Group Purchasing Organizations: Use of Contracting Processes and Strategies to Award Contracts for Medical-Surgical Products
Published: 2003-07-16T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Hospitals have increasingly relied on purchasing intermediaries--GPOs--to keep the cost of medical-surgical products in check. By pooling purchases for their hospital customers, GPOs'in awarding contracts to medical-surgical product manufacturers--may negotiate lower prices for these products. Some manufacturers contend that GPOs are slow to select products to place on contract and establish high administrative fees that make it difficult for some firms to obtain a GPO contract. The manufacturers also express concern that certain contracting strategies to obtain better prices have the potential to limit competition when practiced by GPOs with a large share of the market. GAO was asked to examine certain GPO business practices. It focused on seven large GPOs serving hospitals nationwide regarding (1) their processes to select manufacturers' products for their hospital customers and the level of administrative fees they receive from manufacturers, (2) their use of contracting strategies to obtain favorable prices from manufacturers, and (3) recent initiatives taken to respond to concerns about GPO business practices.
section_title: What GAO Found
paragraphs: The seven GPOs we studied varied in how they carried out their contracting processes. The GPOs were able to expedite their processes for selecting products to place on contract, particularly when they considered these products to be innovative. The GPOs also reported receiving from manufacturers administrative fees in 2002 that were generally consistent with the 3-percent-of-purchase-price threshold in regulations established by the Department of Health and Human Services. However, for certain products, they reported receiving higher fees--in one case, nearly 18 percent. The seven GPOs also varied in the extent to which they used certain contracting strategies as leverage to obtain better prices. For example, some GPOs, including one of the two largest, used sole-source contracting (giving one of several manufacturers of comparable products an exclusive right to sell a particular product through the GPO) extensively, whereas others used it on a more limited basis. Most GPOs used some form of product bundling (linking price discounts to purchases of a specified group of products), and the two largest GPOs used bundling for a notable portion of their business. In response to congressional concerns raised in 2002 about GPOs' potentially anticompetitive business practices, the Health Industry Group Purchasing Association (HIGPA) and GPOs individually established codes of conduct. The conduct codes are not uniform in how they address GPO business practices. In addition, some GPOs' conduct codes include exceptions and qualified language that could limit their potential to effect change.

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-surgical  products. Faced with persistent pressures to cut rising costs, hospitals  over the past two decades have increasingly relied on purchasing  intermediaries—GPOs—to keep the cost of medical-surgical products in  check. Hospitals buy everything from commodities—for example, cotton  balls and bandages—to high-technology medical devices, such as  pacemakers and stents, through GPO-negotiated contracts. By pooling the  purchases of these products for their hospital customers, GPOs may  negotiate lower prices from vendors (manufacturers, distributors, and  other suppliers), which can benefit hospitals and, ultimately, consumers  and payers of hospital care (such as insurers and employers).
Some manufacturers—especially small manufacturers of medical  devices—have contended that GPOs employ a slow process for selecting  products to place on contract and establish high administrative fees that  have made it difficult for some firms to obtain a GPO contract. They have  also expressed concerns about certain contracting strategies that GPOs  use as leverage to obtain better prices. They contend that these strategies  have the potential to limit competition when practiced by GPOs with a  large share of the market.
At the request of the subcommittee, we examined certain GPO business  practices that critics contend have the potential to create an uneven  playing field for manufacturers. This statement focuses on seven large  GPOs serving hospitals nationwide regarding (1) their processes to select  manufacturers’ medical-surgical products for their hospital customers and  the level of administrative fees they receive from manufacturers, (2) their  use of contracting strategies to obtain favorable prices from  manufacturers, and (3) recent initiatives taken to respond to concerns  about GPO business practices. In a subsequent report for this  subcommittee, we will expand our earlier work and examine the extent to  which hospitals benefit from participation in GPOs. In April 2002, we  reported that for two products in one local market, a hospital’s use of a  GPO contract did not guarantee that the hospital paid a lower price.
We focused our current work on purchases made by acute care hospitals  for medical-surgical products, including commodities, such as cotton balls  and bandages, and medical devices, such as pacemakers and stents. We  did not investigate GPOs’ business practices with regard to other products  that hospitals purchase, such as pharmaceutical products, capital  equipment, and food supplies. Our findings are based on structured  interviews with representatives of seven major national GPOs. We also  interviewed representatives of 13 medical-surgical product manufacturers  of various sizes and representatives of trade associations from the  following industries: group purchasing, medical-surgical product  manufacturing, supply distribution, and venture capital. We also consulted  with experts, including representatives from two hospitals, three venture  capital firms, two industry consultants, and one technology assessment  company. In addition, we reviewed literature on group purchasing and  antitrust law. We did not independently verify the information we  obtained. The information GPOs provided was self-reported. We  conducted our work from May 2002 through July 2003 in accordance with  generally accepted government auditing standards.
subsections: section_title: Background
paragraphs: In seeking to provide their hospital customers with medical-surgical  products at favorable prices, GPOs engage with manufacturers in certain  contracting processes and sometimes use certain strategies to obtain price  discounts. Many manufacturers bid for GPO contracts because hospital  purchases with these contracts may increase manufacturers’ market share.  GPOs are subject to federal antitrust laws. A statement developed by  enforcement agencies helps GPOs determine whether their business  practices are likely to be challenged under the antitrust laws.
subsections: section_title: Manufacturers Contract with GPOs to Sell Their Medical-Surgical Products
paragraphs: Many manufacturers use GPO contracts to sell their medical-surgical  products. These products include two types—commodities and medical  devices. Commodities such as cotton balls and bandages are examples of  items for which physicians and other clinicians generally do not have  strong preferences. Manufacturers commonly use GPO contracts to sell  hospitals these non-preference products because hospitals purchase these  items in large quantities. In contrast, medical devices can be “clinical  preference” items—that is, those for which physicians and other  practitioners are likely to express a preference. High-technology medical  devices such as pacemakers and stents are examples of clinical preference  items. Some manufacturers prefer to sell these items directly to hospitals.
section_title: A Few GPOs Dominate the Market for Medical- Surgical Products Sold through Contracts
paragraphs: The GPO industry that purchases products for hospitals is large and  moderately concentrated. Experts have not determined a precise number  of GPOs currently in business, but some estimate that there are hundreds  of GPOs. While some GPOs operate regionally, this study focused on seven  national GPOs with purchasing volumes over $1 billion that account for  more than 85 percent of all hospital purchases nationwide made through  GPO contracts. In 2002, the combined purchasing volume of these GPOs  totaled about $43 billion, excluding distribution dollars. (See table 1.)
Among the GPOs in our study, the two largest GPOs account for about 66  percent of total GPO purchasing volume for all medical products  (including, among other things, medical-surgical products,  pharmaceuticals, capital equipment, and food). These two GPOs also  account for 70 percent of the seven GPOs’ total medical-surgical product  volume. One of the two largest GPOs has as members 1,569 of the nation’s  approximately 6,900 hospitals; the other has 1,469 hospital members. One  of the two largest GPOs permits its members to belong to other national  GPOs, whereas the other largest GPO does not.
section_title: GPOs’ Business Practices Encompass Contracting Processes and Strategies
paragraphs: A GPO’s contracting process for manufacturers’ medical-surgical products  generally includes several phases—namely, product identification and  selection, requests for proposals or invitations to bid, review of submitted  proposals and applications, assessment of product quality, contract  negotiation, and contract award. The contract negotiation phase may  include the negotiation of a contract administrative fee. This fee is  designed to cover a GPO’s operating expenses and serves as its main  source of revenue. Contract administrative fees are calculated as a  percentage of each customer’s purchases of the particular product  included in a GPO contract.
In negotiating contracts, GPOs use certain contracting strategies as  incentives for manufacturers to provide deeper discounts and for hospital  members to concentrate purchasing volume to obtain better prices. These  strategies are not limited to use by GPOs, as some manufacturers also use  them in negotiating contracts with GPOs to increase market share. Key  contracting strategies include the following:    Sole-source contracts give one of several manufacturers of comparable  products an exclusive right to sell a particular product through a GPO.
Commitment refers to a specified percentage of purchasing volume that,  when met by the GPO’s customer (such as a hospital), will result in a  deeper price discount. Commitment levels can be set either by the GPO or  the manufacturer. For example, a manufacturer 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 the customer to commit to  different percentages of purchasing volume: the higher the percentage, the  lower the price.
Bundling links price discounts to purchases of a specified group of  products. GPOs award several types of bundling arrangements. One type  bundles combinations of products from one manufacturer. A manufacturer  may find this arrangement advantageous because it allows increased sales  of products in the bundle that may not fare well as stand-alone products.  Another type bundles products from two or more manufacturers. Also,  contracts can be bundled for complementary products, such as protective  hats and shoe coverings used in hospital operating rooms, while others  bundle unrelated products such as patient gowns and intravenous  solutions. Hospitals that purchase bundles of unrelated products receive a  price discount on all products included in the bundle.
Contracts of long duration—those in effect for 5 years or more—can  direct business to manufacturers for an extended period.
When used by GPOs with a large market share, these contracting  strategies have the potential to reduce competition. For example, if a large  GPO negotiates a sole-source contract with a manufacturer, the contract  could cause an efficient, competing manufacturer to lose business and exit  from the market and could discourage other manufacturers from entering  the market.
section_title: Federal Safe Harbor and Antitrust Safety Zone Exist for GPOs
paragraphs: Certain aspects of GPOs’ operations are specifically addressed by federal  statute, regulation, and policy. While “anti-kickback” provisions of the  Social Security Act prohibit payments in return for orders or purchases of  items for which payment may be made under a federal health care  program, the act also contains an exception for amounts paid by vendors  of goods or services to a GPO. Therefore, GPOs are allowed to collect  contract administrative fees from manufacturers and other vendors that  could otherwise be considered unlawful. In addition, regulations issued by  the Department of Health and Human Services establishing “safe harbors”  for purposes of the “anti-kickback” provisions provide that GPOs are to  have written agreements with their customers either stating that fees are  to be 3 percent or less of the purchase price, or specifying the amount or  maximum amount that each vendor will pay. The GPOs must also disclose  in writing to each customer, at least annually, the amount received from  each vendor with respect to purchases made by or on behalf of the  customer. The Office of Inspector General in the Department of Health  and Human Services is responsible for enforcing these regulations.
Recognizing that GPO arrangements may promote competition among  manufacturers and yield lower prices in some cases and may reduce  competition in other cases, the U.S. Department of Justice and the Federal  Trade Commission issued a statement in 1993 for joint purchasing  arrangements. This statement sets forth an “antitrust safety zone” for  GPOs that meet a two-part test, under which the agencies will not  generally challenge GPO business practices under the antitrust laws.  Essentially, the two-part test in the context of medical-surgical products is  as follows: (1) purchases through the GPO account for less than 35  percent of the total sales of the product in the relevant market, and (2) the  cost of the products purchased through the GPO accounts for less than 20  percent of the total revenues from all products sold by each GPO member.
section_title: GPOs Reported Modifying Contracting Processes When Desirable and Receiving Administrative Fees That Were Generally Consistent with Federal Regulations
paragraphs: In recent years, some manufacturers of medical-surgical products have  contended that GPOs employ a slow product selection process and set  high administrative fees that have made it difficult for some firms to obtain  GPO contracts. These firms tend to be small manufacturers that may have  fewer financial resources available to successfully complete GPOs’  contracting processes than large manufacturers. The GPOs we studied  reported generally having contracting processes that can be modified for  certain types of products. They also reported receiving from  manufacturers administrative fees that were generally consistent with  federal regulations established by HHS.
subsections: section_title: GPOs Reported Expediting Reviews and Using a Public Solicitation Process for Certain Products
paragraphs: In discussing GPOs’ selection of products and negotiation of fees, several  manufacturers we contacted pointed to the paperwork and duration of  these processes as burdensome. Not all manufacturers shared the same  perspective. One small manufacturer commented that the process could  sometimes be relatively easy but that the selection process can be more  difficult if the manufacturer is selling only one product.
The GPOs we studied were able to alter the duration of their process for  selecting products to place on contract, particularly when they considered  these products to be innovative. Based on their reported information,  GPOs’ product selection processes generally took 6 months, and ranged  from as short as 1 month to as long as 18 months. One GPO specifically  reported expediting or modifying its formal selection process when it  considered a product to be innovative and wanted to award a contract  quickly. Most GPOs did not have a distinctly separate process for selecting  innovative technology but reported that these products were generally  selected in a shorter amount of time compared with other products.
Figure 1 shows, across the seven GPOs, the average minimum, most  frequent, and maximum times taken for product selection.
The GPOs in our study reported consulting various sources before making  a decision, including the GPO’s customers requesting the product;  published studies about the product; internal and external technology  assessments; and different manufacturers of the product, both with and  without a GPO contract. In all cases, the GPOs cited customer requests for  products as the most important factor in identifying which products to  place on contract.
In selecting a manufacturer, six of the seven GPOs, including the two  largest, solicit proposals publiclyeither through requests for proposals  or requests for bids through their Web sites. The extent to which these  processes are open to all manufacturers varies by GPO and by product.  For example, one of the GPOs solicits proposals publicly for clinical  preference products, but not for commodities.
GPO-reported information on new contracts awarded in 2002 suggest that  GPOs’ solicitations were not limited to manufacturers already on contract.  Nearly one-third of all the newly negotiated contracts awarded by the  seven GPOs in 2002 were awarded to manufacturers with which the GPO  had not previously contracted. The percentage of such contracts ranged  from 16 percent to 55 percent for the GPOs in our study. For the two  largest GPOs, this share was 29 percent and 55 percent. We could not  determine, from the information provided, whether these first-time  contract awardees were, for example, small manufacturers or companies  new to the industry or whether the products purchased through these  contracts were clinical preference items or commodities.
section_title: GPO-Reported Information Indicates That Contract Administrative Fees Received Were Generally Consistent with Federal Regulations
paragraphs: Manufacturers have expressed concerns that contract administrative fees,  which are typically calculated as a percentage of each customer’s  purchase of products under contract, can be too high for some  manufacturers. These fees, combined with lower prices negotiated by the  GPO, may decrease revenue for manufacturers and may make it more  difficult to obtain a GPO contract for newer and smaller manufacturers  with fewer financial resources than for larger, more established  companies.
Five out of seven GPOs reported that the maximum contract  administrative fee received from manufacturers in 2002 did not exceed the  3-percent-of-purchase-price threshold contained in federal regulations  established by HHS. The most frequent administrative fee level that 4 out  of 7 GPOs received from manufacturers in 2002 was 2 percent; the lowest  fee level received by each GPO was 1 percent or less. Except for one of the  two largest GPOs, the GPOs reported that they have not negotiated any  new or renewed contracts in 2003 that include administrative fees from  medical-surgical product manufacturers that exceed 3 percent.
In 2002, fee levels for private label products —products sold under a  GPO’s brand name—were an exception: The typical contract  administrative fee paid by private label manufacturers was 5 percent. For  one of the two GPOs in our study with private label products, the  maximum administrative fee was nearly 18 percent. In addition to an  administrative fee, the other GPO charged a separate “licensing” fee for  private-label products.
section_title: Seven National GPOs Varied in the Extent to Which They Used Certain Contracting Strategies
paragraphs: GPOs use certain contracting strategies—which include sole-source  contracts, product bundling, and extended contract duration—to obtain  discounts from manufacturers in exchange for providing the manufacturer  with increased sales from an established customer base. Manufacturers  and other industry observers have expressed concerns that use of these  strategies by the two largest GPOs can reduce competition. For example,  when GPOs with substantial market shares award long-term sole-source  contracts to large, well-established manufacturers, some newer, single- product manufacturers—left to compete with other manufacturers for a  significantly reduced share of the market—may lose business and be  forced to exit the market altogether.
The seven GPOs we studied, including two with the largest market shares,  used these contracting strategies to varying degrees. For example, while  all study GPOs reported using sole-source contracts, some GPOs,  including one of the two largest GPOs, used it extensively, whereas others  used it on a more limited basis. GPOs also varied in their approach to  requiring commitment levels from their customers. With respect to  bundling, most GPOs used some form of bundling, and the two largest  GPOs used either contracts or programs that bundled multiple products  for a notable portion of their business. With respect to contract duration,  the two largest GPOs typically negotiated longer contract terms than the  other five GPOs.
subsections: section_title: For Some of the GPOs, Sole-Source Contracts Accounted for a Substantial Portion of the Purchasing Volume
paragraphs: The use of sole-source contracting by the study GPOs varied widely with  respect to the relative amount of sole source contracting they did and the  types of products included in the contracts. For five of the GPOs, sole- source contracts accounted for between 2 percent and 46 percent of their  medical-surgical product dollar purchasing volume. For the rest—the two  largest GPOs—the shares of dollar purchasing volume accounted for by  sole-source contracts were 19 percent and 42 percent. Such levels of sole- sourcing are worth noting, given the sizeable market shares of these two  GPOs.
GPOs also varied in their use of sole-source contracts for commodity  products as compared to medical devices for which providers may desire a  choice of products. Six of the seven GPOs in our study reported their use  of sole-source contracts for commodity products as compared to clinical  preference product. For one of the two largest GPOs, clinical preference  products accounted for the bulk—82 percent—of its sole-source dollar  purchasing volume. Two GPOs reported cases in which manufacturers  refused to contract with the GPO unless they were awarded a sole-source  contract. In contrast, commodities accounted for the bulk—between 62  percent and 91 percent—of the dollar purchasing volume that the smaller  of the seven GPOs purchased through sole-source contracts. GPO- reported data indicate that the proportion of contracts that were sole  source, as a share of all contracts for medical-surgical products for the  past 3 years, remained relatively consistent for GPOs.
section_title: GPOs Considered Customer Commitment to Be Important, but Commitment Requirements Varied
paragraphs: The seven GPOs in our study reported that hospital customers’  commitment to purchase a certain percentage of their products through  GPO contracts was an important factor in obtaining favorable prices with  manufacturers, and all reported establishing commitment level  requirements to some degree. Most of the smaller of the seven GPOs  reported that customer adherence to commitment levels and contracts  were the most important factor in obtaining favorable pricing with  manufacturers. In principle, for GPOs with a smaller customer base, the  assurance of customer commitment to purchasing helps enable them to  achieve the higher volumes needed to leverage favorable prices from  manufacturers. The two largest GPOs reported that volume was the most  important factor for obtaining favorable prices and that customer  compliance with commitment level and contracts was next in importance.  For the two largest GPOs, a sizable customer base may provide the volume  levels needed to obtain favorable prices.
GPOs varied in their approach to requiring purchasing commitment levels.  One GPO requires customers to commit to an overall average dollar  purchasing level of 80 percent for those products available through the  GPO, although the percentage could vary for individual products. The GPO  reported terminating the membership of at least one customer that did not  meet this target. Other GPOs reported establishing customer commitment  levels in certain contracts in order to obtain a certain price level, but  customers were not required to buy under the contract or buy at the  commitment level in order to retain GPO membership. Some GPOs’  contracts include multiple, or tiered commitment levels so that customers  can choose from a range of commitment levels and obtain price discounts  accordingly.
section_title: Most GPOs Use Some Form of Bundling, and the Two Largest GPOs Use It for a Notable Portion of Their Business
paragraphs: All but one of the GPOs in our study reported using some form of  bundling, including the bundling of complementary products, bundling  several unrelated products from one manufacturer, and bundling several  products for which there are commitment-level requirements. One  bundling arrangement that GPOs reported using gave customers a  discount when they purchased a bundle of complementary products, such  as protective hats and shoe coverings. Four GPOs reported bundling  complementary products. These bundles were included in a small  percentage of the GPOs’ contracts; each of the four GPOs reported having  no more than three contracts that bundle complementary products. One  GPO reported awarding only one bundling arrangement for two  complementary products—the only bundling arrangement the GPO had in  effect at the time it reported to us.
A second type of bundling reported by three GPOs, including the two  largest, gave customers a discount if they purchased a group of unrelated  products from one manufacturer. We define this type of bundling as a  corporate agreement. One of the two largest GPOs reported that corporate  agreements for medical-surgical products accounted for about 40 percent  of its dollar purchasing volume for medical-surgical products under  contracts in effect on January 1, 2003.
Four GPOs, including one of the two largest, used a third type of  arrangement that typically bundled products from different manufacturers  and required customers that chose this arrangement to purchase a certain  minimum percentage from the product categories specified in the bundle  in order to obtain the discount. We defined this type of bundling as a  structured commitment program. A structured commitment program  available through one GPO bundled brand name and GPO private label  items for 12 product categories and had a 95 percent commitment-level  requirement. In 2002, one of the two largest GPOs reported receiving  about 20 percent of its medical-surgical dollar purchasing volume from its  structured commitment programs.
The use of bundling arrangements may be declining. For example, data  reported by one GPO showed a decline in the percent of its contracts that  were corporate agreements from 2001 to 2003. This trend was consistent  with comments made by one manufacturer and two medical-surgical  product distributors. The manufacturer told us that GPOs are less  interested in bundling different manufacturers together. Two distributors’  representatives told us that since the summer of 2002, GPOs have fewer  bundling arrangements and that some bundles were “pulled apart.”
section_title: The Two Largest GPOs Typically Award Contracts with Longer Terms Than the Other Five
paragraphs: Our analysis of data reported by the study GPOs showed that, in 2002, the  two largest GPOs typically awarded 5-year contracts, whereas the other  five GPOs typically awarded 3-year contracts. For some of these contracts,  potential renewal periods constitute a portion of the contract duration.  Those contract terms remained fairly consistent between 2001 and 2003,  although two of the five GPOs reported that their most frequent contract  term declined by about 1 year. Some GPOs reported implementing policies  that may lead to a future reduction in contract terms. One of the two  largest GPOs began in the first quarter of 2003 to exclude from new  contracts the option for two 1-year contract extensions, so that when a  contract expires, this GPO will solicit proposals for a new contract.
section_title: GPOs Have Taken Initiatives to Address Concerns about Business Practices, but It Is Too Early to Evaluate Their Efforts
paragraphs: In response to congressional concerns raised in 2002 about GPOs’  potentially anticompetitive business practices, the group purchasing  industry’s trade association established a code of conduct that directs  member GPOs to, among other things, address their contracting processes.  The conduct code also includes reporting and education responsibilities  for the trade association. The seven GPOs we studied drafted or revised  their own codes of conduct, but the conduct codes are not uniform in how  they address GPO business practices. Moreover, some GPOs’ conduct  codes include exceptions and qualified language that can limit the  potential of the conduct codes to effect change. It is too soon to evaluate  the effectiveness of these codes of conduct in addressing concerns about  potentially anticompetitive practices, as many conduct codes are recently  adopted and sufficient time has not elapsed for GPOs to demonstrate  results.
subsections: section_title: Trade Association Code of Conduct Laid Groundwork for Industry Self- Regulation
paragraphs: On July 24, 2002, the Health Industry Group Purchasing Association  (HIGPA) adopted a code of conduct providing principles for GPO business  practices. HIGPA represents 28 U.S.-based GPOs—including five of the  seven major GPOs that we studied. HIGPA members also include health  care systems and alliances, manufacturers, and other vendors. The HIGPA  code of conduct principles address GPO business practices and actual,  potential, or perceived conflicts of interest. Among other things, the  HIGPA code of conduct provides that GPOs    allow hospital and other provider members to purchase clinical preference  items directly from all vendors, regardless of whether the vendors have a  GPO contract; implement an open contract solicitation process that allows any interested  vendor to seek contracts with the GPO;   participate in processes to evaluate and make available innovative    address conflicts of interest, such as disallowing staff in positions of  influence over contracting to hold equity interest in, or accept gifts or  entertainment from, “participating vendors”; and   establish accountability measures, such as appointing a compliance officer  and certifying annually that the GPO is in compliance with the HIGPA  code.
The HIGPA code also includes several provisions regarding the trade  association’s education and reporting responsibilities, including    assessing and updating the code of conduct to be consistent with new  developments and best business practices; implementing industry wide educational programs on clinical innovations,  contracting strategies, patient safety, public policy, legal requirements, and  best practices;   making available a Web-based directory that posts manufacturers’ and  other vendors’ product information; and   publishing an annual report listing GPOs that have certified their  compliance for the year with the HIGPA code of conduct.
As of May 19, 2003, HIGPA’s 28 U.S.-based GPO members certified that  they are in compliance with the HIGPA code of conduct principles.
section_title: Variations Exist in GPOs’ Efforts to Address Business Practices
paragraphs: Although the HIGPA code of conduct laid the groundwork for many GPOs  to change their business practices, its guidelines do not comprehensively  address certain business practices. Specifically, the HIGPA code of  conduct requires GPOs to address business practices associated with  contracting, conflicts of interest, and accountability, and it grants GPOs  discretion in using contracting strategies. It recommends that GPOs  consider factors such as vendor market share, GPO size, and product  innovation when using multiple contracting strategies. However, the  HIGPA code of conduct does not directly address levels of contract  administrative fees or the offering of private label products.
Since August 2002, the seven GPOs we studied, even those that were not  HIGPA members, drafted and adopted their own codes of conduct or  revised their existing conduct codes. One GPO stated that its revised code,  while consistent with the HIGPA code, was more specific than HIGPA’s  principles, particularly in the GPO’s rules on stock ownership, travel, and  entertainment. Another GPO reported expanding on HIGPA’s code by  including provisions to cap administrative fees and prohibit bundling.  Similarly, GPOs who were not HIGPA members said they had revised their  existing codes of conduct and that their conduct codes were in some  respects stronger than HIGPA’s.
Nevertheless, GPOs’ individual codes of conduct varied in the extent to  which they addressed GPOs’ business practices, such as contracting  processes and strategies. Figure 2 provides an overview of the seven  GPOs’ conduct codes with respect to their business practices. The table  indicates whether a business practice was identified in a code of conduct,  but not how the practice was to be addressed.
As figure 2 shows, the conduct codes of all the study GPOs explicitly  mentioned conflict of interest issues such as those dealing with equity  holdings and other conflicts such as receipt of gifts and entertainment and  the need for internal accountability. In addition, the conduct codes of most  GPOs, including the two largest, included provisions dealing with the  contracting strategies, such as sole-source contracting and bundling. For  GPOs that are HIGPA members, the lack of additional provisions in their  individual conduct codes for certain business practices such as  contracting processes may not be significant, as provisions covering these  areas are included in the HIGPA code. However, for one of our study  GPOs that is not a HIGPA member, the conduct code lacked any  provisions pertaining to contracting processes, product selection,  administrative fees, sole-source contracting, commitment level  requirements, contract duration, and private labeling.
The code of conduct provisions for the GPOs in our study were not  uniform in how they addressed business practices. For example:    Four GPOs, including one of the two largest, had unqualified provisions  for capping administrative fees at the 3-percent threshold contained in  federal regulations established by HHS. The other largest GPO had a  provision for capping administrative fees at 3 percent only for clinical  preference items and only for contracts awarded after the establishment of  the GPO’s conduct code.
Four conduct codes had provisions limiting the use of sole-source  contracts for clinical preference items specifically. Another conduct code  limited the use of sole-sourcing to contracts meeting certain criteria, such  as approval for use by a 75-percent majority of the GPO’s contracting  committee. The language of one of the remaining GPO’s conduct codes  was vague with respect to sole-sourcing, stating that the GPO will provide  customers with choices for each product or service, without explicitly  mentioning the use of sole-source contracts.
In their conduct codes, two GPOs had provisions prohibiting the practice  of bundling of unrelated products, two GPOs prohibited and two limited  bundling for clinical preference items, and three GPOs prohibited the  practice of bundling products from different manufacturers. One GPO’s  conduct code stated that the GPO would not obligate its customers to  purchase bundles of unrelated products, allowing the possibility for  bundles to be available to customers on a voluntary basis.
Exceptions and qualified language in the provisions have the potential to  weaken the codes of conduct. Table 2 shows examples of exceptions and  qualified language that can limit the potential of the individual GPOs’  conduct codes to effect change.
section_title: Too Soon to Evaluate Impact of GPOs’ Codes of Conduct
paragraphs: Given the individual GPOs’ relatively recent adoption of codes of  conduct—since August 2002—sufficient time has not yet elapsed for GPOs  to develop a history of compliance with certain conduct code provisions.  Two of the manufacturers and two distributors we interviewed reported  noticing improvements, stating that some GPOs are no longer using  certain contracting strategies. This observation is consistent with the  suggestion that the use of bundling may be declining. One manufacturer  that had difficulty in obtaining a contract with a large national GPO prior  to 2002 said it has since been awarded a contract for a clinical preference  item. The manufacturer also noted that, since September 2002, it has been  awarded several new contracts. However, two other manufacturers told us  they are skeptical that improvements have been made with regard to  business practices. Notwithstanding such anecdotal evidence, because of  the recency of GPOs’ actions taken, the ability to assess the impact of the  conduct codes systematically remains limited. One year is not sufficient  time for the codes of conduct to produce measurable trends that could  demonstrate an impact on the industry.
section_title: Contact and Acknowledgments
paragraphs: For more information regarding this statement, please contact Marjorie  Kanof at (202) 512-7101. Hannah Fein, Mary Giffin, Kelly Klemstine, Emily  Rowe, and Merrile Sing made key contributions to this statement.
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