Money Flows Related to Hospital Purchases Using a GPO

1
Are Group Purchasing Organizations (GPOs) Helping
or Hindering Competition? Presented
toMedicometrie Roundtable18 January 2003
Bernard L. Weinstein, Ph.D. University of North
Texas Center for Economic Development and
Research http//www.unt.edu/cedr/presentations.htm
2
Overview of GPOs

• Negotiate contracts with vendors (e.g.,
  manufacturers) on behalf of members (e.g.,
  hospitals)
• Expected to use volume purchase to negotiate
  lower prices
• Vendors pay GPOs administrative fees based on
  sales
• Fees finance operations
• Surplus fees distributed to owners or used to
  finance new ventures
• GPOs vary by size, scope of service, and
  ownership type

3
Characteristics of Selected GPOs
4
Characteristics of Selected GPOs (contd)
5
2001 GPO Purchases

• Total 120 billion
• Six largest administer 50 billion
• Novation and Premier together administer 32
  billion
• About 25 billion of pharmaceutical purchases
  from GPOs

6
Money Flows Related to Hospital Purchases Using a
GPO
Payment for purchase of product
Vendor(manufacturersanddistributors)
Hospital
Administrativefees
Portion ofadministrative fees
GPO
Portion ofadministrative fees
Otherventures
Source GAO survey of hospitals in a greater
metropolitan area
7
GPO Cost Savings Fact or Fiction?
Contrary to the claim that GPOs hold down costs,
is the market structure - relatively few buyers
and relatively few sellers - in practice a
bi-lateral monopoly that stifles innovation and
competition and drives up prices?
8
GPO Cost Savings Fact or Fiction?

• Purchasing decisions removed from clinicians
• Administrative fees inflate contract prices above
  arms-length level
• Lengthy contracts make market entry difficult for
  new vendors Example of Retractable Technologies
• Because buying groups are financed by vendors,
  conflicts of interest arise. More purchase ?
  Larger rebates

9
Antitrust Issues

• DOJ FTC guidelines include 2 tests to help
  gauge whether an arrangement is likely to raise
  antitrust concerns
• Purchases through a GPO must account for less
  than 35 percent of the total sales of the product
  or service (such as pacemakers) in the relevant
  market.
• The cost of purchases through a GPO by each
  member hospital that competes with other members
  must amount to less than 20 percent of each
  hospitals total revenues.

10
Anti-kickback Issues

• To each participating member, a GPO must
  disclose
• That fees are to be 3 percent or less of the
  purchase price, or the amount or maximum amount
  that each vendor will pay.
• At least annually, the amount received from each
  vendor with respect to purchases made by or on
  behalf of the member.

11
Congressional Hearings Spring of 2002

• Novation acknowledges that 30 percent of
  contracts exceed 3 percent rebate
• Premier says fees 3 percent or less or less, but
  the BGPO accepts stock in supplier companies
• Some executives admit receiving stock options in
  supplier companies
• General Accounting Office releases study showing
  non-GPO contract prices often lower

12
Differences between Median GPO Contract Prices
and Median Non-GPO Contract Prices for 41
Pacemaker Models
Source GAO survey of hospitals in a greater
metropolitan area
13
Differences between GPO Contract Prices Non-GPO
Contract Prices for 11 Pacemaker Models Purchased
by Large Hospitals
Source GAO survey of hospitals in a greater
metropolitan area
14
Garbage Bags A Comparison Novation, a company
that negotiates supply contracts for hospitals,
says it typically gets the best deals on
products. But an analysis of the prices paid for
garbage bags by one hospital in the southeast
shows that it would pay more if it bought though
Novation.
26.7
27.2
18.4
Source CoalesCo New York Times
15
Recent Developments

• In August, Novation says it will use more
  suppliers, shorten the length of contract, and
  limit fees from suppliers
• Both Novation and Premier claim they will no
  longer force hospitals to bundle purchases in
  order to receive discounts
• Premier will no longer invest in supplier
  companies and will drop 90 percent minimum
  purchase requirement

16
Recent Developments (contd)

• In November, Novation loses a 212 million
  contract with five hospitals and 40 clinics in
  San Diego to a smaller GPO. Hospitals expect to
  reduce supply costs by 20 to 25 million
• A 10-hospital chain in Iowa left Premier and now
  negotiates directly with vendors, claiming
  theyre beating Premiers prices by 12 to 14
  percent

17
Why Some Hospitals are Leaving GPOs

• Ability to negotiate with greater number of
  manufacturers
• Shorter contracts that permit hospitals to take
  advantage of falling prices
• Manufacturers dont have to pay administrative
  fees to GPOs pass savings on to hospitals

18
Has technology made GPOs obsolete?