How GPOs INFLATE Healthcare Costs
Sources: Premier Inc., McKesson Corp., Yankee Alliance, hospital pharmacy
"...savings figures that GPOs frequently cite as benchmarks to demonstrate savings are based on a manufacturer's list price that hospitals rarely, if ever, pay.”
Senators Mike DeWine (R-OH) and Herb Kohl (D-WI)
2003 letter from the chairman and ranking member, respectively, of the Senate Antitrust Subcommittee, warning the Department of Defense against outsourcing healthcare supplies purchasing to hospital group purchasing organizations
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The original and sole purpose of hospital group purchasing organizations is to save hospitals money. If they can't do that, there is no valid reason for them to exist. For more than 80 years after the first GPO was established in 1910, they accomplished that mission by obtaining volume discounts from suppliers. GPOs covered their administrative expenses from member dues, which the hospitals gladly paid because the GPOs achieved tangible savings. Their business model was similar to that of the Harvard Co-op, Recreation Equipment Inc. (REI), the outdoor gear co-op, Costco and Sam's Club.
That all began to change in 1987, when Congress, at the behest of hospital industry lobbyists, passed a misguided statute called the Medicare anti-kickback safe harbor provision. The safe harbor exempted GPOs from criminal penalties for accepting kickbacks from vendors---kickbacks that would be unlawful in virtually every other American industry. Indeed, with the enactment of the the safe harbor, GPOs likely became the only American industry that ever received a Congressional exemption from criminal prosecution.
This legislation created a new, destructive GPO business model. After the GPO safe harbor rules were implemented in 1991, GPOs no longer cared about saving hospitals money. Their goal now was to maximize fee (a.k.a kickback) revenue. And because GPO fees are based on a percentage of sales volume, the higher the price of hospital supplies, the more fees GPOs collect. These perverse incentives gave rise to a system in which vendors compete for exclusive GPO contracts based not on who can supply the best product at the best price, but on who can pay the highest fees. In effect, vendors buy market share from the GPOs for exclusive access to their member hospitals. The more they pay, the more market share they receive. As a result, many vendors favored by GPOs enjoy monopoly status.
Under the safe harbor rules, "admin" fees were to be limited to 3% of sales. If they exceeded that amount, the GPOs were to report the fees to their member hospitals. Further, the Inspector General of the Department of Health and Human Services was empowered to request this data from the GPOs. Trouble was, the GPOs circumvented the rules by playing a game of semantics, inventing other kinds of kickbacks, including "marketing" and "advance" payments. Additionally the GPOs included hospital executives in on the action, so that they stood to benefit personally if the fees exceeded 3%. And according to a 2012 GAO report, the Office of the Inspector General hadn't exercised its oversight authority for years!
Since there is virtually no disclosure in this industry, little is known about how much vendors are paying GPOs for exclusive access and market share. What little data is available shows that these fees have sometimes exceeded half of the annual sales for a single drug. In fact, documents obtained through discovery in a federal whistleblower case against Novation show that Ben Venue Laboratories was forced to pay 56.25% of its 1998 sales of diltiazem, which is used to treat high blood pressure and angina, to the giant GPO as the price of entry. [See Novation excess fee reports on the "GPO Documents" page]. Few companies in any industry could survive if they had to pay half of their revenue to a silent "partner" who added no value whatsoever to the business.
Indeed, Ben Venue suspended operations in November 2011 following an FDA inspection that found egregious contamination in the sterile production area. [Click HERE for FDA inspection report]. One immediate result: a critical national shortage of methotrexate, the drug of choice for treating childhood leukemia. Ben Venue has since closed permanently, exacerbating shortages of chemotherapy medications and other drugs. More recent evidence indicates that Novation's fees still exceed the 3% limit by a wide margin. To cross the bridge into the hospital marketplace, suppliers must "pay the toll to the troll": the GPOs.
So it should not come as a surprise that independent empirical research and anecdotal evidence show that instead of saving money for hospitals, these buying cartels actually inflate health care costs by at least $30 billion annually. GPOs are a major reason for the ever-increasing cost of healthcare.
History has shown, time and again, that competition and innovation reduce prices, whereas cartels raise them. For example, when Masimo Corp., now the leading maker of pulse oximeters, was finally able to obtain GPO contracts and compete with Tyco Healthcare, the dominant supplier, the price of pulse oximeters plunged by more than 30%. Masimo was awarded GPO contracts only after its story appeared on page one of The New York Times of March 4, 2002, after its CEO testified before the Senate Antitrust Subcommittee, and after it filed an antitrust lawsuit against Tyco Healthcare, now known as Covidien. Masimo ultimately received an award of about $59 million, including legal fees. In fact, former GPO contracting executives, in separate interviews, have estimated that the kickbacks inflate supply costs by about 30%. If this monopoly premium were eliminated, the savings to our healthcare system could approach $100 billion annually.
The first independent analysis that called into question GPO claims of cost savings was an April 2002 pilot study by what is now known as the Government Accountability Office, the investigative arm of Congress. It found that "GPOs' prices were not always lower and were often higher than prices paid by hospitals negotiating with vendors directly," in fact, "up to 39% higher than hospitals not using a GPO contract." Many other independent government and academic studies and media reports (see below) have discovered what countless U. S. hospitals---hospitals whose executives were more concerned about patient care and saving money than lining their own pockets with GPO patronage fees and slush funds ---had already concluded: that GPO claims of cost savings were a sham.
GPO claims of cost savings are based on dubious "sponsored research" by a few academics, notably Professor Eugene Schneller of Arizona State University. These professors are paid not only for these specious "studies" but also for serving as lobbyists and public relations spokespersons for this troubled industry. PADS strongly believes these practices are an egregious violation of the fundamental tenets of academic integrity and ethics. For example, on January 30, 2013, Professors Schneller and Prof. Lawton Burns of the Wharton School gave a presentation to Senate healthcare staff on behalf of the Healthcare Supply Chain Association (HSCA), the GPO trade group. [Click HERE for a photo of Professors Schneller and Burns with HSCA president Curtis Rooney.] Accordingly, PADS on April 21, 2014 filed a formal ethics complaint against Prof. Schneller with Arizona State University's Office of Research Integrity and Assurance.
Click HERE for PADS COMPLAINT.
Click HERE for Schneller "STUDY."
Click HERE for Novation DOCUMENT
Click HERE for HSCA DOCUMENT.
Click HERE for Schneller BIO.
On November 17, 2014, nearly seven months after PADS filed the complaint, ASU notified us that it would take no action against Prof. Schneller: READ LETTER.
In no sector of the hospital supplies industry is the financial impact of the GPO "pay-to-play" scheme more evident than in the generic injectable drug marketplace. GPOs have caused prices to skyrocket, in some instances by more than 1000% of their pre-shortage levels---if the drugs are available at all. For a representative sampling, see the table below.
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"Isn't That The Point of a GPO?"
PiperJaffray Industry Note, Sept. 19, 2014
"An Empirical Analysis of Aftermarket Transactions by Hospitals"
Journal of Contemporary Health Law & Policy, Fall 2011
"Medtronic Makes Pact-Ending Move"
Wall Street Journal, Feb. 25, 2011
"Billions Wasted in Way Medical Devices are Bought, Study Finds"
USA Today, Oct. 7, 2010
"Empirical Data Lacking to Support Claims of Savings With Group Purchasing Organizations"
Senate Finance Committee, Minority Staff Report, Sept. 24, 2010
Washington Monthly, July/Aug. 2010
"Watch Out for GPOs"
Forbes.com, Nov. 12, 2009
"Redefining Health Care"
Professors Michael Porter & Elizabeth Teisberg, Harvard Business School Press, 2006.
Letter from hospital finance executive to Senate Antitrust Subcommittee staff urging repeal of Medicare anti-kickback safe harbor statute (name and other identifying information redacted), May 2, 2005
"Supply Middlemen May Leave Hospitals Ailing"
Los Angeles Times, Apr. 14, 2005
"Secrets Aid Drug Suppliers, Not UC"
Los Angeles Times, Feb. 21, 2005
"A Valuable Drug Discovery at UC"
Los Angeles Times, February 17, 2005
"Defining and Measuring Product-Based Cost Savings in the Health Care Supply Chain"
Lynn James Everard, healthcare supply chain strategist
"The Impact of Group Purchasing on the Financial Prospects of Health Systems: Changing Value Perceptions and Unintended Consequences"
Lynn James Everard, V.I.P.E.R Group Inc.
"Letter to the Editor: Favoring a Fee-based GPO System"
Healthcare Purchasing News, Aug. 2003
"A Region's Hospital Supplies: Costly Ties"
The New York Times, Oct. 8, 2002
"Letter to the Editor: GPOs Have Lost Customer Focus"
Healthcare Purchasing News, Aug. 2002
"A Mission to Save Money, A Record of Otherwise"
The New York Times, June 7, 2002
"Hospitals Find Buying Groups May Not Come Up With Savings"
The New York Times, Apr. 30, 2002
"Group Purchasing Organizations: Pilot Study Suggests Large Buying Groups Do Not Always Offer Hospitals Lower Prices"
General Accounting Office. Apr. 30, 2002
"New Jersey Hospitals Seek Savings, Nix GPOs"
Jan. 12, 2000