Researchers Offer Evidence that Hospitals and Pathology Labs Often Negotiate Lower Prices on Their Own


Even as Congress shines a spotlight on the business activities of group purchasing organizations (GPOs), the Medical Device Manufacturers Association (MDMA) has made public a research study it initiated about GPO contract practices. This report says an inherent conflict of interest prevents GPOs from obtaining the lowest possible prices for its hospital and clinical pathology laboratory members.

On December 3rd, Dark Daily reported on the report published by the General Accountability Office (GAO) in response to a Congressional directive. The GAO determined that, during 2008, sales made under GPO contracts by members, including hospitals, clinical laboratories, and other types of healthcare providers, totaled $109 billion.

The six GPOs studied by the GAO earned a bit more than $2 billion in revenue for 2008. Of this, $1.7 billion came from administrative fees generated by contract purchases. The balance of $320 million was from fees generated by supply chain outsources, revenue cycle management, and consulting.

Medical Device Manufacturers AssociationIn recent years, Congress has conducted a series of hearings and investigations into GPO business practices. GPOs enjoy a safe harbor from anti-kickback laws that was granted by Congress several decades ago. Some in Congress believe that GPO business activities over the years have not resulted in lower healthcare costs for the member hospitals.

Medical Device Manufacturers Issue a Report on GPO Practices

A simultaneous study of GPO purchasing methods funded by the Medical Device Manufacturer’s Association indicated that GPOs have an inherent conflict-of-interest. The study is titled, “Do Group Purchasing Organizations Achieve the Best Prices for Member Hospitals? An Empirical Analysis of Aftermarket Transactions.”

This report was authored by Robert E. Litan. He is Vice President for Research and Policy at the Kauffman Foundation in Kansas City, a Senior Fellow in Economic Studies at the Brookings Institution, and a Senior Consultant with Navigant Economics. His co-author was Hal J. Singer, who is Managing Director at Navigant Economics. Singer has also served as adjunct professor at the McDonough School of Business at Georgetown University.

The purpose of the MDMA study was to determine whether GPO’s switching from a “sole-source” contracting structure to “multi-source” contracting between multiple vendors actually achieved lower costs for member hospitals.

As described in the study abstract, the researchers “analyzed a database of approximately 8,100 aftermarket transactions, in which the winning GPO price was put up for bid after the initial GPO auction. The transactions data suggest that, when exposed to competition in the aftermarket, hospitals were able to achieve average savings of approximately 10% to 14% across the entire database (2001 through 2010) and a savings of 15% on average for 2010 data.

“Indeed, in over half of all auctions in the transactions database, incumbent device makers on the GPO contract were induced to lower their own prices for the same product to the same hospital, and did so by approximately 7% on average. Our results are inconsistent with the hypothesis that GPOs secure the best prices for their member hospitals,” wrote the MDMA study authors.

“So long as GPOs are compensated via an equity interest in the concession, they have an inherent conflict that limits their ability to negotiate the best prices for their member hospitals,” stated Litan and Singer in their study, “and those hospitals (and their payers, including the federal government) will likely continue to overpay for medical devices.

“Based on the results from our empirical analysis,” continued Litan and Singer, “we conservatively estimate that changing the incentive structure by reapplying the anti-kickback statutes would reduce private U.S. healthcare expenditures by roughly $25 billion annually, and would reduce federal healthcare spending by roughly $11.5 billion annually.”

The report also concluded:

  • “Hospitals saved an average of 10% between 2001 through 2010 when they purchased medical devices aftermarket, when GPOs supposedly negotiated the best price,
  • “In 2010, the savings for hospitals was up to 18% for aftermarket purchases.”

MDMA President Says GPO Model “Fails to Bend Cost Curve Down”

“It is painfully clear that while hospitals and providers are trying to improve care and reduce costs for patients, the supplier-funded GPO model is costing the healthcare system billions,” said MDMA President and CEO Mark Leahey in a press release. “This study proves that GPOs not only fail to bend the cost curve for healthcare down, they are preventing hospitals and patients from getting the best products at the best prices.

“This study bolsters our argument that Congress must pass legislation that will restore the illegality of kickbacks between suppliers and GPOs,” added Leahey.

Pathologists and clinical laboratory managers are free to make their own conclusions. Both the GAO study and the MDMA study offer plenty of details about the operations of group purchasing organizations. In particular, the GAO study opens up a useful window for understanding as to why Congress wants to play watchdog over 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?

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