Group purchasing organizations (hospital purchasing companies), kickbacks and qui tam lawsuits

Phillips & Cohen represents a former senior product manager for Novation in a prominent qui tam lawsuit brought under the False Claims Act against Novation, a group purchasing organization, for Medicare fraud. Novation is owned by VHA Inc. and University HealthSystem Consortium (UHC) and is based in Irving, Texas.

Novation is the nation's largest group purchasing organization (GPO), or hospital purchasing company, but there are other GPOs such as Premier Purchasing Partners, Amerinet, Broadlane, MedAssets, Consorta, Innovatix and Healthtrust Purchasing Group.

The case against Novation is the first major qui tam lawsuit that has been brought against a group purchasing organization for Medicare fraud. There have been a number of anti-trust lawsuits against GPOs, but Phillips & Cohen's qui tam lawsuit against Novation is the first to expose GPO practices that have the effect of cheating the Medicare and Medicaid programs. Because of these GPO practices, hospitals are getting higher reimbursement from the Medicare and Medicaid programs than they are entitled to receive.

Kickbacks to GPOs are basis of Medicare fraud

The basis of the fraud is the improper payments or fees that vendors, manufacturers, distributors and suppliers make to GPOs to influence the hospital purchasing companies' contracting decisions. The GPO contractors might make straight kickbacks to the GPO or pay kickbacks in another form, such as paying higher administrative fees to the GPO than are permissible under the "safe harbor" provisions of the Anti-Kickback Statute. GPO contractors also might pay a "marketing fee" to the hospital purchasing companies as another form of a kickback.

A 2005 HHS OIG report, "Review of Revenue from Vendors at Three Group Purchasing Organizations and their Members," found that (1) hospital members of GPOs didn't fully account for GPO revenue distributions in their Medicare cost reports and (2) GPOs only distributed 69 percent of their net revenue to their hospital members, retaining 31 percent for themselves "to provide reserves and venture capital for new business lines."

GPO practices can violate both the federal False Claims Act and state false claims laws for Medicaid fraud. The case against Novation is filed under the federal False Claims Act and the Texas false claims act. Under the False Claims Act, whistleblowers are entitled to 15 percent to 25 percent of the amount the government recovers as a result of their qui tam lawsuits.

The New York Times ran an excellent series of articles about hospital purchasing organizations, which brought public attention to GPOs' purchasing practices.

If you are aware of improper payments being made to a GPO and would like to discuss your concerns with our attorneys, please contact us.