By Mark Thill
GPOs remain the supply chain’s lightning rod, more than 10 years after Congress and the consumer press raised serious questions about them. Do they lock out small, innovative companies? Do they – because of their administrative-fee funding – actually turn down the absolute lowest prices from vendors? Do they simply make too much money, hence presenting a cost – not a savings – to the healthcare system?
Recent reports from the U.S. General Accounting Office and The Wharton School bring all these issues to the forefront again, leaving Journal of Healthcare Contracting readers to make decisions on their own.
GAO
The GAO’s interest in group purchasing is easily explained: It has to do with healthcare costs.
“Increases in health care expenditures in recent years have intensified congressional scrutiny of the costs of medical care,” write the authors of the GAO report. “Federal spending for health care services provided through Medicare and Medicaid in fiscal year 2013 totaled $850.7 billion – an increase from $557.4 billion in 2006 – and spending is expected to continue to increase. The increase in federal spending for health care services can be attributed, in part, to the growth in health care costs, and an important component of those costs is the cost of products that hospitals and other health care providers purchase to provide care.”
GPOs account for an increasing amount of healthcare dollars, according to the GAO. “The GPOs in our review generally reported receiving more fees from vendors in 2012 than they did in 2008. Together, all five [major] GPOs reported collecting a total of $2.3 billion in administrative and licensing fees from vendors in 2012. This represents a 20 percent increase in the total amount of fees collected from vendors in 2008, when adjusted for inflation.”
In the end, after summarizing the many issues, complaints and defenses of GPOs that the industry has heard for years, the GAO report offers little that’s new. An example: “The literature and the views of experts varied widely on the effects of this funding structure [referring to vendor-funded administrative fees, that is, fees paid by vendors to GPOs based on a percentage of contract sales.] Some suggested it creates misaligned incentives for GPOs to negotiate higher prices for medical products in order to increase the amount of vendor fees that they receive. Others suggested that competition between GPOs incentivizes them to negotiate the lowest possible prices, and mitigates these concerns. There is little empirical evidence available to either support or refute these concerns.”
One suggestion offered by the GAO is this: The Department of Health and Human Services should investigate whether hospitals are appropriately reporting administrative fee revenues on their Medicare cost reports, and then take steps to address any under-reporting that may be found.
If that happens, JHC readers can expect some questions from their finance team soon.
Differing viewpoint
Meanwhile, the study by Lawton Burns, PhD, MBA, and Rada Yovovich, of the Department of Healthcare Management at The Wharton School, creates a more sanguine picture of group purchasing. The study, “Hospital Supply Chain Executives’ Perspectives on Group Purchasing: Results from a 2014 National Survey,” was prepared for the American Hospital Association and the Association for Healthcare Resource and Materials Management under an AHA/AHRMM research grant to the University of Pennsylvania.
Wharton School researchers asked hospital executives with responsibility for supply chain management to evaluate their GPOs. More than 1,200 executives participated in the survey. Following are the percentage of respondents who reported being “strongly satisfied” or “satisfied” with their GPOs:
- Group purchasing and price discounts: 84 percent
- Multisource contracts for commodity items: 73 percent
- Multisource contracts for preference items: 66 percent
- Lowest price in GPO contracts: 62 percent
- Clinical expert and data support for value analysis: 61 percent
- Clinical improvement initiatives: 58 percent
- Benchmarking with peer hospitals and hospital systems: 58 percent
- Direct input on product and service selection: 57 percent
- True strategic partnership with hospital: 57 percent
- Predictive analytics to make better decisions around cost, quality and outcomes: 54 percent
- Bringing innovative products to our attention: 53 percent
- Consulting services: 52 percent
- Member’s control and input on alliance direction: 48 percent
- Safety improvement initiatives: 48 percent
“When compared to similar national survey data collected by Wharton School researchers in 2005, these new data suggest a strong and continuing role played by the national GPOs in hospital supply chain management,” conclude the authors. “This role continues to focus heavily on improving hospital efforts to procure products at lower prices and produce cost savings. It has also recently expanded to help hospitals with services beyond supply chain management that include clinical improvement and value analysis activities.”
If there’s a takeaway from the GAO and Wharton School reports, it’s this: Regardless of where we stand in the supply chain – provider, distributor, manufacturer, GPO, trade publication – we all must be mindful of our need to demonstrate our value to those who are paying the bills.