The Value of Group Purchasing

Posted by on in Uncategorized

Group purchasing is a principal strategy by which companies in many sectors, especially healthcare, have
sought to achieve cost containment, improve the quality of goods and services and allow staff to focus
their efforts on activities more suited to specialized training. This examination, entitled, ‘The Value of
Group Purchasing – 2009’ empirically studied how hospitals and related systems across the United
States regard their utilization of group purchasing organization (GPO) services, savings, satisfaction and
overall value. The hypothesis herein is that GPOs play a significant role in supporting the
administration’s efforts to find major efficiencies in the provision of health care and by doing so keep
costs low. Twenty eight hospital systems, representing 429 hospitals were surveyed as to their
commitment to purchasing from GPO contracts and assessment of value.
This study finds that significant cost savings have been and can be further realized in U.S. national health
care expenditures from the health care group purchasing industry. Specifically, this study estimates that
GPOs save the U.S. health care industry $36 billion dollars annually in price savings and over $2
billion dollars in savings associated with human resources uncommitted to the purchasing process.
Survey respondents noted that GPOs drive significant savings for both prices of goods acquired and total
costs associated with the purchasing process. Few hospitals would be able to take on the expense
associated with hiring new staff dedicated to contracting. This duplication of personnel would be
wasteful, inefficient, and, in all likelihood, ineffective. In the absence of GPOs, collaborative purchasing
efficiencies, to bring together hospitals and systems, would also be required. GPOs assure efficient
contracting, price reductions as a result of consolidating volumes of materials to influence supplier price
levels, and contribute to a sustained level of high quality suppliers in the marketplace. GPOs are a key
part of the value chain that results in high levels of hospital performance in cost, safety and clinical
The $36 billion in annual GPO direct price savings is distributed as follows:
 $6.8 billion in price savings for the calendar year for hospital pharmaceuticals.
 $8.5 billion for savings relating to medical/surgical (non-physician preference item)
 $1.9 billion in attributed savings in the $10.4 billion cardiology implant marketplace, either
directly or indirectly by providing members with GPO purchased goods or reference pricing
from directly engaging the marketplace. Over half of U.S. hospitals and systems use GPO
pricing as the benchmark for starting their own negotiations for physician preference items –
the most expensive items that they purchase. Similarly, over half report the desire to improve
GPO contract penetration.
 $840 million in attributed savings in the $7 billion dollar orthopedic implant marketplace
(either directly or indirectly by providing members with GPO reference pricing for directly
engaging the market).
 $17.96 billion in attributed savings to “other clinical” products, computers, food, janitorial,
office products, etc.
Hospitals were also queried regarding the expenses associated with additional human resources needed to
carry out these functions if there were no GPO present.
Savings beyond product pricing
 $1.8 billion in GPO in attributed human resource savings for hospital purchasing nationally
by buffering hospitals from the need to comprehensively carry out strategic sourcing,
contracting and other key GPO activities for inpatient pharmacy, general medical products,
orthopedic products, other clinical products and housekeeping products. For large systems,
similar additional workforce expenditures of as much as $600,000 per system would be
necessary. Thus total workforce savings for hospitals and systems would exceed $2 billion
dollars annually.
GPOs buffer hospitals from a variety of risks in the marketplace that are necessary to achieve effective
clinical performance and improve safety. Participants value GPO efforts to monitor and manage drug
shortages as well as identify and support contracts for safety products. GPO core competencies include
strategic sourcing (e.g., identifying products services and suppliers), developing requests for proposals
and their evaluation), obtaining best and final offers, and implementing and monitoring contracts.
Since hospitals and systems utilize GPO pricing as reference pricing to enter the market (to achieve
savings beyond GPO savings and with GPO pricing representing the ceiling from which they negotiate)
GPO influenced savings actually extend far beyond the estimated $36 billion in total savings.
Background on GPOs, Study Objective & Methodology:
GPOs play an important part in helping hospitals and other health care providers across the country with
bulk-buying power thereby enabling them to purchase products and services at lower costs than they
could realize individually buying goods and services. GPOs develop contracts for their hospital or health
care provider members and customers to access a highly dispersed and diverse supplier marketplace.
GPOs realize savings and efficiencies by aggregating purchasing volume and using that leverage to
negotiate discounts with manufacturers, distributors and other vendors.
The purchasing entities are characterized by core competencies associated with supply chain management
activities. They reduce the risks associated with new suppliers’ competencies and their products. GPOs
work with their members to assure improvements, safety, efficacy and clinical outcomes. These
competencies and capabilities require highly trained employees whose efforts also provide savings to
hospitals and systems in the form of reduced full-time employees needed to carry out these critical
management tasks.
Objective & Methods
This study provides an important window into hospital and system expectations both traditional and
expanded GPO services. The objective of the study was to determine hospital attributed savings to GPO
participation and document the extent to which GPO contracting activities provide participants with
information to engage the marketplace – both through GPO contracting and through hospital and system
contract efforts. The examination was also designed to:
 Assess hospital strategies for utilizing GPO opportunities and determine the extent to which
these strategies are valued and realized.
 Understand how hospitals and the systems in which they reside carry out key purchasing
 Determine the savings in reduced labor to GPO participants as a result of GPO participation.
 Assess the importance of key GPO functions – including pricing, contracting, physician
preference and management, tools provided to members and networking opportunities.
 Determine GPO participant satisfaction with GPO services.
 Understand how costs of acquisition would increase if GPOs were not involved in hospital

In this survey 28 hospital systems, representing 429 hospitals were queried as to their commitment to
purchasing from GPO contracts for commodities, pharmaceuticals, physician preference items such as
orthopedic implants, and capital equipment (e.g., beds, etc.), as well as the savings achieved by levels of
commitment (i.e., percentage of contract purchased off a GPO contract). The study is unique in that it
considers the extent to which GPOs reduce transaction costs associated with the employment of supply
chain personnel for a variety of categories of products at both the hospital and system level. It also
documents the various added value strategies associated with hospital/system GPO expectations,
including outsourcing, utilizing GPO price as a benchmark for individual hospital contracting, and
utilizing GPO pricing to obtain custom contracting.
The study did not focus on all products purchased by hospitals – but rather those key to the clinical
endeavor including inpatient pharmacy, general medical items, orthopedic implants, cardiology implants,
and a wide range of clinical products.). Respondents were asked about their total percent of all goods
purchased through GPOs and estimated savings. U.S. hospitals have approximately $310 billion in nonlabor
expenses – much of which could theoretically be purchased through a GPO. Respondents purchased
only 72.8% of all their goods through GPOs with an anticipated 18.7% in average savings. This figure,
applied to the full non-labor expenditures, suggests as much as $42.2 billion dollars of savings attributed
to GPO purchases. GPOs, however, do not uniformly provide their participants with access to a full
range of purchased products and services (e.g., utilities and building supplies) or with access to all
medical/surgical, pharmaceutical or capital products. Consequently, reducing the range of purchased
products and services not carried by GPOs by 20% of all non labor expenditures – an overall GPO
savings is estimated at $36 billion dollars nationally. This figure is consistent with the mid-range of other
recent academic estimates.

The Value of Group Purchasing – 2009
List of Tables
Table 1: Characteristics of Hospitals, Systems, and Purchasing Patterns & Savings
Table 2: Decision Making for Purchasing
Table 3: Reported Purchasing Strategy
Table 4: GPO and Hospital Responsibility for Purchasing
Table 5: Meeting Member/Customer Expectations for Traditional Activities
Table 6: Meeting Member/Customer Expectations for Expanded Activities
Table 7: Table 3: GPO Role in Purchasing Strategy
Table 8: Purchasing Patterns and Satisfaction
Table 9: GPO Meeting Expectations for Traditional and Expanded Services by Level of
Contract Utilization
Table 10: Workforce Savings (FTE) Attributable to GPO Participation
The current economic downturn has significantly increased the pressures felt by hospitals and
other health care providers crippled by revenue reductions and the cost of caring for the
uninsured. For nearly 100 years health care group purchasing organizations (GPOs) have
assisted hospitals and health care providers reduce their non-labor costsi
. This has been
accomplished by helping them meet their goals of strategically contracting, sourcing and
procuring goods and services so that they may better care for their patients. Next to labor, the
cost of goods and purchased services account for the second-largest dollar expenditure in the
hospital setting.ii

Hospitals, however, see GPO purchasing as just one, among several alternative strategies,
for meeting their strategic procurement goals. Hospitals go to market for goods and services in
many different ways – and in different ways for different kinds of products. The strategies
surrounding hospital purchasing are, as we shall see in this report, wide-ranging – at times
supplementing GPO services – and at other times actually substituting for such services.iii In
fact, hospitals report using their GPO contracts for, on average, only 72.8 percent of their goods
and services needs.
Some hospitals attempt to purchase mostly from their GPO. Others differentiate between
product types such as pharmaceuticals, capital, commodities and expensive physician preference
items. Thus while it is very important to understand the impact of GPOs – it is also important to
understand how that impact is achieved and why the potential market for GPOs is not the
actualized market for GPO purchasing. Furthermore GPO impact should not be assessed
“merely” on the basis of a hospital’s spend through GPO contracting. Rather, one must
understand how hospitals set out to source and purchase their products to truly understand the
impact and value that GPOs provide to the health care system.
Our work here is consistent with earlier work by Schnelleriv and Burns and Leev
documented the substantial cost savings, savings from lower prices, and overall satisfaction
associated with GPO participation. A 2008 survey by Medical Distribution Solutions, Inc.
documents both high levels of hospital satisfaction with GPOs as well as hospital intentions to
purchase increased volumes through GPO This study supports that GPOs bring
value and satisfaction to hospitals.
Overall satisfaction measures, however, do not provide a full signal of the value
associated with GPOs. Hospitals, to different degrees, have inconsistent expectations regarding
their GPOs – in areas such as lowered prices for products, contract efficiency and flexibility,
management of physician preference items, on-site provision of tools for improving supply chain
management and for networking. While Schnellervii identified the lack of value attributed to
many of these “added service” areas, Burns and Leeviii have recently characterized the
discrepancy between satisfaction by hospitals with GPO services and satisfaction with such
services. Satisfaction for the expanded range of GPO services, however moderate, frequently
exceeds hospital attribution of importance of such services.ix
As we assess findings in this study, it is important to recognize that GPOs were originally
formed to bring together buyers and sellers to create a more efficient marketplace. Thus while
GPOs missions will vary, x it is likely that in assessments of GPOs respondents narrow their
sights to GPO performance to the extent that GPOs meet their goal to reduce transaction costs.
GPOs are first and foremost valued for fulfilling sourcing needs and averting the variety of
market, strategy and demand related-risks associated with entering the market for thousands of
goods on their own.
To provide a more analytical context to these questions Schneller and Smeltzer pointed
out that there are four dominant models for hospital and system engagement with GPOs that
require further elaboration:
Type 1 – GPO dominated purchasing – characterized by high GPO involvement in
Product selection and High use of GPO contracts.
Type 2- Strategic Outsourcing of Contracting – characterized by low GPO
involvement in product selection and High use of GPO contracts
Type 3 – Strategic manipulation of purchasing – characterized by High GPO
involvement in Product Selection and Low levels of GPO contracts.
Type 4 – Hospital/IDN dominated purchasing – characterized by Low involvement of
GPO in product selection and strategic sourcing and low use of GPO contracts.
Understanding that there are different strategies is important for assessing GPO
satisfaction, success and value. As Burns and Lee have pointed out, for overall purchasing,
“hospitals that use the alliance’s pricing as a benchmark ceiling to negotiate their own deals are
less likely to report savings and satisfying benefits” from their GPO.xi Similarly, hospitals that
purchase the larger proportion of their physician preference items through GPOs appear to be
more satisfied with their savings.xii Within this context, it is important to remember that while a
hospital or system may have an intended strategy for carrying out its purposes, there may be a
significant gap between a hospital’s or system’s intended and realized strategy.xiii
As we shall see in the analysis, satisfaction with GPOs is consistently high among Type 1
and Type 2 hospitals. They require relatively fewer competencies for strategic sourcing and
contracting than they now possess. While many of these hospitals are relatively small, Type 1
and 2 hospitals are found across the spectrum of hospitals and systems. And acquiring such
competencies, in the absence of a GPO, would be, without doubt, very expensive. Similarly
Type 3 and Type 4 hospitals, while having made investments in directly engage the marketplace,
rely heavily on GPO presence to bring stable pricing to the medical materials environment.
GPO contracting (with most contracts having a three year term) provides GPO members with
stability in pricing over the course of a contract. As a result hospitals have the ability to engage
in more accurate budgeting activities and to buffer themselves against increases in the costs of
goods. With such stability they can also anticipate the impact that the costs of goods will have
on the hospital as well as specific kinds of admissions to the hospital. To the extent that GPOs
carry out scrutiny of supplier competencies and capabilities, hospitals are relieved of the difficult
task of assessing supplier risk. GPO contracting also can act to smooth out flux in marketplace
pricing – buffering hospitals against short-term price changes such as those recently affecting
certain raw materials markets.
An unintended consequence of GPO pricing is the provision of hospitals and systems, which
choose to purchase outside of GPO contracts, with pricing information for directly negotiating
contracts on their own behalf (especially types 3 and 4 above). While savings associated with
such activities are rarely attributed GPO contracting, GPO contracting facilitates a diverse and
active marketplace for a wide range of products – including costly physician preference items
(PPIs). We agree with a recent study that depicts GPO members and customers as having choice
to “make their own decisions about which goods and services to obtain.”xiv But beyond this they
provide their members and customers with options – for purchasing through their GPO or on
their own.
There are GPO savings associated with reduction in labor costs surrounding the strategic
sourcing, contracting process, and the total acquisition of products. While GPOs act as the
agents of their member hospitals and systems for purchasing, it would be a mistake, save in rare
instances, to characterize GPOs as organizations those hospitals turn to “outsource” their
purchasing. Even those hospitals that utilize GPOs for a majority of their purchases employ
individuals to facilitate the purchasing process. Yet few hospitals or systems would find
themselves adequately staffed to assume the full range of GPO functions. However the extent of
GPO savings to hospitals and systems, associated with reduced full time equivalent employees,
has not been systematically studied and leads to underestimation of the full value that GPOs
bring to members/customers – beyond the significant savings estimates we’ve found, associated
with GPO savings from pricing.
The Value of Group Purchasing – 2009 assesses how 429 hospitals, within 28 systems
utilize and gain benefit from GPO presence in the marketplace. While it assesses the estimated
savings that hospitals accrue directly through GPO purchasing, it also assesses the savings
achieved through the mix of GPO and hospital/system specific strategies. The report, thus,
contributes to the question of levels of GPO penetration in the health care purchasing

The US health care system, at the point of entry into the second decade of the 21st century,
however, does not mirror, in terms of structure, size nor needs the health care system that existed
at the founding of the first group purchasing organizations. Indeed, as a result of mergers,
acquisitions, and the increased centralization of hospital management, the industry must be
understood through the eyes of both hospitals as well as the systems to which they belong. Thus
the findings are frequently presented to illuminate how value accrues to hospitals and/or the
systems to which they belong.
This section considers the savings, satisfaction and value reported by the systems and hospitals
contributing to the study. The average hospital for which data are presented had 380 beds in
service and over 20,000 annual inpatient admissions. Hospitals, however, varied significantly in
size. The respondent hospitals tend to under-represent smaller US hospitals. The average
hospital supply expenditure was over $62 million dollars with the largest hospital in the response
pool spending over $230 million annually for supplies. Collectively the systems account for
over 3 million admissions each year.
Systems – size, admissions and supply expenditures. The vast majority of hospitals
belong to systems, which, depending upon their strategy, competencies and capabilities
contribute to their efficiencies in purchasing. The response pool contained systems ranging in
size from two hospitals to systems with over 100 hospitals and as many as 18,000 beds in service
with system, supply expenditures of over $1.3 billion dollars and almost 700,000 annual
inpatient admissions. Within hospitals belonging to systems there is frequently a high level of
centralization of the purchasing function. Reflecting the great variability in hospital complexity
and mix of medical and surgical conditions treated, hospital supply expenses per adjusted patient
discharge vary substantially across the hospitals and systems studied. While the average hospital
reported such expenses at $1791, it is difficult to tease-out the factors contributing to differences
in expenditure. Thus the analysis in this study focuses on estimations of savings attributable the
purchase of specific item categories including physician preference items (PPIs) such as
orthopedic and cardiology implants, medical surgical suppliers, etc. It also assesses overall
estimates of savings.
Both hospitals and systems appear to take on various aspects of the purchasing function
on the basis of their internal competencies and capabilities. The report reflects their attribution
of such competencies and capabilities at the hospital and corporate levels. In some systems
hospitals take on the full range of purchasing functions – whereas in others the purchasing
function is clearly a system level activity.
Supply expenditures, goals and overall GPO savings. Supply expenditures are related
to a large number of factors including the hospital’s mix of patients and services, efforts taken to
achieve savings, and internal efficiencies. Attesting to the increased strategic nature of supplies,
the majority of hospitals reported having clearly defined goals for managing their supply chain
activities as well as success in meeting their goals. The hospitals studied reported supply expense
as a percent of net revenue at 14%. The systems reported supply ranging from 14% to 18% of
total expenditures. This reflects the diversity of hospitals by both size and mix of patients and
procedures within systems.
The hospitals varied greatly in their overall GPO utilization for purchasing through their
GPO. While the average hospital purchases almost 73% of goods through their GPO, the range
of GPO purchasing effort includes hospitals that purchase only 30% of purchase through GPOs
to those that purchase well over 90% of all products through the GPO. This attests to the
presence of very different purchasing strategies across hospitals and their willingness to take on
the wide range of purchasing functions and transaction costs associated with purchasing.
Attribution of overall savings from GPO purchasing is 18.7%. Applied to the calendar year
hospital expenditures for pharmaceuticals and medical surgical products at over 99 billion
dollars, GPO generated savings would be in the neighborhood of 19 billion dollars. However, as
discussed below, GPO contributions to savings varies across product lines.
GPO contributions to savings across product lines. Table 1 further clarifies hospital and
system selective utilization of GPO contracting to meet their own needs and perceived
marketplace influence with suppliers of different types of products.
Pharmaceuticals. GPOs make a dramatic contribution to purchasing of pharmaceuticals,
a major expense item to hospitals. The average hospital purchases 88% of its
pharmaceuticals through a GPO with an attributed savings of 15% over what it would
achieve in the marketplace purchasing through its own contracting. It has been estimated
that United States hospital market for pharmaceuticals was 38.1 billion dollars in 2007.
With an attributed savings of 15 percent, GPOs may well account for as much as much as
6.8 billion dollars in savings nationally.
Medical/Surgical products. The size of the medical surgical marketplace for hospitals,
not-broken down into components, is approximately 61.4 billion dollars in calendar year
2007. However, as discussed below, hospitals attribute different levels of GPO savings
to different kinds of items – making it difficult to precisely estimate savings to hospitals
across the nation as a result of GPO contracting. Eighty two percent of general medical
items are purchased through GPOs with a savings of approximately 19 percent. If all
items achieved this level of savings through GPO contracts, there would be a savings of
over 9.5 billion attributable to GPOs. The estimation of GPO savings across the medical
surgical marketplace is 20% with attributed savings at 8.5 billion dollars.
Physician preference items (PPIs). Physicians (principally surgeons) have an
extraordinary influence on a variety of expensive products purchased and utilized in
surgery. Among the most expensive of these products are implanted devices utilized in
orthopedic (hip and knee) surgery and cardiology (pacemakers and stents). In 1996 the
cost of hips and knees, alone, was over 11 billion dollars – a significant percentage of the
aforementioned 61.4 billion dollar marketplace. For those hospitals purchasing PPIs
through GPOs (Table 2), estimated savings are 15 percent for orthopedic implants (hips,
knees, shoulder, hands, feet, spine and arthroscopy) and 17 percent for cardiology
physician preference items (pacemakers, stents and valves).
What is noteworthy here is that while many hospitals purchase PPIs directly from
suppliers, those that choose to purchase these items through their GPO attribute
significant levels of savings for all levels of products – and high savings for PPIs
specifically. Given non-disclosure clauses in many hospital contracts with PPI suppliers,
it is difficult to assess the extent to which such direct contracting has an overall affect on
savings across the nation.
o There is an estimated $1.9 billion in attributed savings in the $10.4 billion cardiology
implant marketplace, either directly or indirectly by providing members with GPO
purchased goods or reference pricing from directly engaging the marketplace. Over
half of U.S. hospitals and systems use GPO pricing as the benchmark for starting
their own negotiations for physician preference items – the most expensive items that
they purchase. Similarly, over half report the desire to improve GPO contract
o There is an estimated $840 million in attributed savings in the $7 billion dollar
orthopedic implant marketplace (either directly or indirectly by providing members
with GPO benchmarking or reference pricing for directly engaging the market).

Table 1: Characteristics of Hospitals, Systems and Purchasing Patterns, Satisfaction & Savings
Average hospital supply expense as percent of net
18.4 9.5
Average system supply expense as percent of net
16.0 8.3
Average number of hospitals in the system 17 30
Materials purchased through GPO Mean Percent Std. Dev
Percentage of all materials purchased through GPO 72.8 16.5
Savings attributed to GPO Mean Percent Std. Dev.
Percent savings through GPO contracting 18.7 14
Goals for Purchasing Mean Percent Std. Dev.
Clearly defined goals and objectives for supply
4.3 0.8
Ability to meet goals** 4.0 0.9
Materials purchased through GPO by type of
material and GPO attributed percent savings
Mean Percent Std. Dev
Percent of GPO Purchase Inpatient pharmacy (a) 88.7 15.2
Estimated GPO Savings 20.4 15
Percent of GPO Purchase General
81.8 18.9
Estimated GPO Savings 20 23.3
Percent of GPO Purchase Orthopedic implants (c) 34.1 31
Estimated GPO Savings 12.6 7.6
Percent of GPO Purchase Cardiology (d) 47.7 34.4
Estimated GPO Savings 17.4 10.7
Percent of GPO Purchase Other clinical products 71.3 22.9
Estimated GPO Savings 13.3 10.8
Percent of GPO Purchase Housekeeping/cleaning 77.0 21.4
Estimated GPO Savings 18.7 19.0
Centralization of Purchasing function *** 3.5 1.3
Overall satisfaction with GPO + 4.1 1.0
GPO affect on cost of acquisition
Percent Increase in cost of acquisition with no
GPO for hospital
3.1 4.6
Percent Increase in cost of acquisition with no
GPO for system
19.7 46.8
Additional FTEs needed at the hospital level with
no GPO
9 FTE 1.8 FTE
Additional FTEs needed at the system level with
no GPO
15 FTE 6.0FTE
* 1=No clearly defined goals 5=Clearly defined goals
**1=Not able to meet goals 5=Able to meet goals
***1= Highly Decentralized 5= Highly Centralized +
1=Highly Dissatisfied 5=Highly Satisfied
Respondents were questioned regarding how individual hospitals and their system structure
supply chain contracting activities and engage GPOs in their purchasing strategies. For the
majority of the respondent organizations, decisions on contract utilization, carrying out GPO vs.
non-GPO contracting, and compliance monitoring takes place at the system level (Table 2). For
many of the respondent organizations, however, contracting activity, including the identification
of new products and the determination of non-physician item vendors is similarly a system and
hospital level responsibility. Decisions regarding vendors for physician preference items (PPIs)
and capital purchases, on the other hand, are frequently made at the hospital/operating unit level.
Thus while many systems have attempted to embrace centralization and improve their ability to
act as “operating companies,” for many, purchasing functions remain at the local level.
Table 2: Decision Making for Purchasing – Hospital vs. System Level Contracting Activity
Hospital Vs System Function *
Decision on contract Utilization 4.1 1.2
Sending out non-GPO bids 3.7 1.5
Identification of products, services and supplies 3.4 1.3
Decisions regarding non-physician preference items 3.2 1.3
Monitoring contract compliance 4.2 1.1
Determination of PPI Vendors 3.0 1.3
Initiating and managing the value analysis process 3.5 1.4
Decisions on capital item purchases 2.8 1.4
Understanding savings attributed to GPOs requires an in-depth knowledge of hospital
strategy for purchasing. Hospitals have options as they engage the market for supplies and
services – (1) purchasing though an outsourced agent such as a GPO, (2) self contracting
utilizing GPOs pricing as starting points for self negotiation and/or (3) working with their GPOs
to achieve custom contracts. Table 3 reveals that while the majority of the hospitals and systems
report utilizing GPOs as part of an “outsourcing” strategy – reducing the hospital’s transaction
costs for sourcing goods, developing requests for proposals, evaluating proposals, and engaging
in actually contracting. At the specific product category level, however, hospitals are much more
measured in their utilization of GPOs.
When referencing “all products,” commodities and pharmaceuticals, hospitals and
systems aim to improve the penetration of GPO contracts. For capital and physician preference
items, however, the number desiring outsourcing is substantially reduced. For all categories of
materials, however, hospitals and systems utilize GPO pricing as benchmarking and utilize GPO
contract pricing to achieve custom contracting for their organizations. This may reflect GPOs
increasingly working with individual members/customers to achieve best pricing given a
member’s unique ability to standardize on a manufacturer’s product or to determine that a group
of products are “equivalent.”xvi It is also noteworthy that of all of the areas where hospitals
report “intended strategies” for increased GPO penetration, physician preference items receive
the lowest score.
Table 3: Reported Purchasing Strategy
Expressing a
Strategy to
Outsource to
%Use GPO as
Starting Point
% Utilize
pricing to
%Desire to
All products (C4a)
Hospital 76.5 35.3 50.0 88.9
System 68.4 42.1 47.1 100.0
Commodities (C4b)
Hospital 77.8 33.3 38.9 88.2
System 78.9 44.4 44.4 100.0
Pharmaceuticals (C4c)
Hospital 82.4 29.4 44.4 89.5
System 83.3 35.3 47.1 94.4
Capital Equipment(C4d)
Hospital 35.5 40.0 52.9 58.8
System 47.1 52.4 58.8 62.5
All PPI (C4e)
Hospital 37.5 50.0 43.8 56.3
System 35.3 57.1 58.8 58.8
While respondents frequently reported that it is their strategy to “outsource” a good deal
of their purchasing activity to their GPOs, they also report being moderately active in the
purchasing process. Table 4 reflects respondents’ assessments of their own involvement in GPO
contracting activities. While across all items they are likely to see a purchasing function
responsibility as more of a GPO than hospital or system activity (the mean score across all
activities is 3.6 with a score of 5 representing outsourcing of the item), the strongest role for
GPOs is the identification of products, services and suppliers, and the development and sending
out of bids/RFPs. Hospitals and systems see GPOs as “partners” or “collaborators” in their
purchasing. In somewhat different terms, hospitals and systems are continuously participating in
purchasing functions, if not actively, at the level of oversight.

Table 4: GPO and Hospital Responsibility for Purchasing
Identify products, services and supplies
Med/Surg 3.9 1.1
Pharmacy 3.7 1.3
Develop and send out bids or RFP
Med/Surg 3.7 1.4
Pharmacy 3.6 1.4
Eliminating unacceptable proposals
Med/Surg 3.5 1.6
Pharmacy 3.5 1.5
Evaluating Proposals
Med/Surg 3.4 1.6
Pharmacy 3.3 1.5
Optimize Proposals
Med/Surg 3.7 1.3
Pharmacy 3.4 1.4
Obtain best and final offer
Med/Surg 3.3 1.5
Pharmacy 3.4 1.5
Finalize Award
Med/Surg 3.6 1.6
Pharmacy 3.7 1.4
Implement Contract
Med/Surg 3.4 1.5
Pharmacy 3.4 1.5
Launch Contract
Med/Surg 4.1 1.1
Pharmacy 4.0 1.3
Monitor Contract
Med/Surg 3.4 1.2
Pharmacy 3.6 1.2
+1=Not a GPO Role 3 = Equally a GPO Hospital/System Role 5= Mostly a GPO Role
GPOs provide their members/customers with a wide range of traditional services and activities,
principally focused on achieving improved pricing (Table 4) as well as an expanded range of
services and “tools” to facilitate physician preference item management, support for the
purchasing function, and networking with colleagues to share “best practices” (Table 5).
Regarding traditional activities, as suggested in our previous research, members/customers
highly value traditional GPO activities.xvii Indeed, an expectation for excellence in pricing is
consistently identified as the highest area for importance for GPO performance – especially for
medical/surgical products, pharmaceuticals, and commodity items.

Table 5: Meeting Member/Customer Expectations for Traditional Activities
Pricing (overall) 4.4 3.6
Lowest prices on med/surg products 4.9 3.8
Lowest prices on pharmacy products 4.9 3.9
Lowest prices on PPIs 3.6 2.7
Lowest prices on commodity items 4.9 3.9
High guaranteed savings 4.2 3.4
Financial returns – administrative fee 4.2 3.7
Managing supplier terms & conditions 4.2 3.6
Contracting (overall) 4.4 3.7
Providing contracting flexibility 4.2 3.7
Providing breadth of portfolio 4.6 3.9
Identifying new products 4.2 3.5
Support contract management 4.4 3.6
*1= Not at all Important 5= Extremely Important
+1= Does not Meet Expectation 5= Exceeds Expectation
Similarly GPO contracting is highly valued with the highest score appearing for the GPO
provision of breadth of its portfolio. The lowest level of expectation is for GPO provision of
pricing on physician preference items which, as we shall see later in the discussion, represents an
area that many of respondents have chosen, themselves, to manage. Reflecting this, in all
instances, except for physician preference items, GPOs are meeting their member’s expectations.
Nonetheless, as discussed in later sections of this report, those utilizing such contracts report
substantially higher levels of satisfaction with GPO efforts for PPIs.

Table 6: Meeting Member/Customer Expectations for Expanded Activities
Physician Preference Item Management
3.7 3.3
Provide support for local PPI negotiation 3.6 3.4
Low price on PPI products 3.5 3.0
Help engage physicians on product utilization 3.3 3.1
Support assessment of competing products 4.0 3.3
Assist in Value Analysis Team Activities 3.6 3.4
Provide clinical analytical tools – peer
benchmarking, etc.
4.1 3.5
Tools (overall) 4.1 3.4
Provision of on-site implementation resources 3.9 3.3
Provide supply chain analytic tools – spend
mgt, etc.
4.3 3.3
Support order management 3.7 3.4
Identifying new products 4.2 3.5
Support contract management 4.4 3.6
Networking (overall) 3.9 3.6
Facilitate supplier relationships, supplier
performance assessment and risk management.
3.7 3.5
Facilitate networking with peer groups – share
best practices
4.1 3.7
*1= Not at all Important 5= Extremely Important
+1+ Does not Meet Expectation 5= Exceeds Expectation
As demonstrated in Table 3, relatively few hospitals or systems have made the choice to
outsource all of their purchasing to a GPO for a majority of the products. Indeed, hospitals
report mixed strategies; utilizing some combination of outsourcing to the GPO, utilization of
GPO pricing as an important benchmark for entering the marketplace themselves, or utilizing
their GPO’s services to achieve custom contracting. Tables 3 and 7 also reveal that both
hospitals and systems report having purchasing strategies to utilize GPOs, in concert with other
strategies, for procurement of physician preference items. Table 3 also reveals their intention to
more fully utilize GPO contracts – especially in areas where GPO contract penetration has been
Savings attributed to GPO contracts must be understood within the context of how
hospitals actually utilize both GPO contracts and GPO marketplace activities. Table 7 suggests
that while hospitals may report having strategies advocating purchasing physician preference
items through GPOs (Table 3), a significantly smaller number of hospitals actually make such
purchases for clinical preference items. The reported behaviors reflect a number of factors
associated to a belief that there is an advantage to be gained though self or custom contracting, in
using GPO pricing as a benchmark, working with their GPO to achieve custom contracting.
Perhaps an unanticipated consequence of GPOs providing support for value analysis and other
standardization efforts may be to signal to others their own potential to more successfully engage
the marketplace for price concessions independently of the GPO. Furthermore, GPO willingness
to assist in local negotiations and their provision of benchmarking and reference pricing (the
price at which a product is sold just below its closest competitor product) may facilitate hospital
and systems engaging in non-GPO contracting.
Table 7: GPO Role in Purchasing Strategy (Itemized)
Category of PPI
Cardiology (pacemakers) 16.7 16.7 8.3 20.8
Cardiology (stents) 29.2 8.3 8.3 20.8
Orthopedics (hips) 19.2 15.4 15.4 23.1
Orthopedics (knees) 19.2 15.4 15.4 23.1
Spine 19.2 11.5 11.5 15.4
To assess success in realizing strategies, respondents were queried about their overall
strategies for utilizing GPOs in purchasing physician preference items as well as about their
savings associated with such items. Respondents with high levels (>75% of all purchasing
through their GPO) of overall utilization (Table 8) were characterized by significantly higher
levels of GPO contract utilization in inpatient pharmacy, general medical items, orthopedic
implants, cardiology, other clinical products and housekeeping. Thus overall contract utilization
appears to be a solid marker for higher levels of contract utilization in all supply areas. While
high contract use hospitals are also characterized by lower supply expenses as a percent of net
revenue than their lower contract utilizing counterparts as well as lower costs per adjusted patient
discharge (not show in table), the extent to which these findings are attributable to participation
in GPO contracts or to other size and case mix factors is not clear.
Reflective of intended strategy being aligned with achieved strategy, high contract
utilizing hospitals report only somewhat higher levels of satisfaction with their GPOs. In
somewhat different words, low utilizers tend to feel that their expectations meet their strategic
intent for GPO utilization. Curiously the hospitals with low expenses per adjusted discharge
have relatively high percent of expenses (toward the higher end of national benchmarks) for
supplies as a percentage of net revenue.
Purchasing Patterns and Satisfaction
(< 75%)
Percent Purchased on Contract
Inpatient Pharmacy B1Aa 90.5 87.1
General Med (B1Ab) 92.2 72.1
Orthopedic Implants (B1Ac) 36.1 19.9
Cardiology (B1Ad) 48.3 23.3
Other Clinical Products (B1Ae) 84.1 60.4
Housekeeping (B1Af) 84.2 70.4
Satisfaction for HI/Low Contract Use
Overall GPO Satisfaction 4.3 3.9
Table 9 reveals that those with low levels of contract use are minimally less likely to report
that GPOs do not meet their expectations. This suggests that it is not utilization of GPO
contracts that drives member satisfaction – but rather the hospital or system’s alignment of
goals for the GPO with the GPO’s performance. Low GPO contract utilizers, however, are
less likely to see GPOs as meeting their expectations for financial returns for administrative
fees. Perhaps the most striking difference is associated with networking – where the high
contract utilize respondents value the opportunities that GPO’s bring them more than do their
low utilizer counterparts.
: GPO Meeting Expectations for Traditional and Expanded Services by Level
of Contract Utilization*
Traditional GPO Services
Pricing (overall) 3.8 3.4
Lowest prices on med/surg
4.1 3.6
Lowest prices on pharmacy
4.0 3.8
Lowest prices on PPIs 2.7 2.8
Lowest prices on commodity
3.9 3.9
High guaranteed savings 3.7 3.1
Financial returns – administrative
4.1 3.3
Managing supplier terms &
3.9 3.3
Contracting (overall) 3.8 3.6
Providing contracting flexibility 3.8 3.6
Providing breadth of portfolio 4.1 3.7
Identifying new products 3.6 3.5
Support contract management 3.8 3.4
Physician Preference Item
Management (overall)
3.3 3.3
Provide support for local PPI
3.2 3.6
Low price on PPI products 3.3 2.8
Help engage physicians on
product utilization
3.1 3.1
Support assessment of competing
3.4 3.2
Assist in Value Analysis Team
3.3 3.5
Provide clinical analytical tools –
peer benchmarking, etc.
3.3 3.6
Tools (overall) 3.5 3.4
Provision of on-site
implementation resources
3.4 3.3
Provide supply chain analytic
tools – spend management, etc.
3.3 3.4
Networking (overall) 3.4 0.8
Facilitate supplier relationships,
supplier performance assessment
and risk mgt.
3.6 0.8
Facilitate networking with peer
groups – share best practices
3.2 0.8
*Figures in all cells represent level to which the GPO is meeting the hospital/system
satisfaction for each item.
1= Not meeting expectations 5=Exceeding expectations
GPOs provide members with specialized competencies and capabilities in carrying out strategic
sourcing and contracting activities. Burns and Lee point out, however, that there is disagreement
over the extent to which GPOs yield savings by allowing hospitals and systems to reduce
personnel.xviii Indeed, hospitals and systems continue to have noteworthy investments in full time
equivalent (FTE) personnel involved in the strategic sourcing activities. Tables 3 and 6 reveal the
extent to which GPO and hospital/system functions are duplicative. Given the extent to which
hospitals strategically purchase through their GPOs, their needs for such personnel should be
significantly reduced. Table 10 identifies the current employment of individuals involved in
materials sourcing, contracting and contract management by various product areas and the
estimated additional hires that would be necessary if the hospital assumed the functions now
performed by the GPO.
For the product areas identified, there would be a 129% increase in staff at the system level (from
11.6 to 26.6 FTE) and 115% more staff at the hospital level (from 7.9 to 17.1 FTE). At current
market rates for competent individuals the additional cost for a hospital would be approximately
$368,000 and, at the system level $600,000.
Workforce Savings (FTE) Attributable to GPO Participation
2.0 1.4 3.3 1.8
2.4 1.4 3.1 2.1
1.8 1.1 2.1 1.6
Cardiology 1.9 1.1 2.1 1.5
Other clinical
2.0 1.8 2.5 1.7
Housekeeping 1.5 1.1 1.9 1.5
Total 11.6 7.9 15.0 9.2
Group purchasing organizations have been a feature of the US health care system for almostxix
100 years but remain largely unknown. Hospitals and systems continue to vary, significantly, in
their utilization of GPO contracting. In areas where there is disciplined standardization and
processes driving agreement around products, such as pharmacy, GPO utilization is consistently
high. Similarly, hospitals and systems recognize that savings that might accrue around
individual purchasing on commodities, on a “spot basis,” require efforts that, across the larger
mix of products, are probably best left to GPO purchasing.
The Value of Group Purchasing – 2009 survey results suggest that those with lower levels of
contract utilization, especially in areas such as general medical products, housekeeping and
“other clinical products are likely to have higher expenses per adjusted discharge than do their
high GPO use counterparts.” While we have not teased out the full set of factors explaining a
difference in supply costs for low levels of GPO contract use, such hospitals would be wise to
review their current strategy and its implementation. For every thousand admissions, a hospital
underperforming in this area could save as much as $400,000 and a system could save almost
$900,000. These are, indeed, significant savings in a very difficult economic climate.
The Value of Group Purchasing – 2009 has had a very unique focus – bringing together issues
of savings achieved through estimates of price savings, savings associated with fewer FTEs
required in the purchasing function, as well as satisfaction with GPO engagement by both
hospitals and systems. The research confirms what many industries have known for many years
– that it is critical to link performance to one’s strategy – and to monitor such performance on a
continuous basis. While future studies from this research will employ modeling to more fully
explore the dimensions of savings and satisfaction for different kinds of hospitals, it is important
to note, here, that the overwhelming majority of hospitals attribute high value to GPOs reducing
their risks in purchasing in the marketplace including monitoring the market for drug shortages,
identifying and supporting safety products and managing failure by suppliers to adhere to terms
and conditions. These are functions that are clearly beyond capabilities any one hospital or even
most systems.
Finally, and perhaps of greatest importance, is the near unanimity that respondents would like to
see a greater utilization of GPO contracts and services. Their enthusiasm for taking advantage of
the full range of opportunities suggests that they are highly reflective regarding the functions that
they value as part of their repertoire of competencies and capabilities.

The Strategic Value of Group Purchasing Survey – 2009 was designed to document the
strategies that characterize hospitals and systems as they seek and secure the materials necessary
to provide excellence in patient care. The survey respondents, directors of materials
management for US hospitals, are queried regarding the (1) presence of purchasing strategies
within their hospital and any system to which their hospital may belong and (2) their estimations
of the ability of GPOs to meet those expectations. Thus, unlike efforts to merely solicit
estimations of satisfaction – the goal here was to understand satisfaction within the context of
expectations. Thus one would anticipate findings that reflect different levels of satisfaction with
core GPO strategic sourcing and contracting efforts as well as with other services.
Hospital and system expectations and strategies, of course, do not always correspond to
hospital performance around their strategic intent. A hospital or system, for example, may report
its goal to purchase a large percentage of its needed products through GPO contracts but
experience uneven results in meeting such a goal. As we have pointed out almost a decade ago,
hospitals engage very selectively in when and how they choose to utilize GPO contracts and
pricing and when they choose to utilize such pricing to engage in custom contracts through their
GPOs or through unique contracts.xx
A second goal of the survey was to estimate the extent to which GPOs provide hospitals
and systems with services from which they derive satisfaction. Burns and Lee’s important
assessment has demonstrated that GPOs produce (1) significant cost savings and lower product
prices and (2) appear to be satisfied with their alliance relationships.xxi Our goal is not to
replicate these findings in detail – but rather to clarify the conditions under which such savings
occur and satisfaction is achieved.
Methodology. The survey was designed by Health Care Sector Advances, Inc. in
collaboration with Mathematica Policy Research, Inc. Various issues considered in the survey
were reviewed by a group of industry experts nominated by the Health Industry Group
Purchasing Association. The survey was completed for 28 systems representing 429 hospitals.
Data was collected at both the hospital and system level. Hospitals and systems were not
selected on the basis of their membership in any one GPO. Appendix Table A1 reflects the GPO
representation of respondents.