Open Market Competition Outperforms GPO Pricing By Up To $37.5 Billion
CHICAGO--(BUSINESS WIRE)-- An empirical study released today on the impact of Group Purchasing Organizations (GPOs) on hospital costs for medical equipment shows GPOs often negotiate prices for member hospitals that are significantly higher than hospitals could receive through free market competitive bidding processes.
The report finds that GPOs, whose role is to create volume discounts for hospitals by aggregating their purchasing power, often operate according to a compensation system that in fact provides incentives to keep prices artificially high.
The study, funded by the Medical Device Manufacturers Association (MDMA) and conducted by leading economists Drs. Robert Litan and Hal Singer, examined a database of 8,100 hospital transactions from 2001 through 2010. Findings indicate that when the hospital purchasing process is exposed to greater competition, hospitals were able to achieve savings of up to 18 percent off the GPO price achieved on average for 2010.
Applied across the entire U.S. healthcare system, these savings would represent approximately $37.5 billion annually for hospitals and more than $17.25 billion in savings every year in government healthcare spending versus what is achieved under the current GPO purchasing structure. According to study co-author Hal Singer, Managing Director at Navigant Economics, the study highlights the power of free market competition and the need to reform the way GPOs are compensated to help ensure they deliver value to the healthcare system.
“GPOs can and should have an important role to play in helping control U.S. healthcare costs. But the way they make money is at cross-purposes with their mission to be aggressive negotiators for their clients,” Singer said. “Under the current GPO compensation structure, GPOs are compensated not by their member hospitals but instead by medical suppliers. GPOs therefore are incentivized to protect deals with incumbent device makers, to the detriment of their member hospitals. Hospitals want to hold down the costs of medical equipment. By aligning the GPOs’ incentives with their clients’ incentives, GPOs would do an even better job at a time when holding costs down is vitally important.”
The study concludes that GPOs have been poor bargaining agents because GPO compensation perversely increases with the prices charged under contractual relationships.
The authors conclude that correct alignment of incentives could be achieved by reinstating the Medicare anti-kickback statute of the 1986 Social Security Act, prohibiting vendors from paying GPOs. GPOs, which have been exempted from this provision, currently receive “administrative fees” from suppliers- usually a percentage of the total contract price. This exemption allows GPOs to be compensated by the suppliers they should be bargaining with, while allowing them to benefit from increases in price. “So long as GPOs are compensated by suppliers, they have an inherent conflict that undermines their incentive to negotiate the best prices for their member hospitals,” Singer said.
Details of the study
The study, entitled “Do Group Purchasing Organizations Achieve the Best Prices for Member Hospitals? An Empirical Analysis of Aftermarket Transactions” (available at www.naviganteconomics.com), examined a database of medical device transactions conducted between 2001 and 2010 in which hospitals sought to improve GPO prices through competitive bidding processes.
The categories of capital equipment in the database included biomedical, dietary, imaging, information technologies, laboratory, laundry, monitoring, oncology, physical therapy, plant, storage, surgery, telecom, and vehicles. In nearly 80 percent of actual purchases, hospitals were able to achieve positive savings relative to the GPO price by allowing the firm MEMdata to rebid the contract for a second time. The empirical study finds hospital savings of up to 18 percent off GPO price on average in 2010—a savings of roughly $11,500 for every capital equipment purchase.
About Group Purchasing Organizations
Group purchasing organizations (GPOs) were first established in the early 20th century by small hospitals seeking to pool their purchasing power for better prices, a method used in many industries. By buying as a group, hospitals should achieve lower prices and greater discounts than if they bought individually. However, when GPOs became exempt from anti-kickback laws and became compensated with higher administration fees as prices increased, healthcare prices thereby increased.
GPOs have since consolidated and evolved into large, for‐profit entities that negotiated contracts worth $200 to $300 billion in 2009. The vast majority of hospitals, nursing homes, and other healthcare institutions currently rely upon them to make most purchasing decisions.
About the authors
Robert E. Litan is a Senior Fellow in Economic Studies at the Brookings Institution, and Vice President for Research and Policy at the Kauffman Foundation in Kansas City.
Hal J. Singer is Managing Director and Principal at Navigant Economics and has served as Adjunct Professor at Georgetown University's McDonough School of Business.
About Navigant Consulting
Navigant Consulting, Inc. (NYSE: NCI) is a specialized, global expert services firm dedicated to assisting clients in creating and protecting value in the face of critical business risks and opportunities. Through senior level engagement with clients, Navigant professionals combine technical expertise in Disputes and Investigations, Economics, Financial Advisory and Management Consulting, with business pragmatism in the highly regulated Construction, Energy, Financial Services and Healthcare industries to support clients in addressing their most critical business needs.
Navigant Economics LLC, a wholly-owned subsidiary of Navigant Consulting, Inc., is comprised of more than 130 consulting professionals, including 30 Ph.D. economists, many of whom are affiliated with leading institutions such as the University of Chicago, Georgetown University, Northwestern University and the George Mason University School of Law. Navigant Economics provides economic analyses of legal and business issues to law firms, corporations and government agencies, with particular expertise in Antitrust and Competition, Intellectual Property, Labor, and Securities Ligation matters. More information about Navigant Consulting and Navigant Economics can be found at www.naviganteconomics.com.
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