Source: Becker's Hospital Review Feb. 2017
APV=Annual Purchasing Volume in billions based on self-reported data
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"We find greedy men, blind with the lust for money, trafficking in human misery."
Attorney General Thomas C. Clark
Address before the Boston Chamber of Commerce, October 8, 1947
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Hospital group purchasing organizations (GPOs) control buying of more than $300 billion annually of hospital supplies, including drugs, devices and supplies, for about 5,000 private acute care hospitals and thousands of non-acute care facilities.
The GPO industry is highly concentrated. According to the Government Accountability Office (GAO), four giant GPOs account for about 90% of total annual contracting volume. One, Premier Inc., is publicly-held; others are owned by member hospitals. See table below for details.
The first hospital GPO was founded in New York City in 1910 to reduce members' supply costs by buying in bulk, which is the sole purpose of a GPO. Under that business model, hospitals paid dues to the GPOs to cover administrative expenses. That system worked well for about 80 years, because GPOs understood that their mission was to serve their member hospitals.
That began to change in 1987, when Congress enacted the misguided Medicare anti-kickback "safe harbor," which exempted GPOs from criminal prosecution for taking kickbacks from healthcare suppliers. After the Inspector General of the Department of Health and Human Services implemented the safe harbor in 1991, vendors, not hospitals, paid GPO administrative expenses. Instead of serving member hospitals by cutting costs, GPOs became the agents of vendors.
Under the safe harbor rules, "admin" fees were to be limited to 3% of sales. If they exceeded that amount, the GPOs were supposed to report the fees to their member hospitals. The Inspector General of the Department of Health and Human Services was also empowered to request this data from the GPOs. But the GPOs have circumvented the rules by playing a game of semantics, inventing other kinds of fees (a/k/a kickbacks), including "marketing" and "advance" payments. And a 2012 GAO investigation found that the IG hadn't exercised his oversight authority in years. The available evidence indicates that total kickbacks paid by suppliers to GPOs have sometimes exceeded half of the suppliers' annual revenue for a single drug!
Predictably, this gave rise to a “pay-to-play” system in which suppliers buy market share by paying exorbitant fees to the GPOs in return for contracts giving their products exclusive access to GPO-member hospitals. This system has created supplier monopolies by slashing the number of suppliers of vital generic drugs and discouraging potential competitors from entering the marketplace.
Under this system, purchasing agents, not clinicians, typically decide which drugs, medical devices and supplies physicians can use for their patients. These decisions are based largely on how much kickback revenue these products can generate for the GPOs, not what is best for patients. Patients and healthcare workers are often denied access to lifesaving, cost-effective goods, from drugs to hip implants, pacemakers, pulse oximeters, safety needles, and countless other products.
Virtually all of the drugs in short supply are sold to healthcare facilities through GPOs, rather than directly to consumers at retail pharmacies. Many of these drugs had been saving lives for decades---until the GPOs gained a stranglehold over this marketplace.
These abuses have forced many firms to stop making inexpensive generic drugs rather than produce them at a loss. They’ve also crippled the ability of others to maintain their plants, equipment, and quality control, resulting in tainted drugs, adverse FDA inspections, and plant closings.
- The deadly 2012 meningitis outbreak, which was caused by contaminated drugs sold by an unregulated compounding pharmacy, the New England Compounding Center, was a direct result of this crisis. After two FDA-regulated generic drug makers stopped making a widely-used steroid pain killer because it had become unprofitable, many providers were forced to buy it from now-shuttered NECC. Ameridose, a sister company that has also been shut down because of quality problems, had contracts with the what were then the five largest GPOs, at a minimum. [For documentation, see "GPOs and the Fungal Meningitis Tragedy."]
Years before the drug shortages made headlines, four Senate Antitrust Subcommittee hearings, federal and state investigations, media exposés, antitrust lawsuits and academic studies found that GPOs, instead of saving money for hospitals by purchasing in bulk actually INFLATED healthcare costs. In fact, a 2011 empirical study found that the kickbacks increased supply costs by at least $30 billion a year. But other empirical and anecdotal evidence indicates that this dubious system inflates supply costs by as much as $100 billion. That’s because the “safe harbor” created a perverse incentive in which higher prices for supplies means more money for GPOs.
Thanks to aggressive GPO lobbying and campaign contributions, there is virtually no disclosure, transparency, regulation, or oversight of this powerful, secretive industry. Few, if any, outsiders know where all the billions are going.
Various investigations revealed that many GPO and hospital executives have enriched themselves personally through this system. GPO executives have received stock options in firms they do business with, while hospital officials have gotten “patronage fees” from GPOs and lavish perks from suppliers.
Four Largest Healthcare Group Purchasing Organizations
|1|| || Irving, TX|| Curt Nonomaque|| $100bb |
|*2|| Charlotte, NC|| Susan DeVore|| 50+ |
|3|| Nashville, TN|| Ed Jones|| 30|
|4|| St. Louis, MO|| Julius Heil|| 9|