How GPOs cut costs for the healthcare system and Medicare

August 6, 2014

From 2013 to 2022, GPOs are estimated to save Medicare and Medicaid a combined $398.8 billion

Hospitals and healthcare providers across the country are facing unparalleled financial pressures. Increasing patient populations, shrinking budgets and declining reimbursement rates mean that American hospitals are being asked to do more with less than ever before.

“Healthcare cost containment” has become a ubiquitous refrain as all parties to the healthcare system – payers, providers, patients, the government, suppliers and others – seek to rein in spending and remove costs from the system. The cost problem within the healthcare industry is a unique dilemma – as formulary managers can attest – because cost-cutting measures cannot come at the expense of quality of care.

But what does healthcare cost containment look like in practice?

The Healthcare Supply Chain Association (HSCA) recently released an economic analysis on the value of GPOs to the healthcare system, and their impact on providers, Medicare and Medicaid. GPOs are the sourcing and purchasing partners to virtually all of America’s 5,000+ hospitals, and deliver economic efficiencies to the supply chain through aggregated purchasing power.

For the purposes of the report, healthcare economists Dobson DaVanzo & Associates analyzed National Health Expenditure (NHE) data published by the U.S. Centers for Medicare and Medicaid Services (CMS), as well as updated Medicare Cost Report (MCR) data.

Dobson DaVanzo top-line findings about the impact of GPOs included:

  • From 2013 to 2022, GPOs are expected to reduce healthcare spending by $864.4 billion;

  • In 2012 alone, GPOs generated up to $55.2 billion in savings;

  • From 2013 to 2022, GPOs will save Medicare and Medicaid a combined $398.8 billion;

Dobson DaVanzo noted that they were inclined “toward a conservative estimate,” stating: “we believe [our evaluations are] low because GPOs have been bringing down the cost of supplies to hospitals for over 100 years. This means that there is some portion of the savings attributable to GPOs which is ‘buried’ in the baseline and is incalculable.”

Dobson DaVanzo also looked at the particular case of implantable medical devices (IMDs) such as pacemakers or artificial knees to further shine light on GPO impact and market penetration. IMDs “represent a sizeable proportion of the supply purchasing agreements between hospitals and GPOs, and a relatively large proportion of total health expenditures in the U.S.” The economists found the rate of hospital spending on IMDs to be relatively stable and noted that increased GPO market penetration would likely further reduce the rate of spending growth in the IMD market. 

The analysis also found that, “in total, estimates suggest that GPO activity lead to a reduction in supply-related purchasing costs to nursing homes and hospitals by 10% to 18% compared to the costs for providers who do not utilize GPOs.”

Cost containment is a system-wide challenge. Recent studies, including the Dobson DaVanzo report and other industry surveys of hospital purchasing executives, suggest that hospitals, nursing homes and other healthcare providers will continue to turn to their GPO partners to deliver the best product at the best value. 

Curtis Rooney is the president of Healthcare Supply Chain Association (HSCA).