View from Washington – Should vendor paid administrative fees go directly to hospitals?

‘Too Important Not to Do’
Should vendor paid administrative fees go directly to hospitals?

William Faulkner once said “I have found that the greatest help in meeting any problem is to know where you yourself stand.” My first job in a hospital was in 1970. It was then I made a lifelong decision to stand with hospitals. I have never forgotten that what these institutions do for the patients they serve is because of the miracle of medical progress – yielded in the hands of dedicated men and women.

Group purchasing organizations (GPOs) which serve the majority of the nation’s hospitals have recently received a letter from U.S. Senators Grassley, Kohl and Nelson requesting information about their business practices. This letter restarts a Senate investigation into group purchasing practices which have sporadically run over the past decade or so. The implication of this latest inquiry is there is something amiss about the distribution of vendor paid administrative fees collected by GPOs. The crux of the assertion being that their hospital members may not be accurately reporting all of this income on their Medicare cost reports.

Since I had more than just a little to do with the enactment of the Medicare/Medicaid fraud and abuse “safe harbor” which protects the payment of vendor paid administrative fees, I have been repeatedly asked to write and/or speak about it. The safe harbor amendment was sold to Congress to assist hospitals. It would take a certain high level of recalcitrance not to recognize the enormous benefits which GPO supply chain techniques have brought to the healthcare delivery system as a result. The safe harbor helped hospitals then, as it does now.

What about allegations of abuse and/or illegal activity? If pharmaceuticals and medical products are being selected for use on Medicare and Medicaid patients for some reason other than clinical efficacy, equivalency, and economic best price/considerations – then the federal government should declare open hunting season.

However, the beef should not be with the safe harbor – it is working fine. What is different is the group purchasing business model which has evolved since the enactment of the safe harbor. Large, nationwide group purchasing organizations now dominate the market, causing some suppliers who can’t get their products on contract to complain that something must be wrong. Even some suppliers which do get a GPO contract, but don’t get the support they think they should, continue to complain about not gaining market share.

When the safe harbor was enacted, regional, not-for-profit, hospital-owned GPOs were the dominant model. Today, GPOs come in a variety of flavors – not-for-profit, for-profit, investor owned, big, small, etc. Worth noting, however, is the enormous consolidation in the industry over the past decade which has resulted in the regional players being eclipsed and/or absorbed by massive national players.

Regional pull
The real strength of group purchasing lies at the regional level. This is where the opportunities exist for leaps in improvements for the supply chain. I think the recent resurgence of regional GPO models is a positive development. These GPOs can do some things the big guys can’t. Get a national GPO executive to chat off-the-record sometime and they will rightly take credit for driving down the price of many products for their healthcare provider members. They will also rightly take credit for the sentinel effect of their pricing throughout healthcare. To their credit, great pricing has been achieved in important areas – generic drugs and commodities as prime examples. However, under these circumstances, what they might also tell you is their impact on name-brand pharmaceuticals and clinical preference items in relation to other purchasers isn’t as great. Ask some people who study the healthcare supply chain and they may observe in many product areas, pricing in some markets “has ground to a halt.”

Although some GPOs have increased the percentage of fees paid to their hospital members and shareholders over the past decade, others have clearly reduced the percentage paid. To offset these reductions, these GPOs have greatly enhanced their services to their members. Today, some GPOs return no actual dollars to their members at all but instead return value through offering services instead. Some of these services are highly beneficial to some facilities which might not otherwise be able to afford the vast array of consultants and services some GPOs can offer. But herein lies the rub for the Senate.

For the first time, the Senate is asking about the value of these services. They are asking how the GPOs are reporting the value of these services to their members so the hospitals can account for it on their Medicare cost reports. The implication is GPO member hospitals are not accurately reporting this income to the government.

Where does this all lead?
The first – and misguided – response will be to question if the safe harbor should be repealed. The merits of this will probably be weighed by the Senate. However, as health reform deliberations continue, there will be added Congressional pressure to capture for budget scoring purposes the value of all the GPOs services delivered, to help offset additional government spending. However, it is in the accounting for the Medicare cost reports that the problem lies for hospitals. It could be extraordinarily difficult for hospitals to account for the real non-monetary value of the GPO services to ultimately satisfy the Medicare (and congressional) bean counters.

One likely alternative is Congress may consider requiring all vendor paid administrative fees be paid directly to the hospitals which accept Medicare and Medicaid dollars. Under such a system, financially strapped hospitals would then have to decide how much they are willing to pay for all their GPO’s activities and services. Such a development might quickly revive the dues-supported regional GPOs which used to exist prior to the early 1980s.

The day may be coming when hospitals will pay GPOs directly for their contracting abilities and selective services – as opposed to GPOs splitting a percentage of administrative fees and returning the rest in services. If the government proceeds with this kind of thinking, the relationship between hospitals and GPOs is likely to change substantially. Maybe there will be a compromise with the large national GPOs which can address the concerns of the Senate as well as preserve the current business model. Maybe the national GPOs business model will evolve.

But the bottom line here is important. If the federal government directs all administrative fees be paid directly to hospitals and, in doing so, helps them improve their supply chain performance while providing the desired transparency, then the predominant GPO business model will surely change. If this ultimately benefits the hospitals, then so be it. I will be standing with the hospitals and the patients they serve.

About the Author

Robert Betz Ph.D.
Robert Betz, Ph.D., is president of Robert Betz Associates, Inc. (RBA), a well-established 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