GROUP 

PURCHASING 

ORGANIZATIONS

Funding Structure 

Has Potential 

Implications for 

Medicare Costs

Report to Congressional Requesters

October 2014

GAO-15-13

United States Government Accountability Office
United States Government Accountability Office

Highlights of GAO-15-13, a report to 

congressional requesters

October 2014

GROUP PURCHASING ORGANIZATIONS

Funding Structure Has Potential Implications for 

Medicare Costs

Why GAO Did This Study

GPOs are purchasing intermediaries 

that negotiate contracts for medical 

products and services. GPOs contract 

with vendors and receive a fee from 

them when providers purchase from 

the vendor. These fees are a source of 

operating revenue for GPOs, and they 

are allowed to collect them if they meet 

the requirements of a safe harbor to 

the “anti-kickback” provision of the 

Social Security Act—known as the 

Anti-Kickback statute—which would 

otherwise prohibit such fees.

You raised questions about GPOs’ 

contracting practices and about the 

impact of the GPO funding structure. 

This report examines (1) GPO 

contracting practices and the reported 

effects of these practices; (2) how 

GPOs are funded and the reported 

effects of this funding structure. To do 

this work, GAO sent a questionnaire to 

representatives of the 5 largest 

national GPOs about their contracting 

practices and sources of revenue; 

reviewed the literature on the effects of 

the GPO funding structure; reviewed 

laws, regulations, and guidance on the 

GPO safe harbor; interviewed 

representatives from HHS, FTC, the 

Department of Justice (DOJ), vendors, 

hospitals, trade associations, and 

economic and health care experts.

What GAO Recommends

GAO recommends that the Secretary 

of HHS determine whether hospitals 

are appropriately reporting 

administrative fee revenues on their 

Medicare cost reports and take steps 

to address any under-reporting that 

may be found. HHS agreed with the 

recommendation. GAO also 

incorporated technical comments from 

HHS, FTC, DOJ, and GPOs.

What GAO Found

According to representatives from the 5 large group purchasing organizations 

(GPO) in GAO’s review, GPO contracting generally involves three phases: 

(1) issue requests for proposals or invitations for vendors to competitively bid for 

a contract, (2) review proposals, and (3) negotiate and award contracts. GPOs 

reported negotiating and awarding different types of contracts to vendors in 

different situations. All 5 GPOs reported that the majority of the contracts they 

negotiate are either dual-source or multi-source, meaning that the majority of the 

products sold through their contracts have more than one vendor available on the 

GPOs’ contracts. In addition, all GPOs reported that they did not bundle 

unrelated products and awarded mostly contracts with 3-year terms in 2012. The 

views of experts and others GAO interviewed on the effects of GPO contracting 

practices varied on issues such as whether the practices affect product 

innovation. In addition, while officials from the Federal Trade Commission (FTC) 

stated that they continue to receive and review complaints each year about GPO 

contracting practices, in the last 10 years, the FTC has not initiated any 

enforcement actions directed at GPO conduct.

The 5 GPOs in GAO’s review reported being predominately funded by 

administrative fees collected from vendors, which were almost always based on 

a percentage of the purchase price of products obtained through GPO contracts. 

The 5 GPOs reported that these fees totaled about $2.3 billion in 2012, and 

nearly 70 percent of these fees were passed on to GPO customers or owners. 

The literature and the views of experts varied widely on the effects of this funding 

structure. 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. However, to the extent that the vendor fee-based funding 

structure affects prices for medical products and services, Medicare payment 

rates may be affected over time through the annual update to hospital payment 

rates, which relies, in part, on information that hospitals report to the Centers for 

Medicare & Medicaid Services (CMS)—an agency in the Department of Health 

and Human Services (HHS). Moreover, Medicare payments also could be 

affected if hospitals do not account for revenue they receive from GPOs, which 

they are required to report as a reduction in costs on their cost reports. However, 

the extent to which hospitals are reporting this revenue is not known because this 

has not been reviewed by HHS since 2005, and CMS officials stated that the 

agency has not specifically identified this as information that should be routinely 

audited. Repealing the safe harbor—which allows administrative fees—could 

eliminate the potential effects of the GPO funding structure on Medicare payment 

rates, but experts and others stated that this could be disruptive to the health

care supply chain at least in the near term. Over the longer term, GPOs and 

hospital systems are likely to adapt to the new market environment. While a 

repeal of the safe harbor provision would require a clearer understanding of the 

impact of the GPO funding structure, hospitals’ potential underreporting of 

administrative fee revenue presents an immediate risk that can be addressed 

within the current GPO funding structure.

View GAO-15-13. For more information, 

contact Linda Kohn at (202) 512-7114 or 

kohnl@gao.gov.
 

Page i GAO-15-13 Group Purchasing Organizations

Letter 1 

Background 4

GPOs Reported Generally Utilizing a Three-Phased Approach to 

Competitively Negotiate Contracts with Vendors 10

While Experts’ Views on the Effects of Vendor Funding of GPOs 

Varied, the Funding Structure May Affect Medicare Payment 16

Conclusions 22

Recommendation for Executive Action 23

Agency and Third-Party Comments and Our Evaluation 24

Appendix I Scope and Methodology 28

Appendix II Comments from the Department of Health and Human Services 32

Appendix III GAO Contact and Staff Acknowledgments 34

Figures

Figure 1: General Flow of Administrative Fees 6

Figure 2: GPOs’ Three-Phased Competitive Bidding Approach to 

Negotiating Contracts 10

Figure 3: Average Percentage Distribution of the Reported 

Sources of Revenue in 2012 for the Five Largest National 

GPOs 17

Contents
 

Page ii GAO-15-13 Group Purchasing Organizations

Abbreviations

CMS Centers for Medicare & Medicaid Services

DOJ Department of Justice

FDA Food and Drug Administration

FTC Federal Trade Commission

GPO group purchasing organization

HGPII Healthcare Group Purchasing Industry Initiative

HHS Department of Health and Human Services

HHS-OIG HHS Office of the Inspector General

HSCA Healthcare Supply Chain Association

IV intravenous

MDMA Medical Device Manufacturers Association

MedPAC Medicare Payment Advisory Commission

RFP request for proposal

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Page 1 GAO-15-13 Group Purchasing Organizations

441 G St. N.W.

Washington, DC 20548

October 24, 2014

Congressional Requesters

Increases in health care expenditures in recent years have intensified 

congressional scrutiny of the costs of medical care. 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.1

When a provider purchases a product or service from a vendor that has a 

contract with a GPO, the vendor pays the GPO an administrative fee, 

generally based on the purchase price paid by the provider. These fees 

are a source of operating revenue for GPOs, and they are allowed to 

collect them if they meet the requirements of a safe harbor to the “antikickback” provision of the Social Security Act—known as the AntiKickback statute—which would otherwise prohibit such fees.

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. Providers often use purchasing intermediaries 

known as group purchasing organizations (GPO) to negotiate contracts 

for products and services with vendors such as manufacturers, 

distributors, and other suppliers. Providers can then purchase products 

and services from the vendors for the prices negotiated by the GPOs.

2

 

1

Congressional Budget Office, The Budget and Economic Outlook: Fiscal Years 2014 to 

2024 (Washington, D.C.: Feb. 2014).

This “safe 

harbor” provision was enacted in 1986 to allow these payments, which 

2

The Medicare Anti-Kickback statute, enacted as a part of the Social Security 

Amendments of 1972, specifically prohibits the knowing or willful solicitation, receipt, offer, 

or payment of remuneration, including any kickback, bribe, or rebate, directly or indirectly, 

overtly or covertly, in cash or in kind, to induce or reward the purchase of an item or 

service for which payment may be made under a federal health care program. See 

42 U.S.C. § 1320a-7b(b)(1)-(2). 
 

Page 2 GAO-15-13 Group Purchasing Organizations

had constituted a violation of the Anti-Kickback statute.3 According to a 

House of Representatives Committee report, the Committee believed that 

GPOs could help reduce health care costs by enabling hospitals to obtain 

volume discounts from vendors and that a safe harbor should be 

established to ensure that GPOs and the vendors with which they 

contract do not risk prosecution as a result of the payment and collection 

of administrative fees.4

Over more than a decade, members of Congress and others have raised 

questions about certain GPO contracting practices and the funding 

structure that includes vendor-paid fees. For example, questions have 

been raised about sole-source contracting, in which GPOs may contract 

with only one vendor for a given product when multiple vendors of 

comparable products are available; product bundling, in which price 

discounts are linked to purchases of a specified group of products; and 

long-term contracts of 5 years or more. Members of Congress have also 

raised questions about the oversight of GPOs by the Federal Trade 

Commission (FTC), the Department of Justice (DOJ), and the Department 

of Health and Human Services (HHS), as well as GPO self-regulation 

However, the GPO funding structure protected 

under this safe harbor has raised questions about whether GPOs are in 

fact negotiating the lowest possible prices for their customers because of 

an inherent conflict: while GPOs represent the interests of health care 

providers to obtain needed products and services at a lower price, they 

are funded based on a percentage of the costs of products purchased 

from the vendors they negotiate with on behalf of providers.

 

3

Omnibus Budget Reconciliation Act of 1986, Pub. L. No. 99-509, § 9321(a), 100 Stat. 

1874, 2016 (Oct. 21, 1986) (codified at 42 U.S.C. § 1320a-7b(b)(3)(C)); H.R. Rep. No. 99-

1012, at 309 (1986) (Conf. Rep.). In 1987, Congress directed the Department of Health 

and Human Services (HHS) to issue regulations designating safe harbors for various 

payment and business practices that would be protected from enforcement under the AntiKickback statute, including GPOs. See 42 C.F.R. § 1001.952(j).

4

H.R. Rep. No. 99-727, at 72-73 (1986).
 

Page 3 GAO-15-13 Group Purchasing Organizations

through the Healthcare Group Purchasing Industry Initiative (HGPII). We 

issued five reports between 2002 and 2012 related to these issues.5

You raised questions about GPOs’ contracting practices and about the 

effects of the GPO funding structure.6

1. GPO contracting practices and the reported effects of these practices; 

and

This report examines

2. how GPOs are funded and the reported effects of this funding 

structure.

To address these objectives, we sent a questionnaire to representatives 

of the five largest national GPOs by purchasing volume about their 

contracting practices and sources of revenue, including administrative 

fees collected from vendors.7

 

5

See GAO, Group Purchasing Organizations: Pilot Study Suggests Large Buying Groups 

Do Not Always Offer Hospitals Lower Prices, 

We also conducted a review of the literature 

regarding the effects of the GPO funding structure. In addition, we 

reviewed documentary evidence of the factors that GPOs consider when 

contracting for products and services, and reviewed published articles in 

economic and law journals, as well as analyses of the healthcare market. 

We also reviewed laws, legislative history, regulations, and guidance 

GAO-02-690T (Washington, D.C.: April 30, 

2002); Group Purchasing Organizations: Use of Contracting Processes and Strategies 

to Award Contracts for Medical-Surgical Products, GAO-03-998T (Washington, D.C.: 

July 16, 2003); Group Purchasing Organizations: Research on Their Pricing Impact on 

Health Care Providers, GAO-10-323R (Washington, D.C.: Jan. 29, 2010); Group 

Purchasing Organizations: Services Provided to Customers and Initiatives Regarding 

Their Business Practices, GAO-10-738 (Washington D.C.: Aug. 24, 2010); Group 

Purchasing Organizations: Federal Oversight and Self-Regulation, GAO-12-399R

(Washington, D.C.: March 30, 2012).

6

You also raised questions about the number of shortages of generic injectable drugs in 

recent years and noted that some experts had raised concerns that GPO contracting 

practices were a primary cause of these shortages. We issued a report and a testimony 

on drug shortages in February 2014 and have ongoing work focused on the causes and 

management of drug shortages. See GAO, Drug Shortages: Public Health Threat 

Continues, Despite Efforts to Help Ensure Product Availability, GAO-14-194 (Washington, 

D.C.: Feb. 10, 2014); and Drug Shortages: Threat to Public Health Persists, Despite 

Actions to Help Maintain Product Availability, GAO-14-339T (Washington, D.C.: Feb. 10, 

2014).

7

The five largest national GPOs by purchasing volume are Premier, Novation, MedAssets, 

HealthTrust Purchasing Group, and Amerinet. See GPO Facts & Figures; Largest Group 

Purchasing Organizations (Healthcare Purchasing News, October 2012).
 

Page 4 GAO-15-13 Group Purchasing Organizations

related to the GPO safe harbor. We interviewed FTC, DOJ, and HHS 

officials about their oversight of GPOs. To obtain contextual information 

about their experiences with GPOs, we interviewed representatives from 

five hospitals and eight vendors of medical products. We selected 

hospitals based on variation in the number of hospital beds, the extent to 

which the hospital had an ownership interest in a GPO, and which GPOs 

they used. We selected vendors based on variation in the types of 

products manufactured. To determine the reported effects of the GPO 

funding structure, we interviewed 13 experts in economics, the healthcare 

market, and purchasing cooperatives. We identified these experts through 

our search of the relevant literature on GPOs, healthcare markets, 

purchasing cooperatives, and economics. We also interviewed trade 

associations representing GPOs and vendors of medical products. 

Information obtained from interviews is not generalizable. A more 

extensive discussion of our scope and methodology appears in 

appendix 1.

We conducted this performance audit from June 2013 through October 

2014 in accordance with generally accepted government auditing 

standards. Those standards require that we plan and perform the audit to 

obtain sufficient, appropriate evidence to provide a reasonable basis for 

our findings and conclusions based on our audit objectives. We believe 

that the evidence obtained provides a reasonable basis for our findings 

and conclusions based on our audit objectives.

GPOs are organizations that act as purchasing intermediaries that 

negotiate contracts between health care providers and vendors of 

medical products and services, including manufacturers, distributors, and 

other suppliers. The intent of GPOs is to save their customers money by 

pooling their purchases in order to obtain lower prices and by taking on 

the administrative burden of negotiating contracts with vendors. Through 

GPO-negotiated contracts, health care providers can purchase products 

from vendors, including medical devices, commodities, branded drugs, 

and generic drugs, as well as services, such as laundry and food 

services. The Healthcare Supply Chain Association (HSCA)—a trade 

association representing 14 healthcare GPOs—estimates that U.S. 

hospitals use, on average, 2 to 4 GPOs per facility, and nearly every 

hospital in the United States—approximately 96 percent to 98 percent—

purchases through GPO contracts.

According to HSCA, the first GPO was established in 1910 by the 

Hospital Bureau of New York, and by the 1980s, there were more than 

Background
 

Page 5 GAO-15-13 Group Purchasing Organizations

100 GPOs. While over 600 GPOs in various markets are currently active 

in the United States, a relatively small number of GPOs dominate the 

healthcare market for products and services sold through GPO contracts. 

According to HSCA, GPOs vary in size, type of ownership, and the 

contracting services they offer their customers. For example, some GPOs

• are owned by hospitals, while others are not.

• operate nationally, while others operate regionally to negotiate 

contracts with local vendors.

• serve not-for-profit hospitals, others serve for-profit hospitals, and 

some serve both.

• offer a broad portfolio of products and services, while others focus on 

specific product categories or certain types of health care, such as 

long-term care.

In recent years, the GPO market has become more consolidated as some 

large GPOs have merged. The five largest national GPOs have reported 

contracting for a similar, broad portfolio of products, including, for 

example, commodities such as cotton balls and bandages, devices such 

as pacemakers and stents, and branded and generic drugs. During fiscal 

year 2012, the 5 largest GPOs by purchasing volume reported a total 

purchasing volume of $130.7 billion.

During the contracting process for products and services, GPOs negotiate 

the payment of administrative fees by the vendor to the GPO. In addition 

to using these administrative fees to cover operating expenses, GPOs 

may distribute a portion of the fees to their health care provider customers 

or use them to finance other ventures, such as investing in other 

companies. GPOs may also use administrative fees to fund additional 

services outside of group purchasing for their customers, which can 

include custom contracting; services related to product evaluation, such 

as clinical evaluation and standardization of products; assessments of 

new technology; benchmarking data services; and marketing and 

insurance services.

8 (See fig. 1.)

 

8

For additional information on services GPOs provide to their customers, see 

GAO-10-738. 

Administrative Fees
 

Page 6 GAO-15-13 Group Purchasing Organizations

Figure 1: General Flow of Administrative Fees

HHS’s Office of the Inspector General (HHS-OIG) is responsible for 

enforcing the Anti-Kickback statute.9 The Anti-Kickback statute, originally 

enacted in 1972 and amended over the years, generally prohibits the 

knowing or willful receipt or payment of fees to induce or reward the 

purchase of an item or service for which payment may be made under a 

federal health care program.10 According to HHS-OIG, the main purpose 

of the Anti-Kickback statute is to protect patients and federal health care 

programs, including Medicare, from fraud and abuse by curtailing the 

corrupting influence of money on health care decisions.11 In 1986 

Congress added a “safe harbor” provision to the Anti-Kickback statute to 

allow for fees paid by vendors to a GPO.12

 

9

HHS-OIG shares this responsibility with DOJ.

In addition, in 1991, HHS-OIG 

issued a regulation establishing the requirements that GPOs must meet in 

10The statute specifically prohibits the knowing or willful solicitation, receipt, offer, or 

payment of remuneration, including any kickback, bribe, or rebate, directly or indirectly, 

overtly or covertly, in cash or in kind, to induce or reward the purchase of an item or 

service for which payment may be made under a federal health care program.

11Department of Health and Human Services Office of Inspector General, Fact Sheet: 

Federal Anti-Kickback Law and Regulatory Safe Harbors, (Washington, D.C.: November 

1999). 

12Omnibus Budget Reconciliation Act of 1986, Pub. L. No. 99-509, § 9321(a), 100 Stat. 

1874, 2016 (codified at 42 U.S.C. § 1320a-7b(b)(3)(C)). 

Federal Oversight of 

GPOs

HHS
 

Page 7 GAO-15-13 Group Purchasing Organizations

order to qualify for safe harbor protection under the Anti-Kickback 

statute.13

• have a written agreement with its customers either stating that the 

contract administrative fees are to be 3 percent or less of the 

purchase price, or specifying the amount or maximum amount that 

each vendor will pay; and

Under the regulation, a GPO must

• disclose in writing to each customer, at least annually, and to the 

Secretary of HHS upon request, the amount of contract administrative 

fees received from each vendor with respect to purchases made by or

on behalf of the customer.14

The GPO safe harbor statutory provision and regulation do not require 

HHS-OIG to routinely review or monitor GPO written agreements and 

disclosures. However, HHS-OIG has the authority to investigate potential 

violations of the Anti-Kickback statute. HHS-OIG also has the authority to 

impose administrative penalties, including civil money penalties, and 

exclusion from federal health care programs on GPOs that violate the 

statute.15 HHS-OIG also may refer such violations to DOJ, which in turn 

may bring criminal and civil actions against GPOs that it determines to 

have violated the Anti-Kickback statute.16

 

13See 42 C.F.R. § 1001.952(j). In 1987, Congress directed HHS to issue regulations 

designating safe harbors for various payment and business practices that would be 

protected from enforcement under the Anti-Kickback statute, including GPOs. Medicare 

and Medicaid Patient and Program Protection Act of 1987, Pub. L. No. 100-93, § 14, 101 

Stat. 680, 697. HHS-OIG refers to the statutory provision as an “exception” and the 

regulation as a “safe harbor.” In this report, we refer to each as a “safe harbor.”

HHS-OIG does not have 

14To qualify for safe harbor protection, a GPO must be authorized to act as a purchasing 

agent for a group of individuals or entities that provide services for which payment may be 

made under a federal health care program and who are neither wholly owned by the GPO 

nor subsidiaries of a parent corporation that wholly owns the GPO, either directly or 

through another wholly-owned entity. See 42 C.F.R. § 1001.952(j). GPOs that are 

uncertain as to whether their arrangements qualify for safe harbor protection may request 

an advisory opinion from HHS-OIG. 42 U.S.C. § 1320a-7d(b).

15See 42 U.S.C. §§ 1320a-7(b)(7), 1320a-7a(a)(7). 

16DOJ may bring civil actions against GPOs that violate the Anti-Kickback statute under 

the False Claims Act. The False Claims Act is a federal fraud and abuse law that prohibits 

knowingly presenting, or causing to be presented, a false or fraudulent claim for federal 

payment. 31 U.S.C. §§ 3729-3733. A Medicare claim that results from a kickback may 

render it false or fraudulent, creating liability under the civil False Claims Act as well as the 

Anti-Kickback statute. See 31 U.S.C. §§ 3729-3733.
 

Page 8 GAO-15-13 Group Purchasing Organizations

general oversight authority over GPOs because GPOs do not directly 

participate in Medicare and, therefore, do not enter provider agreements 

with the Centers for Medicare & Medicaid Services (CMS)—a component 

of HHS.

In 2012, we found that, according to officials from HHS-OIG, the office 

had not routinely exercised its authority to request and review disclosures 

related to GPOs’ administrative fees, but it had collected information on 

GPOs’ administrative fees while conducting audits of hospitals’ cost 

reports.17 The provision and receipt of discounts, rebates, and net 

revenue distributions by GPOs to hospitals is protected from prosecution 

under the Anti-Kickback statute by another provision—known as the 

“discount safe harbor.” Specifically, a discount or other reduction in price 

obtained by a Medicare or Medicaid provider is protected from 

prosecution if the reduction in price is properly disclosed and 

appropriately reflected in the provider’s Medicare, or applicable state 

Medicaid, cost report.18

HHS-OIG conducted two audits in 2005 in which it reviewed the 

administrative fees that six national GPOs received from vendors and 

how selected customers of the GPOs accounted for revenue distributions 

from the GPOs on their Medicare cost reports.19

 

17See 

The cost reports are 

used, in part, to set hospital payment rates for Medicare. HHS-OIG found 

that some of the GPO customers did not fully account for revenue 

GAO-12-399R. Medicare certified institutional providers, such as hospitals, are 

required to submit an annual cost report to a fiscal intermediary, a Medicare contractor. 

The cost report contains provider information such as facility characteristics, utilization 

data, costs and charges by cost center, Medicare settlement data, and financial statement 

data. Medicare contractors use these data to compute some elements of Medicare 

reimbursement. The information in cost reports is one of the primary sources that the 

Medicare Payment Advisory Commission uses in reviewing the reasonableness of 

Medicare payment levels.

1842 U.S.C. § 1320a-7b(b)(3)(A); 42 C.F.R. 1001.952(h). Medicare regulations also 

generally require health care providers to offset purchase discounts, allowances, and 

refunds of expenses against expenses on their Medicare cost reports. 42 C.F.R. § 413.98.

19See Department of Health and Human Services, Office of Inspector General, Review of 

Revenue From Vendors at Three Group Purchasing Organizations and Their Members, A05-03-00074 (Washington, D.C.: January 2005) and Review of Revenue From Vendors at 

Three Additional Group Purchasing Organizations and Their Members, A-05-04-00073 

(Washington, D.C.: May 2005).
 

Page 9 GAO-15-13 Group Purchasing Organizations

distributions from the GPOs on their Medicare cost reports.20

DOJ and FTC are responsible for enforcing federal antitrust laws, which 

GPOs are required to follow.

HHS-OIG 

recommended that CMS provide specific guidance on the proper 

treatment of revenue distributions received from GPOs on Medicare cost 

reports. In December 2011, CMS issued an update to its provider manual 

specifying that these distributions must be properly accounted for on the 

cost reports.

21 The agencies have the authority to 

investigate a GPO’s potential violation of federal antitrust laws, identified 

either through a complaint filed with the agencies, through notification of a 

merger, or through information obtained through the agencies’ own 

efforts. The agencies have the authority to resolve violations in a number 

of ways ranging from compliance under a consent order, to an 

administrative complaint, to filing a criminal or civil suit.22

 

20For example, in its January 2005 report, HHS-OIG reviewed how 21 hospitals accounted 

for the net revenue distributed by 3 GPOs. They found that these hospitals did not fully 

account for the net revenue distributions on their Medicare cost reports. Specifically, while 

members of one GPO offset 92 percent of distributions, members of another offset only 

54 percent. In total, the 21 members offset 78 percent of revenue distributed by GPOs. In 

addition, in a May 2005 report, HHS-OIG reviewed Medicare cost reports for 38 hospitals 

under 7 health care systems that received a total of $123 million in administrative fee 

revenue. They found that one of the health care systems did not fully account for net 

revenue distributions on its Medicare cost reports. As a result, administrative fees of about 

$5 million related to 6 of the 38 hospitals reviewed were not offset on Medicare cost 

reports.

In addition to its 

antitrust enforcement authority, DOJ also has the authority to bring 

criminal and civil actions against GPOs that it determines to have violated 

the Anti-Kickback statute.

21The Sherman Act is enforced by DOJ and prohibits restraints of trade and 

monopolization. See 15 U.S.C. §§ 1-7. The Federal Trade Commission Act, enforced by 

FTC, bans unfair methods of competition and unfair or deceptive acts or practices. See 

15 U.S.C. §§ 41-58. The Clayton Act, jointly enforced by DOJ and FTC, regulates mergers 

and acquisitions, among other things, and gives DOJ and FTC, under the Hart-ScottRodino Amendments to the Clayton Act, the authority to review certain proposed mergers 

before they occur. See 15 U.S.C. §§ 12-27.

22A consent order is a voluntary settlement agreement entered into by FTC and an 

individual or entity that the agency has alleged is engaged in activity that violates the 

Federal Trade Commission Act or the Clayton Act. See 16 C.F.R. §§ 2.31-2.34. Voluntary 

settlement agreements entered into by DOJ, often known as consent decrees, are filed in 

federal district court to resolve a legal challenge by DOJ and are approved by the court 

upon a finding that they are in the public interest. 15 U.S.C. § 16 (b)-(h).

DOJ and FTC
 

Page 10 GAO-15-13 Group Purchasing Organizations

In 2012, we found that DOJ and FTC had investigated complaints against 

GPOs. We identified one lawsuit filed by DOJ against a GPO, while FTC 

officials told us the agency had not taken any enforcement action against 

a GPO since 2004.23 Officials said that while FTC has investigated GPOs 

to determine whether their behavior was anticompetitive, the agency has 

not brought any cases to court or issued any consent orders. An FTC 

official told us that in order to take enforcement action against a GPO, 

FTC would need to determine that a GPO violated the law and an 

enforcement action was in the public interest.

According to the GPOs in our review, GPO contracting generally involves 

three phases: (1) issue requests for proposals (RFP) or invitations for 

vendors to competitively bid for a contract, (2) review proposals, and 

(3) negotiate and award contracts. (See fig. 2.)

Figure 2: GPOs’ Three-Phased Competitive Bidding Approach to Negotiating Contracts

 

23In 2007, DOJ challenged actions by a GPO for temporary nursing services and its 

member hospitals, alleging that the GPO caused the wages paid to temporary nurses in 

Arizona to fall below competitive levels. See U.S. v. Ariz. Hosp. and Healthcare Assn., 

CV07-1030-PHX (D.Ariz. filed May 22, 2007).

GPOs Reported 

Generally Utilizing a 

Three-Phased 

Approach to 

Competitively 

Negotiate Contracts 

with Vendors
 

Page 11 GAO-15-13 Group Purchasing Organizations

Issue RFPs. Representatives from all five GPOs in our review reported 

generally issuing RFPs as part of an open bidding process for products 

and services to place on contract. Issuing RFPs includes notifying 

vendors, and publicly posting information such as bid calendars, minimum 

requirements for vendors, and criteria that the GPOs will weigh when 

considering competing proposals. All five GPOs in our review have 

posted on their websites information about the minimum requirements 

that vendors must meet. For example, one GPO’s website states that 

vendors must be the original equipment manufacturer or demonstrate an 

exclusive marketing relationship for the products included in the RFP, 

among other things. Another GPO specifies meeting minimum levels of 

product quality, durability, and cost-effectiveness, as well as requirements 

for the financial stability and long-term viability of the vendor. A sample 

RFP provided by a GPO states that during the competitive bidding 

process, it will consider a vendor’s product capabilities, maintenance, and 

ability to upgrade, as well as pricing and other financial factors.

Four of the five GPOs in our review reported that under certain limited 

circumstances, they may award contracts to vendors without issuing 

RFPs. For example, these “non-bid” contracts may be awarded to 

vendors that present a proprietary, patented, or innovative product; if a 

small group of customers request a local or regional vendor contract; or if 

a product supply shortage or other unique circumstances arise. The fifth 

GPO reported that all contracts are awarded through a competitive 

bidding process, even if there is only one bidder. A representative from 

one generic drug manufacturer stated that, while there is not much 

opportunity for innovation in the generic drug market, GPOs will award 

contracts outside of the three-phased competitive bidding process to 

vendors that have innovative packaging—such as flip-top vials versus a 

pre-mixed bag—if it benefits their customers. A representative from this 

manufacturer stated that GPO contracts with vendors generally contain 

provisions that the GPOs have the right to add additional vendors of the 

same product if the other vendor has innovative packaging.

Review proposals. All five GPOs in our review reported considering 

multiple aspects of a vendor and product when reviewing proposals, 

including weighing financial and nonfinancial criteria, and then scoring 
 

Page 12 GAO-15-13 Group Purchasing Organizations

competing vendors in order to inform their contracting decisions.24

Negotiate and award contracts. GPOs reported negotiating and 

awarding different types of contracts to vendors in different situations. All 

five of the GPOs in our review reported that the majority of the contracts 

they negotiate are either dual-source or multi-source, meaning that the 

majority of the products sold through their contracts have more than one 

vendor available on the GPOs’ contracts. In addition, all five GPOs 

reported that they did not bundle unrelated products, and awarded mostly 

contracts with 3-year terms in 2012. All five GPOs also reported including 

provisions in some contracts—referred to as commitment provisions—in 

which customers that purchase a certain percent of product volume 

receive a rebate or reduced price. For example, a vendor might offer 

greater discounts to GPO customers that purchase at least 80 percent of 

a certain group of products from that manufacturer. Commitment 

requirements can also be tiered, resulting in the opportunity for a 

customer to commit to different percentages of purchasing volume: the 

higher the percentage, the lower the price.

For 

example, one GPO reported reviewing aspects such as a vendor’s ability 

to provide sufficient product to its customers, any documentation of 

concerns raised by Food and Drug Administration (FDA) inspections, 

quality and safety of the products, the source of raw materials, and bar 

code readability. A representative from another GPO said that the GPO 

considers the “total value” of a product or service for their customers, not 

necessarily solely the price. The total value includes, for example, product 

quality, upfront price, discounts, rebates, and anticipated administrative 

fee revenue. This representative said that in certain situations, such as

with multiple possible suppliers of a product, a GPO customer would not 

necessarily want to purchase the product with the lowest price.

Representatives from all five GPOs also reported that, in certain 

situations, they negotiated sole-source contracts, contracts that bundled 

related products, and long-term contracts of 5 years or more. All five 

 

24GPOs have reported being advised by committees consisting of clinical, pharmacy, and 

technical experts from their customers—such as physicians and nurses who would be 

using the products and services being evaluated—in making contracting decisions. 

According to the GPOs, these committees consider customer needs, product quality, and 

pricing before making recommendations for to the GPOs about products and services to 

place on GPO contracts.
 

Page 13 GAO-15-13 Group Purchasing Organizations

GPOs in our review reported that their contracting practices have not 

changed much over time.

• Sole-source contracts: All five GPOs reported that they do negotiate 

sole-source contracts when it is advantageous to their customers, 

though some GPOs reported negotiating a higher proportion of solesource contracts than others. One GPO said that about 18 percent of 

its customers’ spending through the GPO is through sole-source 

contracts. Three GPOs reported sole-source contracting for branded 

drugs and commodities, and four GPOs reported sole-source 

contracting for generic drugs, including generic injectable drugs. For 

example, one GPO reported that in 2012 it had sole-source contracts 

in effect for generic drugs including an oncology drug—oxaliplatin, 

and an antiviral—acyclovir. Representatives from this GPO reported 

taking a vendor’s performance and supply capacity into consideration 

when determining whether to sole-source contract with a vendor. For 

example, the representatives stated that the GPO no longer solesource contracts with a vendor that had failed to comply with FDA 

standards. Representatives from one vendor stated that, as a result of 

recent drug shortages, some GPOs have developed a philosophy to 

contract with as many vendors as possible to ensure a continuous 

supply for their customers, but that other GPOs choose to contract 

with a limited number of vendors and hold those vendors accountable 

for supplying their customers.

• Contracts that bundle related products: Representatives from all five 

GPOs in our review reported negotiating contracts that offer discounts 

based on the purchase of bundled products, but restricting bundling to 

products that are used together or are otherwise related in order to 

create efficiencies and help standardize products for their customers. 

Several GPOs reported bundling related commodities, and one GPO 

reported bundling related branded pharmaceuticals. Representatives 

from one GPO stated that the GPO bundles related products in the 

same product category, such as intravenous (IV) sets and solutions, 

diapers and underpads for incontinence care, and mobility aids such 

as walkers, crutches, and canes. Representatives from another GPO 

stated, for example, that it negotiates bundled contracts for 

interventional coronary products including stents, balloons, catheters, 

and guide wires. In addition, another GPO reported that, in 2013, it 

implemented a program through which participating customers can 

standardize their purchases for up to 40 commodity categories for 

additional discounts.

• Long-term contracts: Representatives from all five GPOs reported 

awarding longer terms for certain types of products, such as IV 
 

Page 14 GAO-15-13 Group Purchasing Organizations

systems and laboratory products. One GPO reported that its 

customers requested long-term contracts for IV systems because they 

found it difficult to switch IVs and pumps every 3 years, and one 

manufacturer we interviewed stated that the investment in time and 

money needed to train clinicians in how to use a brand of IV products 

makes it inconvenient and disruptive for hospitals to change these 

products. A representative from another GPO stated that they often 

negotiate longer-term contracts for chemistry analyzers and the 

specific reagents that are used with them, and had recently negotiated 

a 7-year contract for both the analyzers and reagents together.

Finally, all 5 GPOs in our review provide a grievance process for vendors 

who are not awarded contracts. A representative of one GPO stated that, 

when vendors are not awarded a contract and want to know why, GPO 

staff debrief the vendor on how to make changes to increase their 

chances of being awarded a contract during the next RFP cycle. After this 

debrief, a representative of the GPO stated that vendors can file a formal 

grievance with the GPO. Another GPO posted on its website that any 

vendor may file a grievance within 30 days of the announcement of the 

contract award. The website states that the GPO will acknowledge receipt 

of the grievance immediately, and provide a detailed response within 

90 days, including the GPO’s rationale for the final decision. In addition to 

each GPO’s separate grievance processes, HGPII—which GPOs formed 

in 2005 in order to promote best practices and public accountability 

among member GPOs—also has a formal grievance process that 

vendors may use to lodge complaints against GPOs. However, HGPII 

representatives told us that no complaints have been formally submitted. 

They explained that, while it is possible that there are no vendor 

complaints, they believe it is more likely that not enough vendors know 

about the grievance process. HGPII representatives stated that they have 

brought on board an in-house ethicist to review HGPII’s grievance 

process.

The views of experts and others we interviewed on the effects of GPO 

contracting practices varied. For example, some experts and other 

stakeholders contend that GPOs’ contracting practices may result in a 

reduction in product innovation. Specifically, one expert said that if 

manufacturers believe that it is impossible to get onto a GPO contract, but 

that such a contract is necessary for market success, then manufacturers 

will not innovate and create new products. However, others we 

interviewed told us that GPO contracting practices do not block access to 

innovative products. For example, all 5 of the largest GPOs reported 

using a competitive bidding process as well as contract clauses that allow 
 

Page 15 GAO-15-13 Group Purchasing Organizations

for innovative products to be placed on existing contracts. The GPOs in 

our review also reported participating in forums to help identify new, 

potentially innovative, products in the marketplace. However, they said 

vendors of products that are essentially the same as other products 

already on GPO contracts need to compete through the competitive 

bidding process for the opportunity to be awarded a contract. While 

officials from the FTC told us that they continue to receive complaints 

each year about the potential anticompetitive effects of GPO contracting 

practices—including complaints that GPOs have contributed to recent 

shortages of generic injectable drugs—in the last ten years, the FTC has 

not initiated any enforcement actions directed at GPO conduct. FTC staff 

explained that they have faced significant challenges in investigating 

allegations of anticompetitive behavior of GPOs due to a lack of data. 

They stated that there are a number of significant methodological 

challenges related to conducting a rigorous economic analysis of the 

GPO industry. In addition, a DOJ official told us that the agency has not 

brought any actions or issued any guidance on GPOs since 2007.25 He 

also stated that the DOJ has received one GPO-related complaint since 

2012 when our most recent prior report was issued.

 

25In 2007, DOJ challenged actions by a GPO for temporary nursing services and its 

member hospitals, alleging that the GPO caused the wages paid to temporary nurses in 

Arizona to fall below competitive levels. In May, 2007, DOJ reached a settlement with the 

GPO, which prohibits the GPO and its hospital customers from agreeing on competitively 

sensitive contract terms between hospitals and nursing staff agencies, including uniform 

bill rates paid to nursing staff agencies. The consent decree also prohibits the GPO from 

circumventing the settlement by engaging in anticompetitive activity, such as boycotts or 

other discriminatory conduct, against nonparticipating nursing agencies or any hospitals 

that sought to use them. The GPO that was the subject of this lawsuit was not one of the 

GPOs included in our review. See U.S. v. Ariz. Hosp. and Healthcare Assn., CV07-1030-

PHX (D.Ariz. filed May 22, 2007).
 

Page 16 GAO-15-13 Group Purchasing Organizations

The five GPOs in our review reported being predominately funded by 

administrative fees collected from vendors, and the experts’ views of the 

effects of this funding structure varied widely. In addition, the GPO 

funding structure may affect Medicare payments over time.

The five GPOs in our review reported being predominately funded by 

administrative fees collected from vendors, which were almost always 

based on a percentage of the purchase price for products obtained 

through GPO contracts. GPOs use these fees to fund their operating 

expenses, including expenses related to contracting with vendors and 

providing additional services to their customers outside of group 

purchasing.26 On average, the five GPOs in our review reported that 

administrative fees collected from vendors accounted for about 

92 percent of their revenue in 2012, ranging from a low of 83 percent to a 

high of 98 percent.27

 

26Four of the five GPOs in our review reported using administrative fees to fund additional 

services outside of group purchasing for their customers in 2012. Services funded with 

administrative fees included, for example, benchmarking data, equipment repair, patient 

safety services, and marketing of products and services. Representatives from GPOs we 

interviewed stated that their hospital customers are increasingly requesting these 

additional services.

In addition, these GPOs reported receiving, on 

average, 3.3 percent of their revenue from member fees, ranging from 

0.2 percent to 12.1 percent. Member fees included, for example, fees that 

a GPO charged hospitals in exchange for membership in the GPO. The 

five GPOs also reported that revenue from outside investments 

accounted for, on average, 2.2 percent of their revenue in 2012. 

However, only two GPOs reported receiving this type of revenue, which 

accounted for 8.1 percent and 2.7 percent of their total revenue in 2012, 

respectively. This revenue included, for example, equity income from an 

ownership interest in another GPO. Finally, the GPOs reported receiving, 

on average, 0.6 percent of their revenue from other sources, ranging from 

0 percent to 1.5 percent. This other revenue included, for example, 

27GPOs reported data by fiscal year, and these fiscal years varied.

While Experts’ Views 

on the Effects of 

Vendor Funding of 

GPOs Varied, the 

Funding Structure 

May Affect Medicare 

Payment

GPOs Reported Being 

Predominately Funded by 

Vendors
 

Page 17 GAO-15-13 Group Purchasing Organizations

vendor exhibit fees and conference fees. In addition to these sources of 

revenue, two of the five GPOs in our review offered private label 

programs to their hospital customers in 2012. Under these programs, 

vendors may pay the GPOs licensing fees—which are also based on a 

percentage of the purchase price of products—to market their products 

using the GPO’s brand name. On average, the 5 GPOs reported that 

licensing fees accounted for 2.2 percent of their revenue, though only two 

of the GPOs in our review collected licensing fees through private labeling 

programs in 2012. (See fig. 3)

Figure 3: Average Percentage Distribution of the Reported Sources of Revenue in 

2012 for the Five Largest National GPOs

Note: These percentages reflect the average of the percentages reported by each GPO in fiscal year 

2012, and GPOs’ fiscal years varied. Only two of the five largest GPOs collected licensing fees in 

fiscal year 2012.

The GPOs in our review generally reported receiving more fees from 

vendors in 2012 than they did in 2008. Together, all five GPOs reported 

collecting a total of $2.3 billion in administrative and licensing fees from 

vendors in 2012.28

 

28Throughout this report, we also refer to fees collected from vendors, such as 

administrative and licensing fees, as “vendor fees.”

This represents a 20 percent increase in the total 

amount of fees collected from vendors in 2008, when adjusted for 
 

Page 18 GAO-15-13 Group Purchasing Organizations

inflation. One GPO reported no change in the total amount of vendor fees 

collected between 2008 and 2012, but did report a 15 percent increase in 

its percentage of revenue from outside investments. The other four GPOs 

reported increases in the total amount of vendor fees collected between 

2008 and 2012, ranging from 13 percent to 53 percent, when adjusted for 

inflation. GPO representatives told us there were many reasons for the 

growth in volume of fees collected, including increases in purchasing 

volume by customers and additional products being added to contracts. 

Although we requested this information for years prior to 2008, two of the 

five GPOs in our review reported that they were unable to provide it 

because they do not retain records for that long.

All five GPOs in our review reported most frequently receiving 

administrative fees from vendors that were at or below 3 percent,29

The two GPOs with private-label programs in 2012 reported that their 

highest fees—9.9 and 11.12 percent—were for products sold through 

their private-label programs and included both an administrative fee as 

well as a licensing fee for the GPO to market the products to their 

customers. Representatives from the GPO that reported the fee of 

9.9 percent stated that this was for a brand name drug with a variable fee 

based on the vendor’s sales volume—the vendor was willing to pay a 

higher fee in exchange for the GPO’s customers pre-ordering the drug. 

although the two GPOs with private-label programs reported also 

receiving licensing fees from vendors of products sold under the GPOs’ 

brand names in addition to administrative fees. All five GPOs in our 

review reported that the most frequent vendor fee they received in 2012 

was 3 percent. In addition, all five GPOs reported average fees received 

in 2012, weighted by purchasing volume, of around 1 to 2 percent. This 

average includes fees from distributors and manufacturers. Because fees 

from distributors are often less than 1 percent, average fees from 

manufacturers are likely to be higher than the 1 to 2 percent overall 

average. In addition, the three GPOs without private-label programs in 

2012 reported that the highest vendor fee they received that year was 

3 percent. The administrative fee percentages that GPOs reported 

receiving in 2012 are consistent with the levels that the GPOs reported for 

2008.

 

29The GPO safe harbor regulation requires that agreements between GPOs and their 

customers specify either that the contract administrative fees are to be 3 percent or less of 

the purchase price, or specify the amount or maximum amount that each vendor will pay.
 

Page 19 GAO-15-13 Group Purchasing Organizations

Representatives from the GPO that reported the 11.12 percent fee stated 

that the fee was negotiated with a vendor that supplied five generic drugs 

through the GPO’s private-label program.

Average fee percentages, weighted by purchasing volume, that GPOs 

reported receiving in 2012 were generally consistent across different 

categories of products, but there were some small differences. For 

example, fees for branded drugs were generally lower than for generic 

drugs—average fees for branded drugs ranged from 0.86 percent to 

2.08 percent, while average fees for generic drugs ranged from 

1.31 percent to 3.62 percent. Four of the 5 GPOs reported that, of the 

total amount of vendor fees they received in 2012, on average, 

25 percent were for commodities, 15 percent were for devices, 12 percent 

were for brand name drugs, and 8 percent were for generic drugs. The 

remaining 41 percent were for other products and services, such as 

capital equipment and food service. The fifth GPO in our review was 

unable to report information separately for devices and commodities.

The literature we reviewed and the views of experts we interviewed varied 

widely on the effects of the GPO funding structure, specifically the 

reliance on vendor fees. Some of the literature we reviewed and experts 

we interviewed asserted that the vendor fee-based funding structure of 

GPOs creates misaligned incentives for them to negotiate higher prices 

for medical products in order to increase the amount of vendor fees that 

that they receive. Several experts that we interviewed stated that, based 

on economic theory, the GPO funding structure creates a principal-agent 

problem, in which the GPOs are motivated to act in their own best 

interests, rather than the best interests of their customers. These experts 

argued that because the GPOs’ compensation increases as prices 

increase, the GPOs have little incentive to negotiate lower prices, even 

though their customers would benefit from lower prices. Therefore, GPOs 

may place greater weight on the administrative and other fees than the 

prices of products and services for their customers. According to these 

experts, this funding structure—which allows vendors to pay 

administrative fees to GPOs—distorts the bidding process and results in 

inflated prices for hospitals relative to a funding structure where these 

administrative fees are not allowed.

Other people we interviewed—including some experts and

representatives of the GPOs—stated that competition between GPOs to 

retain their customers incentivizes them to negotiate the lowest possible 

prices, and mitigates any theoretical principal-agent problem. They 

Experts’ Views on the 

Effects of the GPO 

Funding Structure Varied 

Widely, Though Empirical 

Data on the Effects Are 

Limited
 

Page 20 GAO-15-13 Group Purchasing Organizations

explained that hospitals can switch GPOs anytime if they are not satisfied 

with the prices that a GPO is negotiating. Representatives from one 

hospital said that hospitals switch GPOs when they merge with larger 

systems, but that there are significant costs related to the conversion. 

Several experts reported that not only are the largest national GPOs in 

intense competition with each other, they are in competition for purchases 

made directly from manufacturers, as well as through regional GPOs, and 

hospital and health system alliances. Specifically, one expert we 

interviewed stated that GPO customers often obtain pricing information 

from all possible sources and then selectively choose products and 

services they can obtain for the best prices. Another expert told us that 

the percentage-based administrative fee structure works well because 

GPOs are only compensated for the sales that are made.

Although some experts have reported potential effects of the GPO 

funding structure, empirical data on the effects are limited. We identified 

one study that presented empirical data on the effects of the vendor-feebased GPO funding structure.30 The authors of this study concluded that, 

if the GPO safe harbor provision were eliminated, then GPOs “would 

likely structure their procurement process in a way that elicited more 

competitive bidding, resulting in lower prices and greater competition.” In 

addition, the authors concluded that altering the GPO funding structure 

would not eliminate any efficiencies that GPOs currently offer, such as 

reduced transaction costs or consolidated buying power. We also found 

other studies that presented empirical data focused more broadly on the 

value of GPOs, such as studies that focused on whether GPOs save their 

customers money.31

 

30R.E. Litan, H.J. Singer, and A. Birkenbach, “An Empirical Analysis of Aftermarket 

Transactions by Hospitals,” The Journal of Contemporary Health Law and Policy, 

vol. XXVIII: 1 (2011). The authors of this study told us that the data were purchased 

through a grant received by the Medical Device Manufacturers Association. For a rebuttal 

of this study, see C.A. Johnston and C.D. Rooney, “GPOs and the Healthcare Supply 

Chain: Market-Based Solutions and Real-World Recommendations to Reduce Pricing 

Secrecy and Benefit Healthcare Providers,” The Journal of Contemporary Health Law and 

Policy, vol. XXIX: 1 (2012).

However, these studies did not include empirical 

evidence that directly addressed the effects of the GPO funding structure.

31See, for example, E.S. Schneller, “The Value of Group Purchasing – 2009: Meeting the 

Needs for Strategic Savings” (2009); D.E. Goldenberg & R. King, “A 2008 Update of Cost 

Savings and a Marketplace Analysis of the Health Care Group Purchasing Industry” 

(2009).
 

Page 21 GAO-15-13 Group Purchasing Organizations

The GPO funding structure may affect Medicare payments over time.32 To 

the extent that the vendor-fee-based funding structure affects prices for 

medical products and services—either by reducing or inflating the costs of 

the products and services—Medicare payment rates may be affected 

over time through the annual update to the Prospective Payment System 

hospital payment rates. According to HHS, these updates rely, in part, on 

information reported by hospitals on their Medicare cost reports, which 

reflect the hospitals’ costs of medical supplies, including those purchased 

through GPOs.33

Moreover, Medicare payments could be affected if hospitals do not 

appropriately account for any revenues they receive from GPOs. These 

revenues are required to be reported as a reduction in costs on hospitals’ 

costs reports. All five GPOs in our review reported passing a percentage 

of the administrative fees—in some cases, the majority of fees collected 

from vendors—on to their customers or owners in 2012. All five GPOs 

reported sharing with their customers or owners between 37.6 percent 

and 100 percent of the total administrative fees they received in 2012—a 

total of $1.6 billion.34

 

32For additional information on this topic, see 

This represents 70 percent of the $2.3 billion in 

administrative fees collected in 2012. The amount distributed to 

customers and owners ranged from $54 million to $472 million per GPO. 

To the extent that administrative fee revenue is not reflected on cost 

reports, Medicare could be overpaying hospitals. The extent to which 

GAO-12-399R. 

33In addition, the Medicare Payment Advisory Commission (MedPAC) uses the cost 

reports as one component in their assessment of the adequacy of payment rates. 

MedPAC is an independent congressional agency established by the Balanced Budget 

Act of 1997 to advise the U.S. Congress on issues affecting the Medicare program. 

Annually, MedPAC assesses the adequacy of Medicare payments and recommends to 

Congress whether base payment rates should be changed. MedPAC’s general approach 

is to ensure enough funding is available to ensure payments are adequate to cover the 

costs of an efficient provider and to improve payment accuracy among services and 

providers. Among several factors considered in this assessment are Medicare payment 

and provider costs for the current year using information reported by hospitals to CMS on 

their cost reports in order to examine the relationship between payments and costs. The 

annual assessment of payment adequacy also considers whether payments should be 

updated for the coming year based on anticipated changes in costs.

34One GPO reported returning 100 percent of administrative fees to its legacy owners, 

who then fund the GPOs’ operating expenses. This GPO reported that its legacy owners 

include the original partners who started the company, including their successors. In 

addition to the legacy owners, the GPO reported distributing administrative fee revenue to 

customers of the GPO who have a “fee-sharing agreement” with the GPO.

The GPO Funding 

Structure May Affect 

Medicare Payments over 

Time
 

Page 22 GAO-15-13 Group Purchasing Organizations

hospitals are reporting this additional revenue is not known because 

HHS-OIG has not reviewed cost reports for this information since 2005.35

Some experts that we interviewed stated that the potential effects of the 

GPO funding structure on Medicare payment rates could be eliminated if 

the GPO safe harbor were repealed and GPOs were no longer permitted 

to collect fees from vendors. However, experts and representatives from 

vendors, GPOs, and hospitals we interviewed stated that there would be 

a disruption to hospitals and vendors while they transitioned to a new 

supply chain model. Others we interviewed—including GPO 

representatives—told us that if the safe harbor were repealed, GPOs 

would eventually cease to exist because hospitals would not be able to 

afford to pay the fees. However, some hospitals already pay directly for 

access to contracts to supplement their existing contracting arrangements 

with their GPOs. For example, a wholly-owned subsidiary of one large, 

national GPO charges its customers a $50,000 a year subscription fee for 

access to a web-based system for viewing hospital supply prices, 

negotiating contracts with vendors directly, and tracking their purchases 

and contracts online. The company has reported more than $10 billion in 

purchasing power from a user base of 600 hospitals in its first year. 

Finally, others stated that, if the safe harbor were repealed, smaller 

hospitals might have more difficulty adjusting and may be more likely to 

merge with larger hospital systems.

In addition, CMS officials told us that the agency has not specifically 

identified this as information that should be routinely audited by Medicare 

Audit Contractors.

Congress passed the GPO safe harbor provision because it believed that 

GPOs could help reduce health care costs by enabling hospitals to obtain 

volume discounts from vendors. However, the GPO funding structure 

protected under the safe harbor—specifically, the payment of 

administrative fees by vendors based on a percentage of the cost of the 

 

35In a January 2005 report, HHS-OIG reported that none of the 21 GPO customers it 

reviewed fully accounted for revenue distributions they received from the GPOs on their 

Medicare cost reports—while customers of one GPO offset 92 percent of distributions, 

customers of another GPO offset only 54 percent. HHS-OIG reported that, in total, the 21 

customers offset on their Medicare cost reports $200 million of the $255 million distributed 

by the GPOs. See Department of Health and Human Services, Office of Inspector 

General, Review of Revenue From Vendors at Three Group Purchasing Organizations 

and Their Members, A-05-03-00074 (Washington, D.C.: January 2005).

Conclusions
 

Page 23 GAO-15-13 Group Purchasing Organizations

products or services—raises questions about whether GPOs are actually 

negotiating the lowest prices. Some experts believe there is an incentive 

for GPOs to negotiate higher prices for products and services because 

GPO compensation increases as prices increase. However, other 

experts, as well as GPOs, stated that there is sufficient competition 

between them to mitigate any potential conflicts of interest. Almost 

30 years after its passage, there is little empirical evidence to definitively 

assess the impact of the vendor-fee-based funding structure protected 

under the safe harbor. While repealing the safe harbor could eliminate 

misaligned incentives, most agree there would be a disruption while 

hospitals and vendors transitioned to new arrangements. Over the longer 

term, if the current trend of hospital consolidation continues, the concerns 

about these disruptions may be diminished to the extent that large 

hospital systems may be in a better position to pay GPOs directly for their 

services or negotiate contracts with vendors on their own. Furthermore, 

given that some hospitals are already paying a subsidiary of one GPO 

directly for access to vendor contracts, alternative approaches are 

possible.

Despite the limited evidence on the impact of the vendor-fee-based 

funding structure protected under the safe harbor, there is a potential 

impact on the Medicare program. To the extent that the funding structure 

has the potential to affect the costs of products and services, periodic 

updates of Medicare’s payment rates will incorporate these costs over 

time. Additionally, GPOs distribute to their owners and customers—

mostly hospitals—a percentage of the administrative fees they collect 

from vendors, in some cases the majority of such fees. Hospitals are 

required by federal law to account for this revenue in reports to Medicare, 

but that has not always occurred. In 2005, HHS-OIG found that some 

GPO customers did not fully account for GPO revenue distributions on 

their Medicare cost reports. Subsequently, CMS issued updated guidance 

specifying that these distributions must be properly reported, but HHS has 

not reviewed cost reports for this information since then. While a repeal of 

the safe harbor provision would require a clearer understanding of the 

impact of the GPO funding structure, hospitals’ potential underreporting of 

administrative fee revenue presents an immediate risk that can be 

addressed within the current GPO funding structure.

To help ensure the accuracy of Medicare’s payments to hospitals, we 

recommend that the Secretary of the Department of Health and Human 

Services determine whether hospitals are appropriately reporting 

Recommendation for 

Executive Action
 

Page 24 GAO-15-13 Group Purchasing Organizations

administrative fee revenues on their Medicare cost reports and take steps 

to address any under-reporting that may be found.

We provided a draft of this report to HHS, FTC, and DOJ for comment. In 

its written response, reproduced in appendix II, HHS agreed with our 

recommendation, and stated that it will add steps to its process for 

auditing hospitals’ cost reports so that contractors may review 

administrative fee revenues that hospitals receive from GPOs. We 

received technical comments from HHS, FTC, and DOJ which we 

incorporated as appropriate.

We also received comments on a draft of this report from the 5 GPOs in 

our review and from HSCA. Many of the comments we received were 

similar and include the following:

• Some of the GPOs and HSCA noted that they were concerned that 

the draft title was not consistent with the content of the report. We 

reconsidered this title in light of their concerns and believe the revised 

title—Group Purchasing Organizations: Funding Structure Has 

Potential Implications for Medicare Costs—addresses their concerns, 

but is still consistent with the findings of the report.

• Some of the GPOs and HSCA disagreed with the draft report’s 

characterization that repeal of the safe harbor would have potential 

short-term disruption on the supply chain, stating that there would be 

significant market disruption that could result in higher healthcare 

costs. The draft report included statements we obtained from the 

GPOs—as well as experts and others—on the potential impact of 

eliminating the safe harbor. However, the draft report did not include a 

recommendation to repeal the safe harbor, noting that there is limited 

empirical evidence to definitively assess the impact of the vendor feebased funding structure protected under the safe harbor.

• Some of the GPOs commented that the example about a subsidiary of 

a GPO with an alternative funding structure does not indicate that a 

model like this could support the entire industry if the safe harbor were 

repealed. The draft report only describes this as one possible 

example, and we added additional context to the report to clarify this 

point.

• Some of the GPOs and HSCA noted that there is currently no 

evidence that hospitals are not appropriately accounting for revenue 

received from GPOs on their cost reports and that GAO did not 

consider the findings of the 2005 HHS-OIG audit reports. However, 

Agency and ThirdParty Comments and 

Our Evaluation
 

Page 25 GAO-15-13 Group Purchasing Organizations

we did consider the 2005 audit findings, and we added additional 

detail on them to the report. As noted in the draft report, the HHS-OIG 

recommended in 2005 that CMS provide specific guidance on the 

proper treatment of revenue distributions and, in 2011, CMS issued 

updated guidance on this issue. Since that updated guidance, HHS 

has not assessed whether revenues from GPOs are being 

appropriately accounted for.

• Some of the GPOs and HSCA noted that our draft report did not 

explain the reasons for the 20 percent increase in GPO administrative 

fees between 2008 and 2012. We added a statement to the report to 

describe the reasons why the total volume of fees may have 

increased, such as increased customer purchasing volume. In 

addition, the draft report examined changes in the percentage of fees 

collected, noting that these were generally consistent over this 4-year 

period.

• Some of the GPOs and HSCA stated that the draft report did not 

explain the full set of benefits of the GPO industry. We added some 

additional information to the report to more fully describe the activities 

and reported benefits of GPOs and how they serve hospitals or other 

providers. However, the scope of this report is focused on GPO 

contracting practices and funding structure. In a prior report, we 

described the services offered by GPOs and that work is referenced in 

this report. (See GAO-10-738). 

• Some of the GPOs and HSCA commented that in describing the 

literature on the GPO funding structure, we do not include a 

discussion of any of the independent and industry funded studies on 

the impact of GPOs. As we state in the report, while we identified 

other studies that presented empirical data focused more broadly on 

the value of GPOs, these studies did not include evidence that directly 

addressed the effects of the GPO funding structure. In addition, some 

GPOs and HSCA noted that the study described in our report was 

funded by the Medical Device Manufacturers Association (MDMA).

We added a note to the report that explains that MDMA provided 

funding for the author to purchase the data used in this study.

• Some of the GPOs raised concerns about the sample size and 

selection of vendors and hospitals we interviewed and stated that a 

broader sample of vendors and hospitals is necessary to maintain a 

more meaningful representation of their points of view. The 

information we obtained from hospitals and vendors was used to 

provide context and examples. We added a statement to the report to 

note that this information was not generalizable.
 

Page 26 GAO-15-13 Group Purchasing Organizations

• Some of the GPOs commented that the description of FTC complaints 

is incomplete. We report FTC’s comments on this matter and this 

report has been reviewed by FTC.

• Some GPOs commented that the draft report did not include a 

description of the GPO governance process or advisory board 

decision making. We added this information to the report.

We also received technical comments from the GPOs and HSCA which 

we incorporated as appropriate.

As agreed with your offices, unless you announce the contents of this 

report earlier, we plan no further distribution of it until 30 days from the 

report date. At that time, we will send copies of this report to the 

Secretary of the Department of Health and Human Services, the Attorney 

General, the Chairman of the Federal Trade Commission, and 

appropriate congressional committees. The report will be available at no 

charge on the GAO website at http://www.gao.gov. 

If you or your staff have any questions concerning this report, please 

contact Linda T. Kohn at (202) 512-7114 or KohnL@gao.gov. Contact 

points for our Offices of Congressional Relations and Public Affairs may 

be found on the last page of this report. Other major contributors to this 

report are listed in appendix III. 

Linda T. Kohn

Director, Health Care
Page 27 GAO-15-13 Group Purchasing Organizations

List of Requesters

The Honorable Henry A. Waxman

Ranking Member

Committee on Energy and Commerce

House of Representatives

The Honorable Anna G. Eshoo

Ranking Member

Subcommittee on Communications and Technology

Committee on Energy and Commerce

House of Representatives

The Honorable Frank Pallone, Jr.

Ranking Member

Subcommittee on Health

Committee on Energy and Commerce

House of Representatives

The Honorable Diana DeGette

Ranking Member

Subcommittee on Oversight and Investigations

Committee on Energy and Commerce

House of Representatives

The Honorable Edward J. Markey

United States Senate

The Honorable John D. Dingell

House of Representatives
Appendix I: Scope and Methodology

Page 28 GAO-15-13 Group Purchasing Organizations

Our objectives were to describe (1) Group Purchasing Organization 

(GPO) contracting practices and the reported effects of these practices; 

(2) how GPOs are funded and the reported effects of this funding 

structure.

To address these objectives, we sent a questionnaire to the five largest 

national GPOs by purchasing volume: Amerinet, HealthTrust Purchasing 

Group, MedAssets, Novation, and Premier. We asked about their 

contracting practices and sources of revenue, including administrative 

fees collected from vendors. We fielded the questionnaire from December 

2013 through March 2014. One GPO did not provide answers through our 

web-based questionnaire. Rather, the GPO provided a separate 

document with answers to some of the questions, and sometimes in a 

different format than was requested. We clarified this GPO’s responses 

through follow-up questions. Through our questionnaire, we asked about 

each GPO’s

• purchasing volume by fiscal year, from 2000-2012;1

• purchasing volume by category of medical product for fiscal years 

2000, 2004, 2008, and 2012;

• average, highest, lowest, and most frequent administrative fee 

percentages received in fiscal year 2012, by category of medical 

product;

• total dollar amount of administrative fees received in fiscal years 

2000, 2004, 2008, 2012, by category of medical product;

• average, highest, lowest, and most frequent licensing fee percentages 

received in fiscal year 2012, by category of medical product;

• total dollar amount of licensing fees received in fiscal years 2000, 

2004, 2008, 2012, by category of medical product;

• average, highest, lowest, and most frequent fee percentages for any 

fee that was based on a percentage of the purchasing price of a 

product in fiscal year 2012, by category of medical product;

• total dollar amount of total fees based on a percentage of the 

purchasing price of a product received in fiscal years 2000, 2004, 

2008, and 2012, by category of medical product;

 

1

GPOs fiscal years varied.

Appendix I: Scope and Methodology
Appendix I: Scope and Methodology

Page 29 GAO-15-13 Group Purchasing Organizations

• total dollar amount of total fees based on the purchasing price of a 

product received in fiscal years 2000-2012;

• average, highest, lowest, and most frequent administrative fee 

percentages received in fiscal year 2012 for generic injectable drugs;

• average, highest, lowest, and most frequent licensing fee percentages 

received in fiscal year 2012 for generic injectable drugs;

• total dollar amount and percentage of administrative fees shared with 

customers and owners in fiscal year 2012;

• sources of revenue in fiscal year 2012;

• services provided to customers in fiscal year 2012 and how those 

services were funded;

• whether the GPO awarded, or had in effect, any sole-source, bundled, 

non-bid, or long-term contracts with vendors; and

• key ways that GPOs bring value to their customers.

We reported only the information that was consistently reported by most 

of the GPOs in our review. There were several questions that some 

GPOs did not answer, or did not answer completely, including, for 

example, the following:

• For questions requesting information over time, only two of the GPOs 

reported information for the entire time period. One GPO was able to 

report information back to fiscal year 2003, and two other GPOs were 

only able to report information back to fiscal year 2008. 

Representatives from both of these GPOs stated that their records 

retention policies prevented them from obtaining data before fiscal 

year 2008.

• For questions requesting information to be broken into multiple 

product categories, one GPO was unable to separately report 

information for medical devices and commodities. As a result, this 

GPO reported information for both categories combined. Another 

GPO reported that, for the purposes of the questionnaire, the GPO 

only considered cardiac and orthopedic products to be “devices.” 

Other products considered to be devices by the Food and Drug 

Administration (FDA) were included in either the commodities or 

“other” categories.

In addition, we interviewed representatives with knowledge of GPOs, 

including
Appendix I: Scope and Methodology

Page 30 GAO-15-13 Group Purchasing Organizations

• the five largest GPOs to clarify their questionnaire responses, and 

discuss their contracting practices, funding structure, and the GPO 

safe harbor provision in more depth.

• two regional GPOs about how they work with the larger, national 

GPOs: Greater New York Hospital Association Services, Inc., and 

APS Healthcare.

• purchasing departments of five hospitals and hospital systems about 

how the hospitals purchase medical products, the extent of the 

hospitals’ use of GPOs, additional services and total value they 

receive from their GPOs, and potential impacts on hospitals if the 

GPO safe harbor provision were repealed: the Dana Farber Cancer 

Institute, Mt. Sinai Medical Center, the University of Pittsburgh 

Medical Center, BJC Healthcare, and Intermountain Healthcare. We 

selected hospitals based on variation in: number of hospital beds, the 

extent to which the hospital had an ownership interest in a GPO, and 

which GPOs they used.

• eight vendors of medical products about GPO contracting practices, 

funding structure, and the GPO safe harbor provision: 3M; ICU 

Medical; Alcon; Teva Pharmaceutical Industries, Ltd.; Hospira; 

Fresenius Kabi USA; GlaxoSmithKline; AADCO Medical, Inc. We 

selected vendors based on variation in the types of products 

manufactured.

• trade associations representing GPOs and vendors of medical 

products about their members’ relationships with GPOs, GPO 

contracting practices and funding structure, and the GPO safe harbor 

provision: Healthcare Supply Chain Association, Health Industry 

Distributors Association, Advanced Medical Technology Association, 

Medical Device Manufacturers Association, Generic Pharmaceutical 

Association.

In addition, to determine the reported effects of the GPO funding 

structure, we interviewed thirteen experts in economics, the healthcare 

market, and purchasing cooperatives. We identified these experts through 

our search of the relevant literature on GPOs, healthcare markets, 

purchasing cooperatives, and economics: David Balto, Roger Blair, 

Lawton Burns, Einer Elhauge, Adam Fein, Herbert Hovenkamp, 

Michael Lindsay, Diana Moss, Eugene Schneller, LeRoy Schwartz, 

Prakash Sethi, Hal Singer, Dave Swanson.

Finally, we interviewed Federal Trade Commission (FTC), Department of 

Justice (DOJ) and Health and Human Services (HHS) officials about their 

oversight of GPOs, including complaints they had received about GPOs 
Appendix I: Scope and Methodology

Page 31 GAO-15-13 Group Purchasing Organizations

and any investigations they had opened or actions they had taken against 

GPOs since our 2012 report.

To identify literature on the effect of the GPO funding structure, we 

conducted a literature review. To conduct this review, we searched 28 

bibliographic databases, such as ProQuest and MEDLINE, for articles 

published between January 2004 and June 2014. In our search, we used 

a combination of search terms such as “group purchasing” and “health 

care.”2

In addition, we reviewed documentary evidence of the factors that GPOs 

consider when contracting for products and services, including 

scorecards, spreadsheets, and other templates provided by the GPOs. 

We reviewed published articles in economic and law journals, as well as 

analyses of the healthcare market. We also reviewed laws, legislative 

history, regulations and guidance related to the GPO safe harbor.

We considered an article relevant to our review if it discussed the 

potential effects of the GPO funding structure. Using the articles we 

identified as relevant to our review, we then determined which of these 

articles included the results of empirical analyses. To confirm that our 

search captured all of the relevant literature that met our criteria, we 

reviewed the bibliographies of the relevant articles to identify other 

potentially relevant studies. We did not assess the methodologies of the 

studies we identified or review the reliability of the data used in these 

studies.

 

2

Our search terms included the following: “group purchasing,” “purchasing alliance,” 

“pooling alliance,” “hospital,” “physician,” “healthcare,” “health care,” “provider,” and 

“nursing home.”
Appendix II: Comments from the Department 

of Health and Human Services

Page 32 GAO-15-13 Group Purchasing Organizations

Appendix II: Comments from the Department 

of Health and Human Services
Appendix II: Comments from the Department 

of Health and Human Services

Page 33 GAO-15-13 Group Purchasing Organizations
Appendix III: GAO Contact and Staff 

Acknowledgments

Page 34 GAO-15-13 Group Purchasing Organizations

Linda T. Kohn, (202) 512-7114 or kohnl@gao.gov

In addition to the contact named above, Kristi Peterson, Assistant Director; 

Kelly DeMots; Leia Dickerson; Sandra George; and Yesook Merrill made 

key contributions to this report.

Appendix III: GAO Contact and Staff 

Acknowledgments

GAO Contacts

Acknowledgments

(291143)
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