The Office of Inspector General (“OIG”) issued its first opinion of 2012 on March 8th and posted it on its website yesterday. In Advisory Opinion #12-01, the OIG issued a favorable opinion regarding a health system’s (“Health System”) proposal to form a wholly-owned group purchasing organization (“GPO”) to be the primary GPO for the Health System’s hospitals and other organizations within the system. Although there will be no outside ownership of the GPO, health care organizations that are not within the Health System will be allowed to participate in the GPO purchasing process and contract portfolio.
The opinion is significant because one of the basic requirements in the GPO safe harbor regulation (42 C.F.R. §1001.952(j)), which protects contract administrative fees paid by vendors to a GPO, requires that entities for which the GPO serves as a purchasing agent be neither wholly-owned by the GPO nor subsidiaries of a parent corporation that wholly owns the GPO (either directly or through a wholly-owned entity). Interestingly, the relevant statute, Social Security Act §1128B(b), specifically mentions a safe harbor for GPO activities but does not include the wholly-owned prohibition that was included in the regulation.
Despite the wholly-owned prohibition in the regulatory safe harbor, the OIG found the Health System’s GPO to be acceptable in this case due to several features that mitigate the risk present in some GPO arrangements. Specifically, the OIG noted that the proposed GPO would satisfy all the elements of the discount safe harbor at 42 C.F.R. §1001.952(h), include policies and contractual requirements obligating affiliated and non-affiliated participants to comply with all cost reporting implications related to distribution of administrative fees and disclose to vendors the potential for pass-through of administrative fees, which could affect price reporting obligations of vendors (such as the requirements imposed on pharmaceutical manufacturers with respect to drug pricing).
The OIG also relied on operational factors that would increase the likelihood of the wholly-owned GPO providing the benefits intended by the GPO safe harbor. For example, the GPO would not be restricted solely to Health System affiliates but would allow participation by non-affiliated entities, creating marketplace incentive for the GPO to seek out the best prices and services for all participants. In addition, the Health System will continue to use independent GPOs for select products or services when its participants can receive a better value through an outside GPO than what may be obtainable by the wholly-owned GPO.
The issuance of Advisory Opinion #12-01 opens the door to a viable alternative for health systems seeking to assess their GPO relationships. Instead of being limited to the established roster of existing independent GPOs, a wholly-owned GPO or that of another health system can now be an alternative. However, the advisory opinion underscores the importance of proactive compliance, cost reporting and full disclosure and transparency with respect to discounts, rebates and administrative fees involved in the GPO process.
If you have any questions regarding the implications of Advisory Opinion #12-01, please contact
David H. Snow at 414.721.0447 or dsnow@hallrender.com
Benjamin C. Fee at 414.721.0467 or bfee@hallrender.com
or your regular Hall Render attorney.
