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GAO Group Purchasing Organization Report

By October 4, 2010Commentary

We are believers that the health care cost increases in the United States are more a unit cost problem than a volume of services issue.  So anything that helps reduce unit costs should be a good thing.  Providers, especially institutional providers like hospitals, need a lot of supplies and services to operate.  Finding effective methods to purchase such items lowers these providers’ costs.  Group Purchasing Organizations arose to assist with this task.  Vendors complained about some of their practices and even members had concerns about some GPO actions.  Congress and the GAO investigated in the early 2000s and the Government Accounting Office has issued an updated report.   (GAO Report)

GPOs are a significant factor in the hospital market; all but 2% of hospitals use their services and 73% of non-labor spending by hospitals runs through GPOs.  In 2008 six GPOs accounted for 90% of all purchasing volume, or $108 billion, so GAO focused on their practices and also interviewed some members and vendors.  The practices which had earlier been viewed as potentially anti-competitive included sole source contracting, bundling of products and the payment of contract administrative fees by vendors.  The GPOs largely fund themselves by collecting these fees from vendors or by charging their members for services.  The fees are in essence a rebate and a significant portion of them ends up going back to members.  One can imagine the possibilities for conflict of interest.

In addition to the competitive effect on vendors, concerns were raised about access to innovative products.  GPOs often conduct product assessments for their customers and their revised codes of conduct require them to attempt to offer the best products, even if they can’t get the biggest discounts on those products.  GAO generally found that the GPOs have ameliorated some of the practices of concern, although the impact was in essence to create higher prices for products and services purchased by the GPOs’ members.  Vendors will usually give greater discounts if they are the only brand offered through the GPO or if they can bundle various products to get greater volume.   Members seemed to feel that the GPOs were being more transparent in regard to contract fees.  The report offers an interesting look into this somewhat obscure corner of health care, but one that affects a significant portion of providers’ costs.

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