GAO investigates certain business practices of group purchasing organizations

For years, hospitals and clinical pathology laboratories have wondered exactly how much money is saved when they use the services of group purchasing organizations (GPOs). Now a newly-published government report provides interesting details about the financial activities of GPOs.

In response to a Congressional directive, the Government Accountability Office (GAO) recently studied GPOs and released a report on their findings. The GAO’s report will be of particular interest for pathologists and medical laboratory managers working in hospital laboratories.

GAO Report Looks at GPO Activities in 2008

The GAO determined that, during 2008, the six largest GPOs negotiated about $109 billion in purchases for their members.

The GAO report is titled “Group Purchasing Organizations: Services Provided to Customers and Initiatives Regarding Their Business Practices.”

The GAO determined that, during 2008, the six largest GPOs negotiated about $109 billion in purchases for their members. In keeping with Pareto’s Law, the nation’s two biggest GPOs accounted for about 60% of all that volume.

Fees paid into the six GPOs were significant, totaling more than $2 billion during 2008. For that year, the GPOs earned roughly $1.7 billion in administrative fees paid because of member purchases from contracts negotiated with vendors. The GPOs also received additional revenue of $320 million. This was earned from supply-chain outsourcing, revenue-cycle management, and consulting.

In responding to the concerns of Congress about the activities of GPOs, the GAO wrote that, “In 2002, questions were raised about GPOs engaging in potentially anticompetitive business practices such as collecting excessively high contract administrative fees. In 2003, GAO reported that selected GPOs had adopted or revised codes of conduct to respond to the questions about their business practices, but that it was too soon to evaluate the impact of the codes of conduct.

“GAO was asked to provide information on GPOs. In this report, GAO describes:

1) “the types of services that GPOs provide and how the GPOs fund these services,

2) “initiatives that GPOs have implemented since 2002 to address the questions that had been raised about their business practices, and,

3) “the reported impact of the GPOs’ codes of conduct and other initiatives.”

Group purchasing organizations enjoy protection from anti-kickback laws under a 25-year-old congressional safe harbor agreement that enables them to collect their fees. It’s this protection that has the Senate Finance Committee investigating certain GPO practices, including service types, contract transparency, and compensation.

“I think GPOs feel their fees are quite transparent,” said Curtis Rooney, President of the Healthcare Industry Group Purchasing Association in an interview with Modern Healthcare.

“And that’s reflected in the safe harbor law where it’s required that GPOs disclose their fees to hospitals, and that hospitals put that info in their annual cost reports, which can be reviewed,” he added.

But a Senate Finance Committee aide who spoke with Modern Healthcare on the condition of anonymity said, “[The report] confirms what we were hearing about how the GPOs operate in terms of fees. Also, we wanted the GAO to update their previous report from 2003. At that time, a lot of voluntary codes were being put together [by GPOs], and the GAO couldn’t comment on their impact.”

The GAO reported that, in 2008, GPOs distributed $1.1 billion of the $1.7 billion they earned to the members. That represents about 64% of those fees. GPOs are required by contract to return some of their fees to hospital members.

Senate Finance Committee Investigated GPO Practices

“The Senate Finance Committee is concerned that the GAO report doesn’t specify if the returned fees,” said the report. These fees “include the cost of consulting fees that, under contract, members must pay for the ‘development and delivery of member requested consulting services, such as technology assessments, clinical evaluation, and standardization.’”

“Not surprisingly, calculating the savings achieved by GPOs is complicated by the use of administrative fees to provided additional services that may or may not be of significant value to hospitals,” noted the Senate Finance Committee in its own report.

It is likely that Congress will continue to review the activities of group purchasing organizations. Following the release of this most recent GAO report about GPOs, the Medical Device Manufacturers’ Association (MDMA) issued its own study of GPO activity. MDMA asserts that GPOs have an inherent conflict-of-interest. Dark Daily will provide details about the MDMA’s study of GPOs in an upcoming e-briefing.

In recent years, Congressional scrutiny of group purchasing organizations has been critical of certain business practices. GPOs have been sensitive to these issues because the GPO industry would like to keep its safe harbor from anti-kickback laws. For that reason, clinical laboratory managers are likely to be reading more public details about the business practices of GPOs as Congress continues its oversight of the GPO industry.

Related Information:

Group Purchasing Organizations: Services Provided to Customers and Initiatives Regarding Their Business Practices

GPOs Fail to Secure the Best Prices for Patients and Hospitals

Do Group Purchasing Organizations Achieve the Best Prices for Member Hospitals? An Empirical Analysis of Aftermarket Transactions

Does it pay to save?