Similarities and differences between U.S. and German GPOs
Otto von Bismarck was the “Iron Chancellor” of Germany. He dominated European affairs for decades. Among his many accomplishments was the establishment of the first universal healthcare system, arguably today’s most successful one. Like many other developed countries, Germany struggles with driving demographic forces affecting quality and cost. Bismarck once said “God has a special providence for fools, drunks, and the United States of America.” Yet it is to the American group purchasing organization (GPO) model that the Germany healthcare system has turned to fashion a new approach to driving down the costs of consumables, medical supplies, pharmaceuticals, and particularly medical devices.
Uwe E. Reinhardt, Professor of Health Economics at Princeton University and a former President of the Association of Health Services Research once observed about the German health care system “It was the first formal social health insurance system, yes – the first government-regulated system. I believe it is still the best model there is, because it blends a private health-care delivery system with universal coverage and social solidarity. The financing is simple. It’s inexpensive and equitable. Coverage is portable. You’re never uninsured in Germany. No family goes broke over healthcare bills.” 1
Healthcare insurance in Germany operates the same way as in the United States in terms of aggregating demand and negotiating prices. However, stark differences in terms of GPOs set the two apart. The German system provides a paradox that competition among healthcare providers and third-party purchasers is possible when coverage guidelines are sparse, and while financial regulations are set by a top-down government approach. Germany provides an interesting case study of third-party payers and cost containment strategies for supply chain costs.
What are the major similarities and differences between U.S. and Germany in terms of healthcare? The United States has an estimated population of 311,591,917 (2011). GDP per capita in 2011 (USD) is $46,588 (2011). Real GDP growth (annual growth percentage) is 1.7 (2011). Net saving rate for U.S. household disposable income is 5.5% (2010). The average household net-adjusted disposable income is $22,387 (2010). The average household wealth is $36, 238 (2010). Public expenditure on health (% of GDP) is 8.5% (2010) while private expenditure on health (% of GDP) is 9.1% (2010). Life expectancy at birth for men and women is 78.7 years (2010)
Germany has an estimated population of 81,726,000 (2011). The GDP per capita in 2011 (USD) is $39,187 (2011). Real GDP growth (annual growth percentage) is 3.0% (2011). Net saving rate in household disposable income is 11.3 % (2010). Average household net-adjusted disposable income is $27,692 (2010) with average household wealth at $41,695 (2010). Public expenditure on health (% of GDP) is 8.9% (2010) while private expenditure on health (% of GDP) is 2.7% (2010). Life expectancy at birth for men and women is 80.5 years (2010).
It is of significance to note that the average household wealth in Germany, as well as the net-adjusted disposable income, are both higher than the Organization for Economic Co-operation and Development (OECD) average of the United States in both categories. Strikingly, private expenditure in Germany on health is 6.4% GDP lower than private expenditure on health in the United States.
German healthcare system today
There are more than 2,000 hospitals in Germany. About half the hospitals in Germany are public, with about 30 of them being university clinics. One-third of the clinics are private non-profit, while the other hospitals in Germany are for-profit clinics. The numbers of these for-profit clinics are increasing.
This translates into more than 800 hospital beds for every 100,000 inhabitants in Germany. This is the most hospital beds per capita in the European Union (E.U.) in 2011.2 Acute hospital care has generally decreased in the E.U. in recent years: between 1998 and 2008, 274 acute care hospitals closed in Germany. Between 1998 and 2008, the registered number of inpatient surgical procedures per 100,000 inhabitants decreased in Germany by 8.2 percent. Data from 2000 to 2008 shows that in Germany the increase in the total number of doctors was higher than the increase in the number of doctors graduated.
“Germany is known for its comprehensive healthcare coverage by sickness funds and private health insurers and its successful cost containment policy.”3 But there are clear similarities to the United States. To paraphrase von der Schulenberg’s Forming and Reforming the Market for Third-Party Purchasing of Health Care: a Germany Perspective, the German model of health care is not out of the ordinary when compared to other European models. It is in fact similar to that of the United States. in that it accounts for a larger set of social expectations with a compromise of parts that are competitive for the economy while providing social welfare programs for those whose incomes are below the poverty standard. Like the majority of European countries, Germany’s societal outlook, which influences its healthcare policy, is the “solidarity principle” or, the role of government is to provide for the people.
The German definition of a GPO matches that of the United States. “A group purchasing organization is an entity that helps healthcare providers – such as hospitals, nursing homes and home health agencies – realize savings and efficiencies by aggregating purchasing volume and using that leverage to negotiate discounts with manufacturers, distributors and other vendors.”4 The German healthcare system may trace its lineage back to the time of Bismarck, but U.S. GPOs trace their origins back to collaborative efforts started in 1910 by a group of hospitals in New York.
In the United States today, MedAssets (one of the three largest GPOs in U.S.) reported in 2011 that its Spend and Clinical Resource Management sector “manages more than $48 billion of annual supply spend by healthcare providers, including over $27 billion of annual spend through our group purchasing organization on behalf of more than 2,600 hospital clients.” Premier, the second largest GPO reportedly manages an estimated “$43 billion” in purchasing volume. The largest GPO in the U.S. is Novation, which is owned by VHA Inc. and the University
HealthSystem Consortium. Novation reported “$43 billion” in annual purchasing volume by its members, as well as a staggering figure of more than “$75 billion” of annual “supply spend” by healthcare providers.
In Germany, generally the GPOs operate the same as in the United States in terms of aggregating demand and negotiating prices. Although similar in contracting for medical surgical products and consumables, there are, however, some noted differences. U.S. GPOs do as good a job of driving down the cost of generic pharmaceuticals, but the German system does a much better job overall at also reducing pricing for name-brand pharmaceuticals. This is generally attributed to the price controls many European countries have for name-brand drugs. A big differentiator, however, is the seeming success of German GPOs to drive down the cost for physician preference items – specifically implantable medical devices.
What has been the impetus for the recent escalation of GPO activity in Germany? Analysts believe it can be traced to a 1993 law which initiated drastic changes in office-based physician payment (combination of fee-for-service and fees for combined service packages). At the same time German hospital financing was transformed from a per diem remuneration to a payment system where per diems are combined with payments based on diagnostic related groups (DRGs) and patient management categories. The resulting shift from an inpatient acute care model to an incentivized, primarily outpatient care model, has gathered momentum. With it comes a growing focus on input costs, particularly those related to the supply chain.
According to a recent interview with a London-based asset manager that specializes in health care and GPOs, the major differences today between U.S. and German GPOs is “In Germany to date, the GPOs only negotiate the framework of the agreement with suppliers.” “The service offerings of GPOs in the United States are much more involved in offering other services i.e. benchmarking.” Germany GPOs are currently seen as a value-added service and are struggling to penetrate the provider community. Additionally, only an estimated 15 to 20 percent of the market is currently represented by GPOs. In the United States, that market penetration has been estimated to be 90 percent. Reportedly the biggest GPO player in Germany is Sana Kliniken AG, headquartered in Ismaning, Germany. They have been described as an owned and managed hospital system “considered to be the price leader for supply chain products” through their success at “standardization”. The second largest German GPO is Prospitalia, based in Ulm, Germany. It is privately owned. The third largest player in the GPO field in Germany appears to be Einkaufsgemeinschaft Kommunaler Krankenhäuser (EKK) based in Gereonshaus. Both EKK and a company called Clinic Cost Control (CCC) signed a cooperation agreement with GPO-Healthcare, Amsterdam, the Netherlands, which itself signed a cooperation agreement in 2010 with U.S. based Novation.
In terms of which product categories the German GPOs seem to be having the greatest success in, the London asset manager observed that prices on consumables have seen the biggest penetration. High technology products and devices have started to come down particularly with Medtronic enhancing its presence in the marketplace. “Clearly the degree of competition among medical device manufacturers is higher in Germany right now than in the U.S.” the manager observed during the interview. There are significant difficulties with conflict of interest and “tendering” – European government procurement rules for the transparent acquisition of goods and/or services from an external source. The European Union laws related to tendering have not been tested as of yet nor has Germany specifically dealt with any GPO related conflict-of-interest legislation and regulations.
Predictions about the German GPO market reveal that as GPO competition tightens up in the coming years, that net administrative fees will come down. The German healthcare system was further characterized as “a no growth opportunity from penetration, but instead, it now is a marketplace game.” Further mentioned was “To win hospitals and clinics in the future the GPOs in this space will need to offer differentiators like benchmarking.” GPO margins will change as well. According to this asset manager “Currently German GPOs are operating on a current margin of 65 percent while U.S. GPOs operate at a 50-percent margin. The German margin reduction will track closer to the U.S. in the years ahead, as current levels of administrative fees decline.”
The Iron Chancellor once observed that “Only a fool learns from his own mistakes. The wise man learns from the mistakes of others.” Germany is seeing growth and activity among competing GPOs. Clearly, German GPOs will change as the new supply chain actors mature and policymakers catch up with this fast-moving marketplace. The success of German GPOs in the area of clinical preference items in terms of securing price reductions from profit-maximizing global manufacturers is a clear and present advantage over U.S. GPOs. Nevertheless, it appears that German GPOs will move toward the market and policy lessons of the U.S. GPO model in the coming years.
Note: The author wishes to specifically thank Jahwai Lynch, Undergraduate, Columbian College of Arts and Sciences, a Political Science Major, at the George Washington University, for her research contributions to this article.
Robert Betz, Ph.D., is President of Robert Betz Associates, Inc. (RBA), a federal health policy consulting firm located in the Washington, D.C. area. Additionally, Dr. Betz is an adjunct professor teaching at The George Washington University where he specializes in political science and health policy. For more information about RBA, visit www.robertbetz.com.
1 NY Times: http://prescriptions.blogs.nytimes.com/2009/09/29/health-care-abroad-germany/
2 http://www.hope.be/03activities/quality_eu-hospitals/eu_country_profiles/00-hospitals_in_europe-synthesis_vs2011-06.pdf
3 http://www.sciencedirect.com.proxygw.wrlc.org/science/article/pii/0277953694902410
4 http://www.supplychainassociation.org/
