The Ethical Issue of Heading Towards a Monopoly on Premier Inc Purchases of Hospitals

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Rick Norling is the CEO of Premier Inc, which is one of the biggest hospital purchasing organizations in the country along with Novation. Rick Norling was featured in an article in The New York Times which brought the ethical issues of Norling’s organization to the front page. Executives at Premier were initially excited for the story, but as they began doing interviews they realized that the story might be extremely critical on the company’s ethics. Given that a company such as Enron collapsed due to ethical issues, it is a matter that should not be taken lightly. This issue mainly stemmed from a case where Joe E. Kiani, the creator of the oximeter could not sell his device although it had proven to be effective when treating the most vulnerable of patients which are premature infants.

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The reason this problem exists is Mr. Kiani was completely phased out of hospitals since half of the nation’s hospitals do their purchasing through 2 of the largest national purchasing groups. This left him with little ability to negotiate his device into the market which led Mr. Kiani to question the ethics of Novation and Premier given their financial ties with medical supply companies could compromise their ability to transparent about their organizational practices. Premier and Novartis have an extremely tight hold on this industry given that they negotiated supply contracts worth a total of about $34 billion dollars.

The issue of the article may be one problem that Rick Norling and his team must address immediately. Other problems include dealing with criticism about his organization’s unethical practices and how they will go about changing their methods in the future to create a better portrayal of what the organization does.

There were several conflicts of interest with the way Premier has handled its business on behalf of the hospitals they are contracting for. In these cases, the hospitals act as a principal and Premier acted as the agent. For example, Premier is financed by companies that sell medical products which is an issue in itself. This proved to limit their ability to evaluate these companies objectively which lead Premier to favor some vendors over others. Not only is this unethical, but it means that Premier is doing a disservice to the hospitals by not always choosing the products that are the best for hospital rather than the ones that are the best for their own self-interest.

Another big issue was Premier’s CEO promoting his own self-interest as well through his purchasing contracts with the GPO. Norling retained a supplier’s stock option that was converted to the tune of $4 Million in profit in 2001 according to The New York Times. When a CEO can make such a personal hefty profit due to his bias in the selection process by choosing certain manufacturers over others strictly based on personal financial gain, it is never a good sign. This was validated since Norling recused himself from buying group decisions to limit the amount of bias in play during purchasing decisions. In this case, the agent would be the CEO and the principal would be the GPO or hospitals that they are contracting for.

This is also not the first time that Premier has not been transparent regarding the relationships they developed in pursuit of their own self-interest. Premier and Novation have a stronghold over the market share of GPOs, but no one has been able to get behind the scenes of these companies and understand what goes on in the books in terms of the individual contracts they have negotiated. This is where the issue of transparency comes into play because no one knows what companies they are investing in which does a disservice to the customers at the end of the line. There are several issues that arise in the NYT article regarding the shadiness of Premier when it came to maintaining their control over the market. Premier ran into an issue in the early 2000s when they would have contracts in place and newer products which were similar but better would be released but these new products would compete with products that Premier already has under contract.

This led to the creation of the technology breakthrough program which gave Premier the power in their contracts to add a new product without it affecting the commitment agreements of the hospitals. The oximeter that was created by the company Masimo, actually put the oximeter through the technology breakthrough program in 2000 according to the NYT. Premier ended up concluding that there was already a product available on the market that was comparable to the functions that the oximeter provided.

Premier’s ethical issues extend as far back as 1998 when they created the Premier Innovation Institute. This was created by Premier and manufacturers of healthcare products as a way to bridge the time lag between the creation of new product and its use by providers in hospitals. Premier emphasized that the company was separate from the GPO but the conflict of interest still remains.

Premier also had its own venture capital fund called the Premier Medical Partner Fund Limited Partnership (PMPF). This fund invested in private entrepreneurial companies who are in the works of creating new healthcare products and services. In 2001, PMPF comprised approximately 7% of the company’s total investment portfolio which was made up of eight private companies. One of those eight companies was a company called American BioScience, Inc which has links to a generic drug company that had a purchasing contract with Premier. Premier tried to defend the investment, but given the prevalence of ethical issues such as this throughout the article it would not be surprising to see Premier benefit on the back end of this business relationship.

Management should work to evaluate the conflicts of interests that they themselves have since they all are a part of the reason that these ethical issues are exposed in The New York Times. Their mission statement is not a representation of the work that Premier is actually doing behind the scenes and if public accounting records were available we would know the truth behind that statement. They should also work to address the issue of working with suppliers for new investment opportunities. It represents a conflict of interest from the very beginning because it causes speculation that they are doing it in order to promote their own self-interests.

The executive staff should be evaluated as a whole given that they all contributed to these issues. It does not instill trust in customers that their executive team has let all of these ethical issues be thrown under the bus for a profit.

Premier does an extremely poor job of enforcing their existing ethics policy given the carelessness on their behalf when it comes to issues such as the self-interest of individuals within the company. Although the ethics policy sounds good, it is not actually enforced which lies the nucleus of the problem. No one has been held accountable for these unethical actions brought up by the NYT which means that the people who are still a part of the problem will continue to be a problem. Employees of Premier have been proven in several instances throughout the article to pursue their own self-interests. One example would be the CEO collecting $4 Million in supplier stock without raising any eyebrows. Situations like this have gone and continue to go overlooked far too often. Another would be the investments made by Premier into vendors which biased the selection process so they would purchase from companies they have equity stake in. There has been no evidence that Premier has put in any real effort to address these issues and in fact, it seems that they knew what they were doing and did not have a problem with it.

Premier should release its public accounting records and come out with a public statement about the article. The distrust with this GPO is warranted because they have not proven themselves honest through their actions. The best way to regain that trust so that you do not lose out on potential customers is to be transparent about what the company is doing. For example, one way to do this is to release executive salaries and individual contract information that the NYT could not find before.

I do believe their main focus should be on reevaluating their executive staff. Premier’s issues stemmed from problems from the top-down so evaluating the staff you have making those decisions is vital to future organizational success.

I do believe that GPOs generate more positive impacts than negative ones. At the end of the day, GPOs give hospitals the opportunity to negotiate great contracts through group purchasing. Without these contracts, the expenses regarding medical supplies would be much higher today which is why over 90% of hospitals in the country use GPOs to do their contracting services. If every hospital had to do their own contracting they would not be able to negotiate contracts that are as beneficial as the GPOs contract. Although there are some downfalls to GPOs including their hidden or unreported fees that cause issues with Medicare reimbursements to hospitals. There lie more benefits from using a GPO than deterrents. The Wharton Healthcare Management Department did a survey regarding supply chain members evaluating their primary national GPO and 88% of respondents said they received savings from lower prices. Also, over 50% of respondents agreed that there were also savings from IT, Admin fees rebated to the hospital, contract standardization and from providing the market price point. These are all very crucial because in total 90% of the respondents were satisfied or very satisfied with their National GPO.

Overall, I do believe that working with a GPO is better for hospitals. Given that supply chain costs are expected to potentially exceed labor means that the importance of GPOs in contract negotiations is even more important these days. In the future, the supply chain will only become more important and although there has to be more accountability on the unethical actions of GPOs, they are still just as vital to health care delivery as ever.

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