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.

ACA changes contributed to slow in health care expenditures, study finds

Despite conventional wisdom that the Patient Protection and Affordable Care Act (ACA) (P.L. 111-148) has done little to address high growth in health care costs, national health expenditures have grown at historically low rates in recent years, according to a brief by the Urban Institute and Robert Wood Johnson Foundation. The slower growth is related in part to the recession and slow economic recovery, but changes associated with the ACA also seem to have contributed. Analysts predict that these factors will likely cause the slower growth rates to persist into the future.

In February 2017 CMS estimated that national health expenditures grew 4.3 percent annually from 2010 to 2015, lower than its original forecast of 6.5 percent (see CMS actuary releases 2016-2025 health care expenditure projections, Health Law Daily, February 16, 2017). Current estimates of growth in each component of spending for 2010 to 2015 are lower than the original forecast—from 5.8 percent to 4.5 percent for Medicare, from 9.9 percent to 6.5 percent for Medicaid, and from 6.6 percent to 4.4 percent for private insurance.

The report attributed the slower growth to the 2007 to 2009 economic recession and slow recovery, unexpectedly low inflation, increased employer offerings of high-deductible insurance plans, cost-containment efforts within state Medicaid programs, and Medicare policies unrelated to the ACA. The ACA probably also contributed to low spending growth—for example, Medicare payment reductions to hospitals and other providers, the reduction in Medicare Advantage payments, and the managed competition structure of the marketplaces, which were reflected in the 2010 forecast.

Other ACA-related factors not in the original forecast that might have helped slow spending growth include adjustments to ACA Medicare payments, which reduced the number of Medicare hospital days, outpatient visits, skilled nursing facility days, and advanced imaging procedures between 2010 and 2014. Lower Medicare payment rates might also have had spillover effects on other payers. In addition, Medicare policies such as financial penalties for hospital readmissions could have changed provider practice patterns for patients of other payers.

CMS actuary releases 2016-2025 health care expenditure projections

The growth in national health expenditures is expected to average 5.6 percent annually over 2016-2025, according to a report from the CMS Office of the Actuary. Health care spending is projected to grow 1.2 percentage points faster than gross domestic product (GDP) during this period. As a result, the health share of GDP is expected to rise from 17.8 percent in 2015 to 19.9 percent by 2025. This growth in national health expenditures is driven by a projected faster growth in medical prices, offset by a projected slowdown in the use of medical goods and services. The projections in the report are based on current law and do not assume potential legislative changes by the new administration.

The report also projects health care spending to grow 5.4 percent in 2017, due to faster growth in Medicare and private health insurance spending; and at an average rate of 5.9 percent for 2018-19, as projected growth in Medicare and Medicaid accelerates. For 2020-25, an average growth of 5.8 per year is projected, due to the deceleration in growth in the use of medical goods and services.

ACA-related findings

Although the largest health insurance coverage impacts from the Patient Protection and Affordable Care Act (ACA) (P.L. 111-148) have already been observed in 2014-15, the report projects the insured share of the population to increase from 90.9 percent in 2015 to 91.5 percent in 2025. The report attributes this increase to continued growth in private health insurance enrollment, in particular for employer-sponsored insurance, during the first half of the decade.

The report also projects that national health spending growth decelerated from 5.8 percent in 2015 to 4.8 percent in 2016 as the initial impacts associated with the ACA expansions fade. In addition, Medicaid spending growth is projected to have decelerated sharply from 9.7 percent in 2015 to 3.7 percent in 2016 as enrollment growth in the program slowed. Similarly, it is projected that private health insurance spending slowed from 7.2 percent in 2015 to 5.9 percent in 2016.

Payer findings

Additional report findings regarding payers include:

Medicare. Medicare spending is projected to grow at an average rate of 7.1 percent for 2016-25, 7.6 percent for 2020-2025, and 8 percent for 2020.

  • Following consecutive years of expected slow growth of 3.7 percent in both 2016 and 2017, Medicaid spending growth is projected to quicken and average nearly 6 percent through 2025.
  • Private health insurance. Enrollment in private health insurance is projected to average 0.5 percent in growth for 2016-25; 5.7 percent for 2018 through 2019; and at an average rate of 5 percent per year for 2020 through 2025.
  • Out-of-pocket. Out-of-pocket spending growth is projected to accelerate 3.6 percent in 2016 from 2.6 percent in 2015; grow 4.8 percent for 2016 through 2025; steadily increase to a high of 5.8 percent in 2020; and then average 5 percent growth in the final years of the period.

Health sector findings. Major report findings by health sector include:

  • Total hospital spending is projected to grow at an average rate of 5.5 percent per year for 2016-25, compared to 4.9 percent for 2010-15.
  • Physician and clinical services. Growth in spending on physician and clinical services is projected to have accelerated slightly in 2016 to 6.6 percent, from 6.3 percent in 2015. It is projected to slow to 5.9 percent in 2017.
  • Prescription drugs. Prescription drug spending growth is projected to decelerate from 9.0 percent in 2015 to 5.0 percent in 2016 due to reduced use of newly approved specialty drugs, as well as an increase in the number of brand name drugs losing patent protection. It is projected to grow an average of 6.3 percent per year for 2016 through 2025.

Government spending. The report found that health care spending financed by federal, state, and local governments is projected to have grown 4.4 percent to $1.5 trillion in 2016; and is projected to increase to 47 percent of national health expenditures by 2025 (up from 46 percent in 2015).

KFF offers facts about Medicare spending

As the new Administration and Congress consider changes to federal health care programs, including Medicare, a Kaiser Family Foundation (KFF) issue brief offers spending facts about the program, which currently accounts for roughly $1 of every $7 in federal spending. The brief indicated that repealing the Patient Protection and Affordable Care Act (ACA) (P.L. 111-148) would increase spending and worsen the program’s long-term financial outlook, but noted that Medicare faces challenges apart from ACA repeal, including higher health costs and an aging population.

Although the program faces financial challenges, KFF noted that Medicare “isn’t going broke.” The Hospital Insurance Trust Fund, which pays for Part A benefits, primarily through payroll taxes, is expected to pay for full insurance benefits until 2028, at which point it will be able to pay for 87 percent of hospital benefits. Part B physician services and Part D drug benefits, however, are paid for through a combination of general revenues and beneficiary premiums and are set only a year in advance. As a result, they are not subject to a funding shortfall, but higher projected spending would increase the amount of general revenue funding and beneficiary premiums required to cover costs. Spending on Part benefits is expected to rise faster than spending on benefits paid for under Parts A and B, with per-capita spending expected to rise 5.8 percent for Part D between 2015 and 2025, compared to 3.2 percent for Part A and 4.6 percent for Part B.

The aging U.S. population is resulting in higher Medicare spending. For example, the number of people over age 65 is expected to double from 2010 to 2050 from 40 million to 84 million, while the number of people over 80—who account for a disproportionate share of Medicare spending—is expected to nearly triple, from 11 million to 31 million. Medicare spending accounted for 15 percent of the federal budget in 2016, and is expected to increase to 18 percent of the federal budget, accounting for $1 in every $6 spent, by 2027. Average annual growth in spending is expected to increase more quickly between 2015 and 2025—at a rate of 7.1 percent—than it did immediately after the ACA was enacted between 2010 and 2015, when it increased at a rate of only 4.4 percent.

ACA provisions reducing payments to providers and Medicare Advantage (Part C) plans reduced overall spending growth from 9 percent between 2000 and 2010 to 4.4 percent between 2010 and 2015. KFF cited a Congressional Budget Office (CBO) report and stated that ACA repeal would add $802 billion to Medicare spending through 2025; KFF opined that repeal would lead to higher deductibles, premiums, and cost sharing for beneficiaries and would hasten the insolvency of the Hospital Insurance Trust Fund (see Repealing the Affordable Care Act—an unaffordable idea?, Health Law Daily, June 24, 2015). With the ACA in place, KFF reports that net Medicare spending is projected to grow from 3.2 percent of the gross domestic product (GDP) in 2016 to 5.7 percent of the GDP in 2046; prior to the ACA, net Medicare spending was projected to account for 8.5 percent of the GDP in 2046.