Hospitals Still Rely on Group Purchasing Organizations to Save Money
A recent “Viewpoint” published in JAMA raises some old concerns about hospital purchasing alliances, also known as group purchasing organizations (GPOs). Those concerns, first voiced in a series of Senate hearings from 2002-2006, and then investigated in a series of reports issued by the Government Accountability Office, deal with whether GPOs actually reduce supply costs for their hospital members, vendor payments to GPOs for contract administration, and GPOs contracting with small numbers of vendors (e.g., sole-source or dual-source contracts).
New Wharton research by LDI Senior Fellow Lawton R. Burns and LDI Associate Fellow Allison Briggs, published in Health Care Management Review, puts these concerns to rest – for the second time. Burns and Briggs report results from a 2014 national survey of hospital members of GPOs that updates finding from a similar 2004 survey. Appropriately, the article is called “Hospital Purchasing Alliances: Ten Years After”. The more recent survey reiterates the conclusions from the earlier one: hospitals still rely on their GPOs to help them save money. There has been no change in the belief in the national GPO’s ability to demonstrate cost savings or in hospital satisfaction with the national GPO. The majority of hospitals still belong to GPOs but, over time, have shifted some of their purchasing away from the national organizations to regional and local affiliates of the national GPOs. In 2004, 71% of supply spending went through the national GPO; in 2014, 70% went through GPOs at all three levels, with 62% going through GPOs affiliated with the national organizations. Among GPOs at these different geographic levels, however, hospitals still rank-ordered the national organizations as number one in terms of the importance of their role and their impact.
Contrary to the concerns of the JAMA authors, hospitals do not view contract administration fees as an influence over their buying decisions but rather view them positively as a source of hospital savings, since they are largely funneled back from the GPO to the hospital. Moreover, hospitals continue to positively view contracting with a limited number of vendors, and even report little change in how their physicians view such contracts. The use of fewer vendors – also known as vendor rationalization – is commonly used to drive down prices for “physician preference items” such as implants and stents. Indeed, there appears to be little change in the use of such contracts over time. They are nevertheless concerned about competition in supplier markets, which may be more a function of merger activity than GPO contracting.
Similar to findings from other recent research by my Wharton colleagues Matthew Grennan and Ashley Swanson, hospitals derive value from pricing benchmark data supplied by their GPOs as well as data analytics. They also derive value from non-price services such as savings from IT and centralized staffing, clinical improvement, clinical expertise and data support for value analysis, and consulting services.