Group Purchasing Organizations: Pilot Study Suggests Large Buying Groups Do Not Always Offer Hospitals Lower Prices
Published: 2002-04-30T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: 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.
section_title: What GAO Found
paragraphs: 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.

section_title: Letter
paragraphs: 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 GPO- negotiated 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 for 2000 from 18 hospitals in one greater  metropolitan area.  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 GPO- negotiated 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.
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.
subsections: section_title: Background
paragraphs: 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.
subsections: section_title: Hospitals and Medical Devices
paragraphs: According to an American Hospital Association (AHA) survey, roughly  4,900 nonfederal community hospitals 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.
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.
section_title: GPOs’ Size, Structure, and Benefits
paragraphs: According to the Health Industry Group Purchasing Association, hundreds  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  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.  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.    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 include, in addition to lower prices,  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.
section_title: GPO Price Negotiation and Administrative Fees
paragraphs: In order to sell to hospitals through GPO contracts, vendors generally  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.  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.
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.  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.)
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.
section_title: Antitrust
paragraphs: 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.  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.
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.
section_title: Price Savings Not Obtained Consistently with GPO Contract and Savings Varied by Model and Size of Hospital
paragraphs: GPOs did not always obtain better prices for member hospitals.  The  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  pilot study, we compared median GPO and median non-GPO prices for  purchases by hospitals and found the following:  Among hospitals of all sizes, hospitals using GPO-negotiated contracts  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.
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.
subsections: section_title: Use of GPO Contract Often Did Not Yield Price Savings for Hospitals Buying Pacemakers and Safety Needles
paragraphs: Purchasing with GPO contracts did not ensure that hospitals saved money.  Among hospitals of all sizes in our study market, those using GPO- negotiated contracts for pacemakers and safety needles often paid more  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  safety needles models and over three-fifths of the 41 pacemaker models  that could be compared.  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  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 GPO- negotiated 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.)
section_title: Small and Medium-Sized Hospitals More Likely Than Large Hospitals to Realize Price Savings on Pacemakers with GPO Contract
paragraphs: We examined how hospitals of different sizes using GPOs fared relative to  their peers purchasing pacemakers on their own and found that whether  there were savings depended on the size of the hospital.  The 4 small  hospitals (those with fewer than 200 beds) always did better with a GPO  contract. The 11 medium-sized hospitals (those with 200 to 499 beds) did  better with a GPO contract for 40 percent of the models (see fig. 3), and the  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.
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.
section_title: Compared to Smaller GPOs, Use of Large GPOs Yielded Price Savings for Needles— Less Often for Pacemakers
paragraphs: The size of a GPO was not related consistently to whether a hospital, when  using a GPO contract, obtained a better price.  Whether use of large GPOs  offered price savings varied by type of device: for safety needles, they were  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 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.
section_title: Hospitals Rarely Purchased Selected Medical Devices from Small Manufacturers
paragraphs: Regardless of whether a GPO contract was used, hospitals bought  pacemakers and safety needles predominantly from large manufacturers.   In our study, 5 of the 16 manufacturers from which hospitals purchased  were small; however, purchases from these 5 represented a small minority  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.
section_title: Concluding Observations
paragraphs: While this is a pilot study based on one market, the data raise questions  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  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.
section_title: Contacts and Acknowledgments
paragraphs: For more information regarding this statement, please contact Janet  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.
section_title: Characteristics Of Selected GPOs
paragraphs: 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.)