```
                                                                 
Group Purchasing Organizations: Pilot Study Suggests Large Buying
Groups Do Not Always Offer Hospitals Lower Prices (30-APR-02,	 
GAO-02-690T).							 
                                                                 
This testimony discusses group purchasing organizations (GPO) for
medical devices and supplies used in hospitals. By pooling the	 
purchases of their member hospitals, these specialized firms	 
negotiate lower prices from vendors. GAO found that a hospital's 
use of a GPO contract did not guarantee that the hospital saved  
money: GPOs' prices were not always lower and were often higher  
than prices paid by hospitals negotiating directly with vendors. 
GAO studied price savings with respect to: (1) whether hospitals 
using GPO contracts received better prices than hospitals that	 
did their own contracting, (2) the size of the hospital, and (3) 
size of the GPO. This data raises questions about whether GPOs,  
specially large GPOs, achieve consistent price savings. 	 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-02-690T					        
    ACCNO:   A03212						        
  TITLE:     Group Purchasing Organizations: Pilot Study Suggests     
Large Buying Groups Do Not Always Offer Hospitals Lower Prices	 
     DATE:   04/30/2002 
  SUBJECT:   Contracts						 
	     Health care cost control				 
	     Hospital administration				 
	     Hospitals						 
	     Medical supplies					 
	     Private sector					 

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GAO-02-690T
     
A

Test i mony Before the Subcommittee on Antitrust, Competition, and Business
and Consumer Rights, Committee on the Judiciary, U. S. Senate

For Release on Delivery Expected at 2: 00 p. m. GROUP PURCHASING Tuesday,
April 30, 2002 ORGANIZATIONS

Pilot Study Suggests Large Buying Groups Do Not Always Offer Hospitals Lower
Prices

Statement for the Record by William J. Scanlon Director, Health Care Issues

GAO- 02- 690T

Mr. Chairman and Members of the Subcommittee: We are pleased to have the
opportunity to comment on the role of group purchasing organizations (GPO)
in the marketplace for medical devices used in hospitals. Faced with
persistent pressures to cut their costs, hospitals over the past two decades
have increasingly relied on specialized private firms- GPOs- to keep the
cost of supplies in check. Hospitals buy everything from sophisticated
medical devices- for example, cardiac defibrillators- to commodities such as
saline solution through GPOnegotiated contracts. By pooling the purchases of
their member hospitals, these specialized firms are intended to negotiate
lower prices from vendors (manufacturers and distributors), which can
benefit hospitals and,

ultimately, consumers and payers of hospital care (such as insurers and
employers). The price advantages of a GPO are expected to be greater for
large GPOs, which negotiate on behalf of nearly 2,000 hospitals. To increase
its leverage with vendors, a GPO often selects only certain manufacturers
and vendors of a product to include in its catalog.

According to GPOs, this selection of some vendors and exclusion of others
reflects judgments about both product quality and price. Some manufacturers-
especially small manufacturers of medical devices- allege that contracting
practices of some large GPOs have blocked their access to hospitals?
purchasing decisionmakers. The manufacturers contend that these practices
ultimately deny patients access to innovative or superior medical devices.
These concerns have spurred calls for reexamining federal antitrust
guidelines regarding GPOs. Issued in 1993, these guidelines articulate an
antitrust enforcement policy that affords GPOs considerable latitude to
merge and grow. The policy has permitted the creation and growth of the
largest GPOs, formed in the 1990s.

To assist the Subcommittee as it considers GPOs? effects on medical device
purchasing, this statement provides an overview of the GPOs and their
operations and summarizes results from our pilot study, which the
Subcommittee requested, of a selected metropolitan area?s hospital
purchasing. This study was exploratory, testing the feasibility of
collecting price and purchase data for medical devices, and will be followed
by a broader study covering more areas, devices, GPOs, and hospitals.
Specifically, this statement details (1) the extent to which, in one market,

hospitals buying pacemakers and safety needles saved money by using a GPO
contract and (2) the extent to which these hospitals purchased pacemakers
and needles from small manufacturers. To learn about GPO operations, we
interviewed officials of 11 hospitals, four GPOs, nine medical device
manufacturers, two industry associations, and the Department of Justice
(DOJ). We established the feasibility of collecting price and purchase data
on medical devices by obtaining such data on pacemakers and safety needles 1
for 2000 from 18 hospitals in one greater metropolitan area. 2 We chose to
study pacemakers and safety needles because they are two types of medical
devices that are commonly

purchased by hospitals. Hospitals in our sample purchased 121 models of
pacemakers and 196 models of safety needles. We compared GPOnegotiated
prices to prices obtained by hospitals purchasing on their own. Because all
these hospitals did not purchase each model, price

comparisons were only possible for subsets of models. Taken together,
comparisons involved contracts of eight GPOs, 23 models of safety needles,
and 42 models of pacemakers. In many cases, more than one hospital

purchased a particular device; in those cases, the price refers to the
median price. We also used the purchase data to determine the extent to
which these hospitals purchased these devices from small manufacturers. We
did not independently verify the information in appendix I. Our work was
conducted from October 2001 through April 2002 in accordance with

generally accepted government auditing principles. 1 The term safety needle
includes many different types of devices with features to reduce the risk of
needlestick injuries for health care workers. 2 Price data did not reflect
manufacturers? rebates- which hospitals may receive regardless of whether
they used a GPO contract or purchased items on their own- or other payments
earned by hospitals purchasing with a GPO contract. In our statement, the
term ?hospitals? refers to single facilities as well as health systems with
multiple hospitals. Seven hospitals reported safety needle data for 2001.

In summary, for the hospitals that we studied, a hospital?s use of a GPO
contract did not guarantee that the hospital saved money: GPOs? prices were
not always lower and were often higher than prices paid by hospitals
negotiating with vendors directly. Specifically, we examined price savings

with respect to three factors:

 Whether hospitals using GPO contracts got better prices than hospitals
that did their own contracting varied widely by product model. For some
pacemaker models, the hospitals using GPO contracts got

considerably better prices- up to 26 percent lower than the hospitals not
using a GPO contract. But for other models, hospitals using a GPO contract
got prices that were much worse- up to 39 percent higher than hospitals not
using a GPO contract. Similar results held for hospitals using large GPOs-
those whose members purchase more than $6 billion

per year with their contracts- compared to hospitals buying on their own.

 Price savings differed by size of hospital. Large hospitals- those with
more than 500 beds- often obtained lower prices on their own than by using a
GPO. By contrast, small and medium- sized hospitals were more likely to
obtain price savings using a GPO contract. But these hospitals? experiences
also ranged widely: Some hospitals? GPO contract prices

were much lower- and others much higher- than prices negotiated by hospitals
on their own.

 Price savings had little relationship to the size of the GPO. Hospitals
using contracts of large GPOs- those whose members purchase over $6 billion
per year with their contracts- did not necessarily obtain better prices than
hospitals using smaller GPOs? contracts. This lack of

consistent price savings is contrary to what would be expected for large
GPOs.

In the metropolitan market we studied, hospitals bought pacemakers and
safety needles predominantly from large manufacturers. We could not
determine the extent to which hospitals? reliance on large manufacturers of
these two devices reflected hospitals? independent preferences for large

manufacturers? products or the effect of GPOs? contracting practices on
hospitals? purchasing decisions, since almost all hospitals in our sample
belonged to GPOs.

The data on hospital purchases in our study market raise questions about
whether GPOs- and especially large GPOs- achieve price savings

consistently, as expected. In addition, the limited number of purchases from
small manufacturers in our study market suggests the need to examine data
from additional markets, given small manufacturers? concerns that GPOs?
practices inappropriately limit their access to potential purchasers. This
additional information on price savings and

GPO practices could inform an examination of GPOs? treatment under federal
antitrust policy. Background Hospitals? budgets for medical devices and
other goods are substantial. Many hospitals buy medical devices and other
supplies through GPOs, which are generally owned by member hospitals and
vary in size and scope of services. GPOs are expected to use volume
purchasing as leverage in negotiating prices with vendors. In exchange for
administrative services and the ability to sell through a GPO to its member
hospitals, vendors pay administrative fees to a GPO based on the hospitals?
purchases made using

that GPO?s contract. These fees, sanctioned under Medicare law, cover the
GPO?s costs; GPOs often distribute surplus fees to their owners. Federal
antitrust guidelines help a GPO determine whether its business practices and
market share are likely to be questioned as anticompetitive by enforcement
agencies.

Hospitals and Medical According to an American Hospital Association (AHA)
survey, roughly Devices 4,900 nonfederal community hospitals 3 spent an
estimated $173 billion on nonlabor supplies, services, and capital in 2000.
A significant share of hospitals? nonlabor costs include such goods as
pharmaceuticals and medical devices. Hospitals buy these goods through their
own purchasing departments, and many hospitals- in addition to contracting
on their own

with vendors- use GPO- negotiated contracts for at least some of their
purchasing. Some hospitals have large or more sophisticated purchasing
operations, but even hospitals belonging to large chains or health systems
often do at least some purchasing through a GPO. The proportion of hospitals
belonging to at least one GPO is substantial: estimates range from 68
percent to 98 percent. 4

Medical devices that hospitals buy span a wide array of products, such as
pacemakers, implantable defibrillators, and infusion pumps. Some device
manufacturers are small companies that offer one product or a few closely

related products while others are large firms that offer many, often
unrelated, products. The Medical Device Manufacturers Association estimates
that some devices become obsolete within 2 to 3 years- when the next
generation of a particular device becomes available. Manufacturers market
medical devices in medical journals and trade shows but place considerable
value on having access to clinicians in hospitals as well as to hospital
purchasing departments, which make the final buying

decisions. GPOs? Size, Structure, and

According to the Health Industry Group Purchasing Association, hundreds
Benefits

of GPOs operate today, but only about 30 negotiate sizeable contracts on
behalf of their members. The emergence of these large GPOs in part stems
from GPO mergers in the mid- 1990s. Joint ventures and mergers created

the two largest GPOs, Novation and Premier, which have annual purchases by
member facilities using their contracts of $17.6 billion and $14 billion,
respectively. Other GPOs in our pilot study have less than $6 billion in 3
Community hospitals include all nonfederal short- term general and special
hospitals whose

facilities and services are available to the public. Most community
hospitals have fewer than 200 beds while roughly 5 percent have over 500
beds.

4 AHA survey data indicate that 68 percent of hospitals belonged to a GPO in
2000 while, according to the Health Industry Group Purchasing Association,
96 to 98 percent of hospitals belonged to a GPO.

annual purchases by member facilities. (See appendix I for purchasing
volumes of GPOs in our pilot study.) In addition to differences in size,
GPOs differ in scope. Some negotiate national contracts and offer many
services beyond purchasing, such as programs emphasizing the gains in

safety and economic value resulting from standardization, or specialized
software to help ensure that hospitals are not overcharged. Others serve
regional or local hospital markets and provide fewer additional services.

GPOs differ in their corporate structures and their relationships with
member hospitals. All large GPOs and many smaller GPOs are for- profit
entities, some of which are owned by not- for- profit hospitals. 5 Other
GPOs have shareholders independent of the member hospitals, which themselves
do not necessarily hold an ownership stake. An example of a for- profit GPO
owned by not- for- profit hospitals is Premier. Premier is owned by 203 not-
for- profit health care organizations that operate approximately 900
hospitals. Other for- profit GPOs are owned by investors that are not member
hospitals; for example, InSource is owned by MedAssets, a private purchasing
and contract services company. Broadlane?s owners consist of individual
investors as well as for- profit and not- for- profit organizations
including Tenet Healthcare, a nationwide provider of health care services. 6
Some GPOs are jointly owned. For example, both Novation and Healthcare

Purchasing Partners International (HPPI) are owned by the same two networks
of hospitals and physicians. Network members purchase using Novation
contracts. However, non- network members purchase using HPPI contracts,
which are negotiated by Novation. Some GPOs, such as HealthTrust, require
that members do not belong to other GPOs. In addition, some GPOs, such as
Novation and Amerinet, contract with manufacturers to supply products sold
under the GPO?s own ?private- label? brand name. (See appendix I for a
summary of characteristics of GPOs in our pilot.)

According to officials of GPOs and a GPO trade organization, benefits that
GPOs provide to member hospitals 7 include, in addition to lower prices, 5
Hospital- owned GPOs may have nonowning members (affiliates), in addition to
member hospitals that are shareholders. 6 InSource is one of two GPOs owned
by MedAssets. Broadlane began as a division of Tenet

Healthcare, which is now one of its owners. 7 In addition to hospitals, many
GPOs include as members other health care organizations, such as nursing
facilities. We focus on hospitals, which are key buyers in the medical
device market.

reduced costs due to hospitals being able to reduce the size of purchasing
departments, as well as assistance with product- comparison analysis and
standardization of products. Benefits that GPOs say they provide to
manufacturers with which they contract include, in addition to access to
hospital decisionmakers, cost savings due to reducing manufacturers?
contracting, marketing, and sales activities. According to representatives
of some manufacturers, many GPOs act as gatekeepers to hospital

purchasing decisionmakers and charge the manufacturers administrative fees
as the price of access to their member hospitals.

GPO Price Negotiation and In order to sell to hospitals through GPO
contracts, vendors generally

Administrative Fees submit proposals to a GPO- in response to Requests for
Proposals (RFP)- that are then evaluated. Based on these evaluations, the
GPO enters into negotiations with select vendors to determine prices and, in
some cases, administrative fees that vendors pay to the GPO. Hospitals then
buy directly from the manufacturer for a price specified in a GPO contract.
Often prices through a GPO- negotiated contract vary based on each
hospital?s volume of purchases and the extent to which the member hospital
delivers on its ?commitment? to buy an agreed- upon share of its

purchases of a certain product from a particular manufacturer. 8 The more of
a product that a hospital purchases, the lower the price per unit it may pay
the manufacturer. A hospital?s price may also vary depending upon the

share of a product it purchases from a manufacturer. For example, a hospital
that buys only 25 percent of its cardiac stents from one manufacturer may
pay nearly three times more per stent than one that purchases all its stents
from that manufacturer. Member hospitals may

have an additional financial incentive to use the GPO contract. The extent
to which a hospital buys using the GPO?s contracts may affect the share of
the administrative fees that the GPO returns to the hospital.

8 Volume and commitment are also important factors in manufacturers?
contracts with hospitals that purchase without using a GPO contract.

Although GPOs provide services to hospitals and are often organized by
hospitals, many finance their operations primarily through the
administrative fees paid by manufacturers and other vendors. These fees are
typically calculated as a percentage of each hospital?s purchases from a

vendor. The Social Security Act, as amended in 1986, allows these fees,
which would otherwise be considered ?kickbacks? or other illegal payments to
the GPO. 9 Regulations establishing appropriate administrative fees,

enforced by the Office of Inspector General in the Department of Health and
Human Services, state that the fee structure must be disclosed in an
agreement between the GPO and each participating member. The

agreement must state that fees are to be 3 percent or less of the purchase
price, or if not fixed at 3 percent or less, the amount or maximum amount
that each vendor will pay. The GPO must also disclose in writing to each

member, at least annually, the amount received from each vendor with respect
to purchases made by or on behalf of the member. The fees tend to be higher
on purchases by hospitals that buy most or all of an item from one vendor.
In addition to covering their operating expenses with these fees, GPOs, with
the approval of their boards of directors, often distribute surplus fees to
member hospitals but may also use administrative fees to

finance new ventures, such as electronic commerce, that are outside their
core business. (See fig. 1.) 9 Any return of a portion of a purchaser?s
payment for the purpose of obtaining favorable treatment in connection with
a contract may be considered a kickback.

Figure 1: Money Flows Related to Hospital Purchases Using a GPO

Payment for purchase of product

Vendor Hospital

(manufacturers and distributors)

Portion of GPO

Administrative administrative fees fees

Other Portion of ventures administrative fees

Source: GAO interviews with GPOs and a GPO trade association.

The complex financial flows among vendors, GPOs, and hospitals have raised
concerns that GPOs? interests may diverge from those of hospitals. According
to some small manufacturers, GPOs have an incentive not to seek the lowest
price because higher prices yield higher administrative

fees. These manufacturers further suggest that GPOs, by relying on vendors?
fees, become agents of manufacturers and assist them in limiting
competition. By contrast, according to some GPOs, they act as an extension
of hospitals and GPO members have input into the GPOs? product selections.
GPOs acknowledge that a manufacturer dominant in a

product line may contract with a GPO, or agree to a favorable contract, to
preserve its market share and exclude competitors. However, GPOs assert that
this selective contracting is part of a competitive process allowing the

GPO to negotiate lower prices. GPOs also emphasize that participation in a
GPO is voluntary, so the GPO must reflect what the hospitals want if it is
to retain their business.

Antitrust Recognizing that joint purchasing arrangements among hospitals may
enable members to achieve efficiencies that will benefit consumers but may,
in some cases, pose risks of harming consumers by reducing competition, DOJ
and the Federal Trade Commission (FTC) issued in 1993 a guideline to help
GPOs and others gauge whether a particular GPO arrangement is likely to
raise antitrust problems. 10 This guideline sets forth an ?antitrust safety
zone? for GPOs that meet a two- part test, under which the agencies, absent
extraordinary circumstances, will not challenge the arrangement as
anticompetitive. Essentially, the two- part test is as follows: 1. Purchases
through a GPO must account for less than 35 percent of the total sales of
the product or service in question (such as pacemakers) in the relevant
market. This part of the test addresses whether the GPO accounts for such a
large share of the purchases of the product or service that it can
effectively exercise increased market power as a

buyer. If the GPO?s buying power drives the price of the product or service
below competitive levels, consumers could be harmed if suppliers respond by
reducing output, quality, or innovation. 2. The cost of purchases through a
GPO by each member hospital that competes with other members must amount to
less than 20 percent of

each hospital?s total revenues. This second part of the test looks at
whether the GPO purchases constitute such a large share of the revenues of
competing member hospitals that they could result in standardizing the
hospitals? costs enough to make it easier to fix or coordinate prices. 11
However, the guideline states that a purchasing arrangement is not
necessarily in violation of the antitrust laws simply because it falls
outside

the safety zone. Likewise, the guideline suggests that even a purchasing
arrangement that falls within the safety zone might still raise antitrust
concerns under ?extraordinary circumstances.? Each arrangement has to be
examined according to its particular facts. In this regard, the guideline
also describes factors that reduce antitrust concerns with purchasing
arrangements that fall outside the safety zone.

10 U. S. Department of Justice and the Federal Trade Commission, Statements
of Antitrust Enforcement Policy in Health Care, Statement 7 (Washington, D.
C.: August 1996). 11 Statements of Antitrust Enforcement Policy in Health
Care, Statement 7, p. 23.

Price Savings Not GPOs did not always obtain better prices for member
hospitals. The

Obtained Consistently advantage or disadvantage of GPO prices varied by the
model purchased

and size of hospital- but lacked a clear relationship to size of GPO. In our
with GPO Contract and pilot study, we compared median GPO and median non-
GPO prices for Savings Varied by purchases by hospitals and found the
following:

Model and Size of  Among hospitals of all sizes, hospitals using GPO-
negotiated contracts Hospital to buy pacemakers and safety needles often
paid more than hospitals negotiating on their own. This finding also held
for hospitals using large GPOs, compared to hospitals negotiating on their
own.

 Between hospitals of different sizes, small and medium- sized hospitals
buying pacemakers were more likely than large hospitals to save money when
using GPO- negotiated contracts. 12 We also compared prices between large
GPOs and smaller GPOs: Hospitals

of all sizes using a large GPO?s contracts almost always saved money on
safety needles but often paid more for pacemakers, compared to those using
smaller GPOs? contracts. Large GPOs would be expected to achieve price
savings consistently. In all these comparisons, the price savings or
additional cost that hospitals realized- for example, by using a GPO or by

negotiating on their own- often varied widely from model to model. Use of
GPO Contract Often

Purchasing with GPO contracts did not ensure that hospitals saved money. Did
Not Yield Price Savings Among hospitals of all sizes in our study market,
those using GPOnegotiated

for Hospitals Buying contracts for pacemakers and safety needles often paid
more

Pacemakers and Safety than those negotiating on their own. The median GPO-
negotiated price was higher than the median price hospitals paid on their
own for all six

Needles safety needles models and over three- fifths of the 41 pacemaker
models that could be compared. 13 Similarly, the use of a large GPO- one
with an

annual purchase volume greater than $6 billion- did not guarantee price
savings. Hospitals using contracts negotiated by a large GPO paid more 12 We
compared GPO- negotiated prices to non- GPO prices for each size- category
of hospital separately. For example, prices were compared for large
hospitals using GPO contracts with large hospitals buying on their own. 13
Price comparisons include instances in which only the purchases of two or
three hospitals could be included.

than hospitals purchasing on their own for the six safety needle models and
roughly half of the 22 pacemaker models that could be compared. The price
savings or additional costs that hospitals obtained using GPOnegotiated
contracts varied by model. For different safety needle models, median GPO-
negotiated prices exceeded prices negotiated by a hospital buying on its own
by from 1 percent to 5 percent. For different pacemaker

models, the variation was much greater: median GPO- negotiated prices ranged
from 26 percent less to 39 percent more than the median price paid by
hospitals purchasing on their own. (See fig. 2.)

Figure 2: Differences between Median GPO Contract Prices and Median Non- GPO
Contract Prices for 41 Pacemaker Models 50 Percen

tage price differential 40 30 20 10

0 -10

Models 14, 15, and 16 had zero price differential

-20 -30 -40 -50

12 3 4 5 6 7 8
91011121314151617181920212223242526272829303132333435363738394041 Model

Models for which GPO contracts yielded savings compared to hospitals
purchasing on their own Models for which GPO contracts did not yield savings
compared to hospitals purchasing on their own

Note: Each bar refers to a different model of pacemaker. The length of the
bar reflects the difference between the price paid by hospitals using GPO
contracts and the price paid by hospitals not using GPO contracts to
purchase the same model. Median prices were calculated and used in
comparisons that included more than one GPO- negotiated price or hospital
purchasing on its own. Source: GAO survey of hospitals in a greater
metropolitan area.

Small and Medium- Sized We examined how hospitals of different sizes using
GPOs fared relative to Hospitals More Likely Than

their peers purchasing pacemakers on their own and found that whether there
were savings depended on the size of the hospital. 14 The 4 small Large
Hospitals to Realize

hospitals (those with fewer than 200 beds) always did better with a GPO
Price Savings on

contract. The 11 medium- sized hospitals (those with 200 to 499 beds) did
Pacemakers with GPO

better with a GPO contract for 40 percent of the models (see fig. 3), and
the Contract 3 large hospitals rarely did better with a GPO contract-
compared with their respective peers purchasing on their own (see fig. 4).
Even though small hospitals buying on their own generally paid higher prices
than the small hospitals using GPOs, the GPO- negotiated price was not much
lower- from 1 to 6 percent- than what they paid on their own.

14 Comparisons by hospital- size for the purchase of safety needles were not
possible. Several small and medium- sized hospitals did not purchase safety
needles. Of those that did buy safety needles, the majority used GPO
contracts for all their purchases or bought items for which there was no
comparable purchase without a GPO contract.

Figure 3: Differences between Median GPO Contract Prices and Median Non- GPO
Contract Prices for 25 Pacemaker Models Purchased by Medium- Sized Hospitals
50 Percentage price differential 40 30 20 10

0 -10

Model 11 had zero

-20

price differential

-30 -40 -50

1 2 3 45 678 9101112131415161718192021 22 23 24 25 Model

Models for which GPO contracts yielded savings compared to hospitals
purchasing on their own Models for which GPO contracts did not yield savings
compared to hospitals purchasing on their own

Note: Each bar refers to a different model of pacemaker. The length of the
bar reflects the difference between the price paid by medium- sized
hospitals using GPO contracts and the price paid by mediumsized hospitals
not using GPO contracts to purchase the same model. Medium- sized hospitals
are hospitals with from 200 to 499 beds. Median prices were calculated and
used in comparisons that included more than one GPO- negotiated price or
hospital purchasing on its own. Source: GAO survey of hospitals in a greater
metropolitan area. As figures 3 and 4 show, the range of price savings or
additional costs

associated with GPO contracts was considerable. For example, for medium-
sized hospitals, the median GPO- negotiated price was 39 percent lower for
model 1 and 25 percent higher for model 25 than the median price paid by
these hospitals purchasing on their own.

Figure 4: Differences between GPO Contract Prices and Non- GPO Contract
Prices for 11 Pacemaker Models Purchased by Large Hospitals 50 Percentage
price differential 40 30 20 10 0 -10 -20 -30 -40 -50

123 4 5 6 7 8 91011 Model

Models for which GPO contracts yielded savings compared to hospitals
purchasing on their own Models for which GPO contracts did not yield savings
compared to hospitals purchasing on their own

Note: Each bar refers to a different model of pacemaker. The length of the
bar reflects the difference in the price paid by large hospitals using GPO
contracts and the price paid by large hospitals not using GPO contracts to
purchase the same model. Large hospitals are hospitals with 500 or more
beds. Median prices were calculated and used in comparisons that included
more than one GPO- negotiated

price or hospital purchasing on its own. Source: GAO survey of hospitals in
a greater metropolitan area. Compared to Smaller GPOs,

The size of a GPO was not related consistently to whether a hospital, when
Use of Large GPOs Yielded

using a GPO contract, obtained a better price. Whether use of large GPOs
Price Savings for Needles-

offered price savings varied by type of device: for safety needles, they
were Less Often for Pacemakers more likely to obtain better prices and for
pacemakers, they were less likely to do so. Specifically, the median price
paid by hospitals using a large

GPO?s contract to purchase safety- needles was nearly always lower- for 18
of the 19 types of needles we could compare- than the median price paid by
hospitals using a smaller GPO?s contract. For pacemakers, a large GPO?s

contract infrequently yielded better prices than smaller GPOs? contracts-
for only 5 of the 18 pacemakers we could compare. In this case, the higher
prices associated with most of these pacemaker purchases run counter to the
expectation that large GPOs yield substantial price advantages. (See

fig. 5.) Figure 5: Differences in Median Prices between a Large GPO?s
Contracts and Other GPOs? Contracts for 18 Pacemaker Models

50 Percentage price differential 40 30 20 10

0 -10

Model 6 had zero price differential

-20 -30 -40 -50

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 Model

Models for which large GPO contracts yielded savings compared to smaller GPO
contracts Models for which large GPO contracts did not yield savings
compared to smaller GPO contracts

Note: Each bar refers to a different model of pacemaker. The length of the
bar reflects the difference in the price paid by hospitals using a large
GPO?s contract- one whose members purchase over $6 billion per year with its
contracts- and the price paid by hospitals using smaller GPOs? contracts to

purchase the same pacemaker model. Median prices were calculated and used in
comparisons that included more than one GPO- negotiated price or hospital
purchasing on its own. Source: GAO survey of hospitals in a greater
metropolitan area. Figure 5 shows that, as with the previous comparisons,
the range of price

savings or additional costs associated with large GPOs was wide. For
hospitals using large GPOs? contracts to buy pacemakers, the median price
paid ranged from 20 percent less for one model to 26 percent more for
another, compared with the median price paid by hospitals using smaller
GPOs? contracts. Hospitals Rarely

Regardless of whether a GPO contract was used, hospitals bought pacemakers
and safety needles predominantly from large manufacturers. 15 Purchased
Selected In our study, 5 of the 16 manufacturers from which hospitals
purchased Medical Devices from

were small; however, purchases from these 5 represented a small minority
Small Manufacturers

of the models bought (1 of 121 pacemaker models and 22 of 196 safety needle
models). Almost all purchases from small manufacturers in our pilot were
made by hospitals buying on their own; only one hospital purchased from a
small manufacturer using a GPO contract.

We could not determine the extent to which hospitals? reliance on large
manufacturers of these two devices reflected hospital preference or the
effects of GPOs? contracting practices, because almost all hospitals in our
sample belonged to GPOs. Representatives from small manufacturers whom we
interviewed stated that some incentives in GPO contracts penalize hospitals
purchasing off- contract. However, hospital personnel whom we interviewed
emphasized different factors as influencing their

purchasing decisions, including clinical considerations for pacemakers and
cost for safety needles. Seventy- one percent of hospitals purchased a
pacemaker and 15 percent a safety needle outside of their GPO contracts.
Concluding While this is a pilot study based on one market, the data raise
questions

Observations about one of the intended benefits from having large GPOs. In
our study

market, GPOs of different sizes realized comparable savings for member
hospitals. Buying through a large GPO did not guarantee a hospital the 15
For our study, we defined small manufacturers of safety needles as those
with 500 or fewer employees and small manufacturers of pacemakers as those
with a market share of less than 10 percent.

lowest prices. In fact, there were several instances in which individual
hospitals using a large GPO?s contracts paid prices that were at least 25
percent higher than prices negotiated by hospitals on their own, and

smaller GPOs also sometimes offered better prices. Clearly, more evidence on
GPOs and their effects is needed, since our data pertain to one urban
market, two types of medical devices, eight GPOs, and 18 hospitals. To
assist the Subcommittee, we plan to obtain data from a broader array of
geographic areas and for other devices, hospitals, and GPOs. Gathering
additional information on GPOs? benefits and possible drawbacks could

inform an examination of antitrust policy toward GPOs. Contacts and For more
information regarding this statement, please contact Janet Acknowledgments

Heinrich at (202) 512- 7114 or Jon Ratner at (202) 512- 7107. JoAnne R.
Bailey, Hannah F. Fein, Kelly L. Klemstine, and Michael L. Rose made key
contributions to this statement.

Appendi x I

Characteristics Of Selected GPOs The information in this appendix
illustrates how GPOs in our study market vary in size, ownership structure,
and profit status. The appendix contains information obtained both from GPO
Web sites during April 2002 and through telephone interviews. We did not
independently verify the information in this appendix. (See table 1.)

Table 1: Characteristics of Selected GPOs in Our Pilot Study Market Current
annual purchasing

GPO's volume profit

Owners' profit Members/ customers

Miscellaneous GPO

(in billions) status Owners of the GPO status using GPO contracts features

Novation $17.6 For- profit Novation is owned by VHA: for- profit, Members
include Novation has a VHA, a nationwide UHC: not- for 2,300 not- for-
profit

private label brand network of communityowned profit

hospitals and other with over 250 product health care

health care sites. lines and over systems and their $1 billion per year in

physicians, and UHC, an sales.

alliance of academic health centers.

Premier 14. 0 For- profit Premier is owned by 203 Not- for- profit Members
include over The average of

health care organizations 1,800 hospitals and contract

that operate other health care

administrative fees approximately 900 sites.

paid to Premier is 2 hospitals.

percent. AmeriNet 5.2 For- profit AmeriNet is owned by Intermountain Members
include Membership in AmeriNet Central, Health Care:

14, 315 acute care AmeriNet grew by Intermountain Health Not- for- profit.

hospitals and other 3,172 new members

Care, and Vector. health care sites. in 2000. Many Profit status for

members are health AmeriNet care organizations Central and other than
hospitals. Vector was not readily available.

Amerinet has a private label brand.

HealthTrust 4. 0 For- profit HealthTrust is owned by For- profit Members
include 650 There is no

HCA, Inc., LifePoint not- for- profit and for membership fee for a

Hospitals, Triad Hospitals, profit acute care member to belong to

and Health Management hospitals and other

HealthTrust. Associates.

health care sites. HealthTrust does not allow members to belong to more than
one GPO.

(Continued From Previous Page)

Current annual purchasing

GPO's volume profit

Owners' profit Members/ customers

Miscellaneous GPO

(in billions) status Owners of the GPO status using GPO contracts features

InSource 3.0 For- profit InSource is owned by For- profit Members include
over MedAssets also owns MedAssets, 11, 000 acute care

Health Services a private purchasing and hospitals and other Corporation of
contract services health care sites. America, a national company. GPO.

Consorta 2.5 For- profit Consorta is owned by 12 Not- for- profit Members
include 320

Consorta seeks 85 to Catholic- sponsored, faithbased, acute care hospitals
90 percent voluntary not- for- profit and over 800 other

compliance (buying health systems: Ancilla

health care sites. through its contracts) Systems, Ascension from its
members.

Health Systems, Catholic Health Initiatives, Hospital Sisters Health
Systems, Ministry Health Care, Provena Health, Saint

Clare's Health Services, Sisters of St. Francis, St. John Health System,
Trinity Health - National Region, Wheaton Franciscan Services, Inc., and Via
Christi Health Systems.

Broadlane 2.3 For- profit Broadlane is owned by a For- profit and Customers
include

Broadlane has two mix of for- profit and not Not- for- profit 476 acute care
types of purchasing for- profit organizations

hospitals and 1,200 to programs. Customers and individual investors. 1,500
other health that buy through one Information about each care sites.

program buy almost specific investor was not 80 percent of their readily
available.

goods and services through the GPO. The second program is supplemental, with
more lenient contracting and buying requirements.

(Continued From Previous Page)

Current annual purchasing

GPO's volume profit

Owners' profit Members/ customers

Miscellaneous GPO

(in billions) status Owners of the GPO status using GPO contracts features

HPPI 1.5 For- profit HPPI is owned by VHA, a VHA: for- profit, Members
include 998

Agreements offered nationwide network of

UHC: not- forprofit acute- care facilities by HPPI are community- owned
health

5,022 other health negotiated by care systems and their care sites.

Novation. physicians, and UHC, an alliance of academic

HPPI was created to health centers.

enable VHA and UHC to market Novation agreements to health

care organizations that do not belong to either VHA or UHC.

Note: Current annual purchasing volume was obtained from GPOs or their Web
sites during April, 2002. The year that corresponds to a GPO?s purchasing
volume may differ by GPO; GPO Web sites often referred to this amount as the
GPO?s "current annual purchasing volume." Source: GPO Web sites and GAO
interviews with GPOs. Additional information was obtained from Modern
Healthcare (http:// www. modernhealthcare. com/ charts/ gpo_ chart. php3?
id= 1), accessed September, 2001. (290183)

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Appendix I Characteristics Of Selected GPOs

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Appendix I Characteristics Of Selected GPOs

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