The debate over how to stem the rising costs of healthcare has assumed a central role in the public policy conversation. Because healthcare group purchasing organizations (GPOs) play an integral role in the medical supply chain, questions about whether GPOs operate competitively and whether they reduce healthcare costs have greater urgency.
In the 1980s, Congress endorsed GPOs as a powerful force offering competition and lowered prices in the medical supply market, finding that GPOs “can help reduce healthcare costs for the government and private sector alike.” In more recent years, the cost-savings benefits long attributed to GPOs have been the subject of some debate, typically centered on whether GPOs truly obtain the lowest prices for their members and whether GPO contracting practices shut out some suppliers. Some have suggested that the GPO funding model—vendor-paid administrative fees—may hamper GPOs from providing competitive benefits.
In light of these questions, we examined the role of GPOs and the vendor-funding model by evaluating empirical evidence and applying economic analysis. Based on our analysis, the following are 5 things to know about GPOs, their business model and role in the supply chain, and their impact on healthcare costs and competition:
1. GPOs source and negotiate prices for products and services. GPOs help source and negotiate prices for drugs, medical devices, and other products and services on behalf of healthcare providers, including hospitals, nursing homes, ambulatory care facilities, physician practices, and home health agencies. Often, GPOs are owned by their provider members. They do not take title to or possession of product. Rather, the central purpose of GPOs is to improve efficiency. GPOs have also increasingly sought to differentiate themselves by offering a range of additional services to healthcare providers—for example, data analytics—that may further lower costs or improve operations.
2. GPOs save money for healthcare providers and patients. GPOs reduce costs primarily through two mechanisms: lower transaction costs and lower prices through joint negotiation.
The healthcare supply acquisition process is complex, involving thousands of suppliers selling many more thousands of pharmaceuticals, devices, products, and services to thousands of healthcare providers. Because prices are frequently negotiated and negotiations can be complicated, the scope for transaction costs savings from reducing the number of negotiations is large. For perspective, imagine that 1,000 vendors each sell 10 products to each of 2,000 hospitals. If each vendor bargains separately with each hospital, there are 2 million negotiations to determine as many as 20 million prices. If the GPO negotiates one price for each product on behalf of its members, then the number of negotiations falls from 2 million to 1,000, and the number of prices negotiated falls from 20 million to 10,000.
Economic literature identifies several ways by which joint purchasing can yield lower prices than buyers can obtain on their own, including increasing a buyer’s bargaining strength, increased volume and other discounts, and more intense supplier competition. Evidence indicates that providers realize cost savings of 10% to 18% by using GPOs, relative to the costs providers would have incurred if they negotiated prices on their own. Importantly, providers are likely to pass some of these cost savings on to patients.