GAO on GPOs

Group purchasing organizations began as a way for hospitals to aggregate their purchases to receive better prices.  They have recently significantly expanded the type of services they offer, but much of their revenue is still derived from taking a cut of the cost of supplies and other items purchased through their programs.  Some of this fee revenue is returned to the hospital members.  The Government Accounting Office was asked to look into the effects of this practice and issued a report which provides a great deal of enlightening information on how the GPOs function and what their financial structure looks like.  (GAO Report)   One concern that prompted the report was whether hospitals accurately reflect on their Medicare cost reports the rebates they get from the GPOs, which can be very sizable.  Under-reporting could affect CMS reimbursement policy and would not give a true picture of the financial condition of hospitals.

The GAO found that the five largest GPOs generally do business in the same way.  Most of the contracts they award on behalf of their members are dual or multi-source, and the most common term is for three years.  These five GPOs reported that their largest revenue source was fees collected from vendors, usually a percentage of the purchase price, with the total fee level being $2.3 billion in 2012.  About 70% of these fees were passed on to the hospital members of the GPO.  It can easily be seen that distorted incentives can be created by this arrangement, as the GPO may actually be happy with higher product prices to earn a higher fee.  GAO said it is not clear the extent to which this actually happens.  GAO did concur with concerns that hospitals were not reporting their fee revenue on their cost reports and suggested that CMS improve its oversight in this area.   But the main value of the report is to serve as an excellent guide for understanding how GPOs work.