Group purchasing organizations reduce costs while reducing the risk of fraud

A study funded by the Healthcare Supply Chain Association has found that Group Purchasing Organizations (GPOs) operate competitively and reduce health care costs. The vendor fee mechanism allows for negotiation of lower prices thereby reducing transaction costs compared to other funding models. The data reviewed did not support the inference that GPO funding raises any heightened risk of fraud.

Background

Group purchasing organizations (GPOs) are companies that negotiate prices for drugs, devices, and other medical products and services on behalf of health care providers, including hospitals, ambulatory care facilities, physician practices, nursing homes, and home health agencies. GPOs are often owned by their member providers, and they do not take title to or possession of medical products, but rather enhance the quality of the services delivered and lower their members’ operating costs by reducing transaction costs and negotiating lower prices for supplies than providers might otherwise obtain on their own. As part of improving efficiency in the supply chain, GPOs also provide a range of additional services to health care providers that may lower costs or improve operations.

The GPO Safe Harbor

A review of federal policy regarding GPO administrative fees shows that policy makers have long recognized that GPOs create substantial efficiencies and should be permitted to operate based on their traditional vendor-funding model. Both Congress and HHS recognized the need for efficient pricing institutions in order to constrain health care costs. The statutory clarification for GPOs (GPO Statutory Clarification) enacted by Congress and the subsequent codification of the provision in the HHS safe harbor provisions (GPO Regulatory Safe Harbor) clarified the legality of administrative fees paid by vendors to GPOs.

The GPO Statutory Clarification, 42 U.S.C. § 1320a-7b(b)(3)(C)—also referred to as a “safe harbor” provision—specifically excluded vendor fees paid to a GPO from the definition of a kickback in the Anti-kickback Statute (AKS.) In fact, at the time the GPO Statutory Clarification was enacted, no court had ever found that vendor fees paid to a GPO constituted a kickback under the AKS.

Effects of vendor funding

Because most GPOs are funded by vendor-paid administrative fees that are a percentage of the sales made pursuant to GPO contracts, the study was undertaken in an effort to analyze how this funding mechanism affects health care supply procurement costs. While a few critics have suggested that vendor fees contribute to higher health care costs and have therefore suggested that such fees should be prohibited, the study’s analysis suggested otherwise based on a finding by the authors that GPOs operate in a highly competitive market, and that many national, regional, and local GPOs compete with each other in the provision of GPO services. Also, many GPOs are owned by their provider members, which have strong incentives to direct GPOs to offer them competitive services. Furthermore, providers can choose to buy through a competing GPO with whom they have contractual arrangements, or they can choose to negotiate directly with vendors. These factors combine to make the market for GPO services significantly more competitive than it would be without customer ownership and opportunities for self-supply. The study found evidence that the GPO market operates with a level of competition equivalent to what one would expect from an un-concentrated market with more than 10 independent competitors of equal size.

Conclusions

Among the findings of the study were the following:

  • Health care executives state that GPOs reduce their costs of procuring health care supplies and services by 10–18 percent. Cost savings arise from reductions in transaction costs (such as eliminating thousands of negotiations) and lower prices for health care supplies and services.
  • The cost savings created by GPOs are consistent with economic theory, which yields several mechanisms through which GPOs reduce costs and pass cost savings on to health care providers, reducing the cost of health care for patients and taxpayers.
  • The market for GPO services is intensely competitive. Two factors make GPO markets significantly more competitive than one would infer from traditional measures of concentration alone: (1) Many GPOs are owned by their members, who have strong incentives to direct their GPOs to reduce transaction costs and negotiate lower prices; and, (2) GPO member providers can, and frequently do, purchase supplies and services on their own instead of through their GPOs. An estimate of the competitive performance of the market for GPO services using the numbers equivalent confirms that this market is highly competitive.
  • A fundamental principle in the economics of taxation—the neutrality principle—implies that there is likely nothing to gain and potentially much to lose from mandating a shift from vendor-paid to provider-funded fees. The most likely result of such a shift would be to increase transaction costs, raise the costs of entry into health care supply markets, raise the prices paid by health care providers for products and services, and raise health care costs for patients and taxpayers.

The analysis showed that the GPO market is performing well for providers, patients, and taxpayers under its current funding regime, and they found no empirical, economic, or policy basis for forcing GPOs to shift to an alternate funding mechanism.

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