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.

Highlight on Tennessee: Malpractice alternative under consideration, not all agree on potential effects

Pending Tennessee legislation on medical malpractice could potentially drastically impact the state’s health care costs, some believe. Although action on HB0546/SB0507 was deferred last spring, the Patient Compensation System (PCS) is on the legislature’s agenda as the 109th Tennessee General Assembly is underway.

Malpractice

 The high number of malpractice suits, resulting in high malpractice insurance costs, has long been a concern for the medical community. Even the Government Accountability Office (GAO) got involved in 2003, presenting a report to Congress indicating that insurance premium rates had risen primarily due to claim losses. These losses, combined with investment income decreases and low premium prices offered during times of intense competition, resulted in some insurers leaving the market or becoming insolvent. This resulted in fewer options and less competition.  Nearly a decade later, in 2012, $3.6 billion was paid out in 12,142 medical malpractice claims, with 93 percent coming from settlements.

Defensive medicine

In an attempt to avoid malpractice suits altogether, doctors practice what is known as defensive medicine. Even if they are comfortable with a diagnosis, they may order additional tests to cover their bases, just in case. Surveys have revealed that as many as 75 percent of doctors order these extra unnecessary tests, which could add up to about $650 billion each year, or one in four health care dollars. This expensive idea has at least some merit: Florida data from 2000 to 2009 showed that when hospitals billed more for a patient’s case, the doctor was less likely to be sued. Even when tort reform resulted in caps on damages or early offers of compensation prior to litigation, doctors did not feel comfortable abandoning defensive medicine practices. The PCS system, however, prevents doctors from being sued altogether. In theory, it could completely eliminate the practice of defensive medicine.

Patient Compensation System

The PCS creates a no-fault administrative system comprised of medical experts that review claims. This alternate system would ease the burden on the courts, and would be funded through liability premiums. Evidence shows that medical malpractice attorneys are reluctant to take cases that are likely to have a low payout, but the administrative system would allow those who have been less seriously harmed to recover for their injuries. The Patients for Fair Compensation organization has been fighting for this type of reform, emphasizing the lack of fairness in the current system and its contribution to rising health care costs through the practice of defensive medicine. The organization argues for the likelihood of cost saving through eliminating costs of litigation and the increased predictability of patient awards.

Tennessee bill

In 2015, the bill’s sponsors, Representative Glen Casada and Senator Jack Johnson attempted to garner support for the PCS through a Tennessean article, emphasizing how much of the out-of-pocket burden consumers are bearing due to soaring health costs. They argued that the current tort system is broken, and that Tennessee residents spend $13 billion annually on defensive medicine with employers coughing up $4.6 billion of the amount. They projected that the PCS would save employers between $25 and $30 billion over ten years. Recently, another Tennessean article written by a hospital administrator of 40 years brought up the topic again. He stated that hospital administrators are not able to prevent doctors from practicing defensive medicine, and that the majority of physicians he has known have been sued and many, frivolously. Yet the Tennessee Medical Association  (TMA) and the Steve Volunteer Mutual Insurance Company (SVIMC) strongly oppose the PCS model, believing that costs would actually dramatically increase. TMA and SVIMC said that the current system is actually working and the PCS is “an untested system with significant flaws.”

The CONNECT for Health Act suggests the future isn’t too remote

A new piece of legislation would increase the use of telehealth and remote patient monitoring (RPM) in the Medicare program. The Creating Opportunities Now for Necessary and Effective Care Technologies (CONNECT) for Health Act, a bipartisan piece of legislation, is aimed at cutting health care costs while improving care outcomes. The bill is premised on the belief that telehealth is the future of medicine and that the quality of care can be greatly improved, in a cost effective way, through better contact between patients and providers.

Provisions

The CONNECT for Health Act would loosen current restrictions on Medicare reimbursement for telehealth and RPM services. Specifically, the legislation would allow certain providers to use telehealth and RPM without many of the current 42 U.S.C. §1834(m) limitations, which include originating site restrictions, geographic limitations, restrictions on store and forward technologies, limitations on distant site providers, and limitations on covered codes. The act would also permit providers to use telehealth and RPM in alternative payment models without most of the Section 1834(m) restrictions. The act would allow RPM of certain patients with chronic conditions, permit more facilities to serve as originating sites, and enable telehealth and RPM to be considered basic benefits in Medicare Advantage, without most of the Section 1834(m) restrictions.

Response

According to an Avalere study, the bill could save as much as $1.8 billion over the next ten years. The American Medical Association (AMA) has expressed its support for the bill, noting that it stands to strengthen physician-patient relationships and improve care access while maintaining patient safety. The bill was introduced by Senators Brian Schatz (D-Hawaii), Roger Wicker (R-Miss), Thad Cochran (R-Miss), Ben Cardin (D-Md), John Thune (R-SD), and Mark Warner (D-Va). The Senators praised the advances of health information technology and the promise of telehealth, noting the importance of the opportunity to bring together improvements in technology with the prospect of better care quality.

Highlight on Virginia: Health Opportunity Index maps out disparities

An updated version of the Virginia Health Opportunity Index (HOI) allows consumers, policymakers, and providers to evaluate multiple social determinants of health as they impact different geographic areas of the Commonwealth. The Virginia Department of Health’s Office of Minority Health and Health Equity (VDH-OMHHE) originally developed the HOI to provide a picture of the social, economic, educational, demographic and environmental factors that impact community health. Since its inception, the HOI has been redesigned into a continuously updated source of information to help stakeholders engage with changing health data using a convenient, visual dashboard.

Dashboards and Indicators

The HOI website uses a number of interactive dashboards and maps to allow consumers, policy-makers, and providers to interactively examine the HOI data. With separate dashboards for counties, health districts, and legislative districts, the HOI interface is designed to allow scrutiny of the data at multiple different levels of detail. The HOI relies on 13 indicators, which were chosen to serve as the building blocks of the HOI. The indicators were selected for their influence upon health, stakeholder input, and the availability of data on those factors for all of the relevant geographical areas in Virginia.  The indicators are all focused on determining an individual’s opportunity to live a long and healthy life in a particular area.

Profiles

The HOI dashboards synthesize the 13 indicators into four different profiles: the Community Environment Profile, the Consumer Opportunity Profile, the Economic Opportunity Profile, and the Wellness Disparity Profile. The Community Environment Profile is an indicator of social and natural measures, including air quality, population turnover, population density, and walkability, which refers to street connectivity and public transit accessibility. The Consumer Opportunity Profile measures the availability of consumer resources, including access to and the affordability of food, transportation, housing, and education. The Economic Opportunity Profile evaluates economic opportunity in individual communities by measuring employment accessibility, income inequality, and the number of individuals actively participating in the workforce. The Wellness Disparity Profile provides a measure of the disparate nature of access to health care services within in a community. The Wellness Disparity Profile indicates access by measuring the number of physicians in a community, the number of uninsured individuals. The Profile also more broadly considers whether community members have access to a primary care physician and the means to pay for care.

Impact

According to VDH-OMHHE,” the HOI is remarkably predictive of health outcomes.” The VDH-OMHHE believes that because the HOI explains the majority of life expectancy variation in Virginia’s Census Tracts, the HOI influence is comparable to that of the World Health Organization’s Social Determinants of Health (SDOH). In other words, Virginia believes that its HOI does as good of a job predicting health outcomes as the economic and social predictor of health used by the Centers for Disease Control and Prevention (CDC). The HOI is premised upon an understanding that place matters and, with appropriate spatial modeling, health care can be improved. The HOI provides a wealth of information. Now, stakeholders need to put that information to good use in order to start improving health across the state of Virginia.