What is a group purchasing organization?
A group purchasing organization (GPO) is an entity that helps healthcare providers—such as hospitals, nursing homes, surgery centers and clinics, 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. Hospitals and other healthcare providers use group purchasing to obtain the best products at the best value.
How does group purchasing work?
Most healthcare providers make group purchasing selections in a committee setting, usually composed of healthcare professionals, such as doctors, nurses and other clinicians. These committees help determine which medical supplies are most appropriate from a clinical standpoint. Once a decision is made, GPOs work to negotiate contracts with healthcare manufacturers, distributors and other suppliers.
After a group purchasing contract is created, it is still up to the hospital to decide which product is most appropriate in each circumstance and make the most appropriate purchase. GPOs do not purchase or buy any products. They negotiate contacts that hospitals can use when making their own purchases.
How do GPOs save money for health facilities?
Because GPOs represent many healthcare facilities, GPOs offer economies of scale to the healthcare supply chain. By aggregating the purchasing power of hospitals, GPOs help balance the negotiating equation between purchasers and vendors. Additionally, GPOs provide valuable cost-avoidance savings to hospitals and other providers by helping them standardize and streamline their purchasing, as well as reduce the number of non-clinical staff that hospitals must employ to negotiate purchasing contracts.
How much money do GPOs save the healthcare system?
Independent, empirical, and industry- and non-industry-funded analyses of GPOs have found that GPOs deliver billions in cost savings every year to the healthcare delivery system. A recent analysis of Medicare claims data by healthcare economists found that GPOs reduced healthcare costs by up to $55 billion annually, and up to $864 billion over 10 years. Former Federal Trade Commission Chairman Jon Leibowitz recently analyzed the GPO market and found that hospitals save 10% to 18% by buying through GPOs. Visit our archive of industry research to read more on the cost-savings associated with GPOs.
What types of services do GPOs provide beyond volume discounts?
Hospitals and other healthcare providers are increasingly relying on GPOs to help manage the complex system of purchasing, and GPOs have expanded their offers to help meet providers’ needs. The value that GPOs deliver beyond cost-savings includes data analysis and benchmarking, innovative technology integration, market research, emergency preparedness and natural disaster response. The GPO community is also a leader in the effort to reduce medical errors by helping to standardize some of the product use in hospitals and educating clinicians on best practices.
How are GPOs financed?
GPOs rely, in part, on fees paid by vendors to finance the services the GPOs offer healthcare providers. These administrative fees are generally based upon the purchase price that the healthcare provider pays for a product purchased through a GPO contract. The fee is paid when a GPO’s provider-member utilizes a GPO contract. A 2010 report by the Government Accountability Office found that the average weighted contract administrative fee for GPOs ranged from only 1.22% to 2.25%, and the vast majority of administrative fees fall in that range.
Do other industries use the vendor fee model?
GPOs and the vendor-based fee model are increasingly leveraged by other industries to yield cost saving, including: government procurement (Department of Defense, Department of Veterans Affairs, etc.) food service, online marketplaces and group buying, consumer credit, hospitality, and even nonprofits, charities, and churches. Click here to learn more about other industries that use group purchasing and the vendor fee model.
What is the value in allowing GPOs to earn administrative fees from vendors?
Allowing GPOs to earn administrative fees enables hospitals and healthcare providers to dedicate more financial resources to the direct provision of patient care, such as employing additional doctors or nurses, purchasing the most advanced products, or a host of other goals. Without the ability to earn administrative fees, hospitals would have to choose between diverting financial resources from the direct administration of patient care to fund the operations of GPOs or they would have to stop using GPOs altogether, thereby losing the volume discounts and raising the cost of healthcare.
What is the GPO Safe Harbor?
The GPO Safe Harbor is what allows healthcare GPOs to deliver billions in annual savings to hospitals and other healthcare providers, Medicare and Medicaid, and taxpayers. GPOs have operated under the same model for over 100 years; Congress included the GPO Safe Harbor in its 1987 Medicare and Medicaid Patient Protection Action to protect the cost savings realized through lawful GPO practices. The GPO Safe Harbor is not unusual – in fact, it is one of 23 carve outs of the 1987 Act. A broad array of business practices are now protected within federal healthcare programs by safe harbors, including price reductions offered in health plans, equipment rentals, replenishment of ambulance supplies, and referral arrangements in specialty services. Click here to learn more about the origin and intent of the safe harbor.
Are hospitals and suppliers required to use GPOs?
No. All GPO contracts are voluntary and the product of competitive market negotiations. Suppliers are not required to contract with GPOs and healthcare providers are not required to use the contracts negotiated by GPOs with suppliers, even if the providers were a part of the committee process that reviewed and approved the contracts. All hospitals, nursing homes, clinics, surgery centers, etc., can purchase “off contract” and often do. Virtually all of America’s 7,000+ hospitals as well the vast majority of the 68,000 non-acute care centers belong to at least one GPO. A 2010 GAO report found that, on average, hospitals belong to 2-4 GPOs, which compete with one another for hospital business.
Under what transparency and oversight do GPOs operate?
GPOs are the most transparent industry in healthcare. Pursuant to the GPO Safe Harbor, GPOs disclose all administrative fees in writing to members at least annually; any GPO fee above 3% must be included in the contract agreement; GPOs make all fee information available at the request of the Secretary of Health and Human Services; and hospitals must report GPO fee distributions as part of their Medicare cost reports.
The GPO industry has established additional transparency measures beyond federal requirements. All GPOs participating in HSCA subscribe to a transparency and ethics initiative, The Healthcare Group Purchasing Industry Initiative (HGPII), that is reviewed and certified by an independent auditor annually, and are subject to review by an independent panel of ethicists that advise participating GPOs. GPOs have also created an independent supplier grievance process through the American Arbitration Association. You can learn more about HGPII here.
GPO cost savings, administrative structure, and business practices are all thoroughly reviewed by the Department of Justice (DOJ), Federal Trade Commission (FTC), U.S. Government Accountability Office (GAO), the U.S. Supreme Court, the 8th Circuit Court of Appeals, academia and virtually all of America’s 7,000+ hospitals.
Are there different types of GPOs?
If you’ve seen one GPO, you’ve really only seen one GPO, as they vary greatly in size, type of ownership and the services they offer their members. Some GPOs are owned by hospitals, while others do not have such a link to the facilities they serve. Some GPOs only serve not-for-profit hospitals, while others serve just proprietary facilities, and some serve a mix of the two. Some GPOs offer hospitals the ability to purchase nearly every conceivable type of product, while others focus on specific product categories. In addition, some GPOs specialize in certain types of healthcare, such as long-term care.
How many GPOs are there in the U.S.?
More than 100 national, regional and local GPOs and regional cooperatives compete with each other to provide GPO services.