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FOR IMMEDIATE RELEASE
Contact: Carolyn Hickey
Phone: 703-243-9262

Arlington, VA (January 27, 2004) — Group purchasing organization (GPO) contract agreements including exclusionary dealing [sole source contracting], other related discounting practices and Codes of Conduct adopted by the industry are not anticompetitive but clearly justified insofar as they reduce product costs and attendant marketplace risks, said Herbert Hovenkamp, Ph.D., a professor of law at the University of Iowa and one of the country's most respected antitrust scholars.

Professor Hovenkamp was commissioned by the Health Industry Group Purchasing Association (HIGPA) to analyze Einer Elhauge's perception of group purchasing written on behalf of the Medical Device Manufacturers Association (MDMA) for their submitted testimony to the Federal Trade Commission’s September 2003 hearing.

In the report, titled Group Purchasing Organization (GPO) Purchasing Agreements and Antitrust Law, Hovenkamp states, “outright exclusive dealing is procompetitive and lawful in the great majority of circumstances. Exclusive dealing enables firms to predict the quantity of sales, and to control certain types of free riding. Contracts that reward hospitals for purchasing a certain quantity or a certain percentage of their anticipated needs are procompetitive and should not be forbidden in the general run of cases.”

Further, “the structural requirements for the anticompetitive foreclosure, which Professor Elhauge fears, are not satisfied in the medical device markets in which hospital GPOs participate.” Citing a previous paper, Hovenkamp states, “no GPO has a market share as high as 20%. Further, there are many GPOs and hospitals that can and do join multiple GPOs or switch their memberships. No antitrust case in several decades has condemned exclusive dealing on such low percentages, and particularly not in the presence of a strong defense of cost savings.”

“Elhauge notes the possibility that under suitable structural conditions exclusive contracts could operate so as to deprive rivals of similar economies that will enable them to reduce their unit costs. However, antitrust [law] categorically rejects the implication that a firm should be expected to increase its own costs in order to permit a rival to lower its costs. Often when some firms increase their output in order to attain scale economies, rivals are deprived of sufficient business to attain optimal production themselves. For example, when a new grocery store comes into town, an older or less efficient store may have inadequate trade to compete at prevailing prices. But this is hardly anticompetitive. Indeed, it is precisely the way that competition works. A contrary rule would force firms to keep their own costs higher by selling less, so that there would be room for other firms to operate the market. The result would be that consumers pay higher prices.”

In an attempt to validate his argument that the GPO industry is anticompetitive, Elhauge compares the GPO industry to a different market where the major player had 90% of the relevant market. Hovenkamp rebuts stating, “the GPO industry is intensely competitive, with the largest GPO accounting for medical device market shares in the range of 15%, and many smaller firms with market shares ranging downward from 12%. The market would be considered ‘unconcentrated’ under the standard promulgated in the Antitrust Division and FTC’s 1992 Horizontal Merger Guidelines.”

In regards to other contracting tools employed by GPOs to drive standardization and realize cost savings, Hovenkamp contends, “There is no reason for thinking that rebates or discounts given directly by manufacturers to member hospitals in exchange for loyalty raise competitive concerns, even on concentration levels far higher than exist in this market…discounting is in nearly all cases a socially beneficial, procompetitive practice that should be encouraged. In the GPO situation suppliers are willing to give lower prices in exchange for larger sales. That serves the interest of all classes of purchasers and their agents, from GPOs, to hospitals and other purchasing institutions, to individual patients who obtain lower prices.”

In his paper, Prof. Elhauge argues that the Codes of Conduct adopted by GPOs are merely voluntary and therefore they can violate these provisions as they see fit. To the contrary, Hovenkamp argues, “but antitrust is not an affirmative regulatory enterprise. Rather, it depends on firms’ ‘voluntary’ compliance with the law and intervenes only in the case of a violation. If any firm should violate the Codes and engage in anticompetitive tying, exclusive dealing, price-fixing, or some other unlawful practice the antitrust laws are available to provide a remedy.”

Further, Hovenkamp proclaims, “no additional legislation or ‘compulsory’ rule making is needed to produce competitive results in this [GPO] market. The recent decisions of the D.C. Circuit and the Third Circuit indicate that the antitrust courts are completely capable of dealing with the occasional anticompetitive discounting practices when it arises.”

Professor Hovenkamp is the Ben V. & Dorothy Willie Professor of Law, University of Iowa. He is the author of Antitrust Law: an Analysis of Antitrust Principles and Their Application; Federal Antitrust Policy: the Law of Competition and its Practice; and several other books and approximately 50 articles in the general field of antitrust law. He is universally recognized in the legal community as one of the preeminent antitrust scholars in the United States.

To obtain copies of the report visit HIGPA's web site—www.higpa.org—or contact Carolyn Hickey, HIGPA Director of Communications, at (703) 243-9262.

HIGPA is a chartered trade association of over 175 health care purchasing and supply chain organizations. HIGPA's Industry Members include purchasing groups, associations, and health care provider alliances. HIGPA's Trading Partner members include many of the world's leading health care product manufacturers, distributors, wholesalers and related suppliers. According to a recent study conducted by a former principal analyst at the Congressional Budget Office, hospitals save patients over $30 billion each year by purchasing products through group contracts.

To learn more about HIGPA or the group purchasing industry, visit www.higpa.org or call 703-243-9262.

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