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.

Kusserow on Compliance: HHS Office of Inspector General adopts new Anti-kickback safe harbors

In a Final rule effective January 6, 2017, the HHS Office of Inspector General OIG amended the rules to the Anti-Kickback Statute (AKS) by adding new safe harbors that protect certain payment practices and business arrangements from sanctions under the AKS. The law provides criminal penalties for individuals or entities that knowingly and willfully offer, pay, solicit, or receive remuneration in order to induce or reward the referral of business reimbursable under federal health care programs. This law was so broad that, as Inspector General, I requested Congress to create an administrative alternative. Upon enactment, I was permitted to identify and create safe harbors that would identify practices that would not result in enforcement actions.  The changes created additional safe harbors that enhance flexibility for providers and others to engage in health care business arrangements to improve efficiency and access to quality care while protecting programs and patients from fraud and abuse. They include:

Changes to existing safe harbors for cost-sharing waivers. Changes were made to the definition of the term “remuneration,” allowing the waiver or reduction of certain patient cost-sharing obligations. Previously, there were cost-sharing waiver exceptions that included waivers for some amounts owed for inpatient hospital services, and amounts owed by individuals who qualified for subsidized services or amounts paid to federally qualified health care centers or certain other qualified health care facilities. The new rule expands these existing safe harbors to cover cost-sharing waivers issued to beneficiaries in all federal health care programs, which includs Medicare, Medicaid, the State Children’s Health Insurance Program (SCHIP), TRICARE, the Veterans Health Administration (VHA) program, and the Indian Health Service (IHS) program.

Waivers or reductions by pharmacies. Pharmacies will now be allowed to reduce or waive cost-sharing amounts imposed under a federal health care program if the waivers or reductions are not offered as part of an advertisement or solicitation which could result in abusive steering of patients. Waivers or reductions offered to certain individuals eligible for Medicare Part D subsidies need only meet the no-advertising, no-solicitation requirement to fall within this safe harbor. For waivers or reductions offered to individuals not eligible for subsidies, the pharmacy must meet several additional requirements. It must not routinely waive or reduce cost-sharing amounts, and must only waive the cost-sharing amounts “after determining in good faith that the individual is in financial need or after failing to collect the cost-sharing amounts after making reasonable collection efforts.”  Providers should note that this rule only applies to pharmacies, and thus would not allow a physician to waive cost-sharing for Part B drugs.

Waivers or reductions for emergency ambulance services. Cost-sharing reductions or waivers for emergency ambulance services will now be allowed, but extend only to emergency ambulance services furnished by a state, municipality, or federally recognized Indian tribe. However, they must not take into account insurance or financial status of the beneficiary, nor can the ambulance provider shift costs to a federal health care program.

Free or discounted shuttle service and local transportation. A new safe harbor will allow eligible entities to provide free or discounted local transportation or shuttle services, as long as they meet defined requirements. An eligible entity is any individual or entity, except for individuals or entities (or family members or others acting on their behalf) that primarily supply health care items, such as durable medical equipment suppliers, pharmaceutical companies, and pharmacies. Transportation is divided into two categories: (1) a “shuttle service” provided by an eligible entity and (2)other transportation offered to federal health care program beneficiaries. Eligible entities must meet five standards: (1) have the availability of the free or discounted local transportation services set forth in a policy, applied uniformly and consistently and not determined in a manner related to volume or value of federal health care business; (2) not be air, luxury, or ambulance-level transportation; (3) not market or advertise the services, nor market health care items and services during the course of transportation, or pay drivers on a per-beneficiary-transported basis; (4) only make the transportation available to established patients; and (5) bear the cost of the transportation services and not shift the burden onto federal health care programs, other payers, or individuals. Simply put, hospitals and other eligible entities will be able to provide some forms of transport services for their patients without fear of violating the AKS, so long as they meet the applicable safe harbor requirements laid out above.

Protected remuneration between FQHCs and Medicare Advantage. Another safe harbor was created that will protect any remuneration between a federally qualified health center (FQHC) (or an entity controlled by such a health center) and a Medicare Advantage (MA) organization pursuant to a written agreement required by regulations. The payment to the FQHC must not be less than the level and amount of payment that the MA organization would make to a non-FQHC entity. Provision of free space by the FQHC to the MA organization would not be covered by the safe harbor, because arrangements must be related to MA plan enrollees being treated at the FQHC. Similarly, financial support from the MA to the FQHC for outreach services or infrastructure costs, for example, would not be covered.

Medicare Coverage Gap Discount Program. A new safe harbor was created that supplements the already-existing statutorily-based Medicare Coverage Gap Discount Program, which allows prescription drug manufacturers to enter into an agreement with HHS to provide access to discounts on drugs at the point of sale. “Applicable drugs” furnished to “applicable beneficiaries” under the Medicare Coverage Gap Discount Program will not be considered remuneration. The rule requires manufacturers to be “in compliance with the requirements of the Medicare Coverage Gap Discount Program,” rather than “in full compliance with all requirements” of the program. “A manufacturer that knowingly and willfully provided discounts without complying with the requirements of the Medicare Coverage Gap Discount Program could be subject to sanctions.”

Technical revision of the AKS. There is in the Final rule a technical correction pertaining to referral services, whereby the language was changed inadvertently in 2002 to say “. . . business otherwise generated by either party for the referral service . . .” and is now changed back to the 1999 language, “. . . business otherwise generated by either party for the other party”.

Richard P. Kusserow served as DHHS Inspector General for 11 years. He currently is CEO of Strategic Management Services, LLC (SM), a firm that has assisted more than 3,000 organizations and entities with compliance related matters. The SM sister company, CRC, provides a wide range of compliance tools including sanction-screening.

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Copyright © 2016 Strategic Management Services, LLC. Published with permission.