiled here.

It is sad to see logical fallacies so cavalierly employed. There frequent, sometimes strident use in current health policy suggest the need to better train health care professionals in logic and the use of evidence.

I am still awaiting a defense of the sorts of conflicts of interest that we frequently discuss on Health Care Renewal that is based on logic and evidence, but it may be that no one can produce such a defense.

Meanwhile, we continue to recommend that at the very least, medical academics, medical academic institutions, and other health care not-for-profits or NGOs should reveal in detail what payments they get from companies selling health care products or services, and how these payments could relate to the companies' marketing or lobbying efforts. In the US, some such disclosure would be mandated by the proposed "Sunshine" legislation now being considered by the US Congress. (By the way, note that this problem is hardly confined to the US, and needs global, not just American attention.)

However, physicians (at least physicians in full-time private practice, academic positions, and employed by mission-oriented not for profit organizations) should go further, and consider whether receiving industry money is worth the ongoing damage it does to our professionalism and our professional reputations. Medical schools, universities, health care foundations, disease advocacy groups, and other health care not-for-profits and NGOs should also go further, and consider whether receiving industry money is worth the ongoing damage it does to their missions, and their institutional reputations.

Post Title → Again, Defending Conflicts of Interest with Logical Fallacies

How Hospital CEOs Get Paid Tens of Thousands to Advise Hospital Suppliers

The New York Times just reported on the activities of an organization called the Healthcare Research and Development Institute (HRDI).

Despite its name, HRDI is a "for-profit company owned by about three dozen hospital executives, but underwritten by 40 or so of its handpicked corporate members, all suppliers to hospitals." These "executives benefit from payments made by companies their hospitals do business with." HRDI industry members are limited to "only two competing companies in any specific field."

The purpose of the organization is apparently to give hospital suppliers access to the CEOs of large not-for-profit hospitals. "Last May, more than 130 representatives from 40 health care companies were scheduled to attend confidential consulting sessions at the Broadmoor, a Colorado Springs hotel. When not attending the sessions, hospital chief executives and suppliers mingled at company-sponsored tennis, golf and social events. Each year, H.R.D.I. holds two gatherings like the one in Colorado, where each corporate member gets a meeting of up to three hours with five or six chief executives, according to [HRDI CEO]Mr. Mecklenburg." "'The typical organization is paying $40,000,' Mr. Mecklenberg said. 'It can be more, but that would not be typical.' Additional access to hospital executives and their institutions can cost companies $55,000 a year or even more. For example, a special two- to three-day visit to a specific hospital costs $2,000 a person, according to H.R.D.I., which says most of that money is eventually passed on to the hospital."

"It is unclear exactly how much hospital executives, who are the shareholders of the healthcare institute, earn annually for consulting at the two conferences. Asked to verify a report that some members earned as much as $50,000, Mr. Mecklenberg initially denied it. 'Our observation and recollection is $20,000 to $30,000 a year,' he said. 'It may be more than that but we don’t have data in front of us, but it’s certainly not $50,000.'

Mr Mecklenberg himself has an interesting history. He is "a former chairman of the American Hospital Association, the industry’s largest trade group." Furthermore, now he "not only runs a large nonprofit hospital, Northwestern Memorial in Chicago, but he also serves on the board of Becton, Dickinson and Company, a major supplier of medical devices to hospitals around the world, including his own. Becton, Dickinson pays the institute for marketing advice, and the institute pays Mr. Mecklenburg $50,000 a year, mostly for participating in two national conferences, according to the group."

HRDI is now under the scrutiny of Connecticut Attorney General Richard Blumenthal, who "is investigating whether the organization allows certain vendors to buy access to hospital leaders who are in a position to influence what supplies or services their institutions purchase. As a result, Mr. Blumenthal said, hospitals may not be getting the best deals, either in terms of cost or quality. 'At the very least it suggests insider dealings — an insidious, incestuous, insider system,' said Mr. Blumenthal...." He is also investigating whether the limitation on HRDI membership to only two companies from each sector violates anti-trust regulations. Mr Blumenthal recently testified that HRDI is a "secretive" network of "ethically questionable business arrangements." Note that until recently, the organization did not allow public access to its web-site, and did not list its members, although its current membership list and list of corporate sponsors are currently on the web.

The Times' investigative reporting has opened yet another window on the pervasive web of conflicts of interest that entangles health care. The report reveals problems at multiple levels:

• Hired leadership of not-for-profit hospitals seem to be personally profiting from their positions of trust
• Hospital leaders not only have cozy relationships with at least some suppliers, but are paid handsomely by these same suppliers for their supposed market advice, raising questions about how effectively their hospitals will negotiate with these suppliers
• The leader of the organization that makes these cozy relationships possible is simultaneously a not-for-profit hospital CEO and a member of the board of directors to a major hospital supplier, and hence has a fiduciary duty to that organization that seemingly clashes with his duty to his main employer

You just can't make this stuff up.
And people wonder why health care is so expensive? And think that the only solution to the rising cost of health care is to keep cutting physicians' fees for "cognitive services?" (See post here.)
Note that the well-publicized article by Brennan et al that castigated physicians for accepting so much as a coffee mug with a company logo from a drug or device company would have put academic medical center administrators in charge of enforcement of this stringent policy, the same administrators who may personally get paid tens of thousands of dollars to sit give market advice to the companies whose logos are on the coffee mugs. LOL. (See post here.)
Instead, as we have said before, there needs to be a broad, impartially enforced policy that bans major conflicts of interest affecting all decision makers in health care.
And we need some of leaders of large health care organizations, not just pharma and device companies, but also managed care organizations and insurance companies, hospitals, academic medical centers and health care systems, and medical schools and universities, to to look in the mirror to see who has been dodging responsibility for rising costs, declining access, stagnant quality, and demoralized providers.

Post Title → How Hospital CEOs Get Paid Tens of Thousands to Advise Hospital Suppliers

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 dot.com that would allow hospitals to order supplies online, whose fortunes had plunged after the dot.com 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. 

Post Title → The Investigation of Novation