Understanding Group Purchasing

Group Purchasing Organizations (GPO’s) were originally designed as a means of controlling healthcare costs and providing members greater economies of scale. The basic idea is to combine the buying power of members together to get better pricing. The US Senate has held numerous hearings about the questionable benefits and business practices of some GPO’s. Below is an excerpt from a New York Times article on GPO’s, which summarizes some of the United States Senate and the General Accounting Office (GAO’s) concerns.

“The Senate Judiciary Subcommittee on Antitrust, Competition Policy, and Consumer Rights held three hearings regarding the practices of Group Purchasing Organizations (GPOs) and Dominant Medical suppliers. As a result of these hearings, most of the major GPOs, including Premier and Novation, created Codes of Conduct to attempt to reduce anticompetitive conduct relating to clinical preference products. As part of these investigations, the General Accounting Office published two reports. The first report found that GPOs do not always offer hospitals lower prices. The second GAO report addressed certain anticompetitive contracting practices used by GPOs including sole source contracts and bundling arrangements and discussed the various Codes of Conduct implemented by the GPOs to correct these practices -.”

The bottom line is that GPO’s do not always deliver the latest products at the best price. GPO’s charge money for their services. They receive rebate payments called an Administrative Fee, of up to 3% of the purchase price. GPO’s have been permitted a Safe Harbor from anti-kickback statutes that prohibit these type payments in other industries. These additional costs are either included in the product price and rebated from the manufacturer back to the GPO, or are added to the invoiced amount and paid back to the GPO by the Distributor.

The Catalog/Web Only Distributors who typically win low bid GPO contracts are those that offer the least to their customers. Yes, you save a few cents by changing your Vendor from one that has a local presence, to an out of state mail order house. But no longer will you have access to qualified on site In-Service Training. No longer will you be able to make a simple call to get returned items picked up. No longer will you be offered the full range of products available, or the latest technology. No longer will you have a knowledgeable, objective source of product information. If something breaks, you are the one who deals with the manufacturer. They will not offer product repairs or service. They will not come to your golf tournament, or be at your Regional Conference. These companies are often called “box movers”, because that is all they do. You will pay a little less and get a lot less. No magic here folks.

The benefit of Group Purchasing is that you can save some money by giving up product choice, flexibilty, and access to support. The savings will not be dramatic, since most of the savings goes to pay the GPO Administrators salary and overhead. You just trade who gets your money, more than control how much you spend. It seems few business school educated Hospital Administrators ever ask the obvious question. When presented with the annual rebate check none ask, how much extra did I spend to get it?


About Dan White

I'm a retired Paramedic and EMS Instructor with 35 years EMS and emergency medical product experience. I love canoes, cars and EMS. I have written a lot about EMS Technology on the Paramedic Blog, the Insights on Innovation column for EMS1.com, on AmbulanceWorld.com and Multibriefs.com. I can be reached directly at 573-240-0002.
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2 Responses to Understanding Group Purchasing

  1. GPOs come in various sizes and derive their revenue through a variety of mechanisms. One of the most common methods is through administrative fees that are actually paid by the vendors.

    • Dan White says:

      After over 35 years in the medical product industry I have grown convinced that GPO’s have dramatically increased the cost of health goods and services, and in doing so increased the cost of healthcare to Americans while simultaneously stifling innovation. I keep looking in the cloud for a silver lining and all I can find inside smells bad.

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