Analysis of the role, funding model and impact of GPOs shows their value as well as the likely negative impact of changing the GPO funding mechanism
A comprehensive economic and legal analysis has affirmed that GPOs save money for healthcare providers, patients, and taxpayers; that GPOs promote competition in the market for procurement services; and that the current GPO funding model supports competition and lower costs.
The analysis was conducted by Jon Leibowitz, former chairman of the Federal Trade Commission (FTC) and partner at Davis Polk; Dan O’Brien, former FTC deputy director of the Bureau of Economics and partner at Bates White; and Russell Anello, an associate at Davis Polk. It was published by the Healthcare Supply Chain Association, which represents the nation’s leading healthcare group purchasing organizations.
“Providers generally realize savings of 10 to 18 percent by using GPOs,” said Leibowitz. “These savings are likely to be especially valuable to smaller, rural hospitals; and providers pass these savings onto patients and ultimately to taxpayers.
“GPOs operate in a highly competitive market and have strong incentive to offer competitive prices,” he said. “Many GPOs are owned by their provider members, GPOs compete with one another for provider business, providers can use multiple GPOs to further reduce costs, or providers can purchase directly from a manufacturer.”
Key findings of the economic and legal analysis include:
- GPOs save money for providers, patients, and taxpayers. GPOs create value by negotiating lower prices and lowering transaction costs (e.g., eliminating thousands of negotiations). Providers, including hospitals, long-term care facilities, surgery centers and clinics typically realize savings of 10 to 18 percent by using GPOs.
- GPOs promote competition. Providers voluntarily decide whether to join a GPO, can choose from multiple GPOs, and also can, and commonly do, use multiple GPOs simultaneously. Providers often own their GPOs, and they can also procure supplies directly from vendors. As a result, the supply procurement market is highly competitive.
- The current GPO funding model supports competition and lower costs. GPOs and their vendor administrative fee model produce cost savings. Vendor funding is common in other industries, and, for GPOs, collecting fees from vendors is likely more efficient than other models. Changing the GPO funding mechanism would be less effective than the current model and would likely raise healthcare costs for providers, consumers and taxpayers.
“Congress took deliberate action to support the current GPO funding model in order to encourage the cost savings that GPOs provide,” said O’Brien. “Our analysis of the vendor-paid administrative fee funding model, which is common across a broad range of industries, finds that it likely reduces healthcare costs, and a disruption to the model would likely raise healthcare costs for American consumers and taxpayers.”
“At a time of great change for the healthcare system, when American hospitals and their patients face uncertainty and significant new challenges, GPOs are delivering the best products at the best value and providing critical cost-savings that allow hospitals and other healthcare providers to focus on their core mission – first-class patient care,” said HSCA President and CEO Todd Ebert, R.Ph.
For the full report, “Group Purchasing Organizations: How GPOs Reduce Healthcare Costs and Why Changing Their Funding Mechanism Would Raise Costs,” go to http://c.ymcdn.com/sites/www.supplychainassociation.org/resource/resmgr/research/Leibowitz_Final.pdf.