The purpose of this report is to provide an estimate of the costs associates with possible new regulations and legislation. The Medical Device Competition Act of 2004 (SB 2880) is used in this report to illustrate the scope and nature of such regulation and the possible financial impact such an act would have on the U.S. health care system.

Muse & Associates, a health care research firm, sought to estimate the size of the GPO marketplace and the savings GPOs provide for their members, as well as to assess the impact of additional restrictions on the contracting process. The study revealed that hospitals and other health care providers annually purchase more than $270 billions of dollars worth of medical services, office equipment, hospital supplies and pharmaceutical. However, of greater significance to those concerned with rising health care costs, the study revealed that by employing the services of GPOs, hospitals and other health care providers save between 10 to 15 percent, equaling savings of between $21.8 and $38.7 billion for hospitals in CY 2004. Researches also found recent federal and state government activities could hinder hospitals potential to employ the power of group purchasing. A one percentage point decline in GPO-generated savings would occur if restrictions were imposed on the GPO contracting process. This would result in an increase in total public and private expenditures for health services and supplies of between $2.18 billion and $2.58 billion. In sum, should federal or state action restrict current practices of the group purchasing industry, as evidenced by the study, providers, payers, and ultimately consumers will be forced to pay more for products and services they purchase through GPOs.

Herbert Hovenkamp, Ph.D., a professor of law at the University of Iowa and one of the country’s most respected antitrust scholars, analyzed Einer Elhauge’s perception of group purchasing in his September 2003 report. In Hovenkamp’s report, he argues the conditions identified by Elhauge as anticompetitive – exclusive dealing [sole source contracting] and other related discounting practices – are justified within the group purchasing industry as they reduce product costs and attendant marketplace risks. Hovenkamp further contends that these practices are fully reachable under the existing antitrust laws and concludes no additional legislation or regulations are necessary to produce competitive results in the group purchasing market. Outlining the benefits of exclusive dealing, he states that it enables firms to predict the quantity of sales and to control types of free riding. Contrary to Elhauge’s argument that group purchasing organizations can violate the Codes of Conduct adopted by the industry due to their voluntary nature, Hovenkamp asserts antitrust law exists to intervene in the case of a violation and provide remedy should any firm engage in anticompetitive practices.

The Lewin Group, a health care consulting and research firm, provided the results of three analyses to support their conclusion that group purchasing organizations (GPOs) provide measurable savings as well as non-financial benefits to hospitals and health systems. Lewin researchers used three avenues of investigation to come to this conclusion: (1) interviews with hospital and supply chain executives; (2) analysis of product price data obtained from GPOs and a distributor; and (3) Lewin Group’s proprietary hospital efficiency model. The report details the savings GPOs generate for health care providers by offering generally favorable pricing on goods purchased and influencing suppliers to keep prices lower in the market overall. Executives estimated GPOs save their institutions an average of 10.4 percent on supply costs, and approximately nine out of ten executives indicated the absence of GPOs would lead to higher prices of between 10 to 35 percent for medical supplies. In addition, GPOs deliver patronage dividends, shareholder distributions and value-added services. The Lewin Group’s research also affirms the function of GPOs to reduce purchasing administration expenses for many hospitals and health systems, with participation in a GPO yielding savings between eight and 11 percent in hospital costs per case. The results of the Lewin Group study validate the importance of GPOs in helping to cut the costs of all supply purchases made by GPOs.

Muse & Associates, a health care research firm, aimed to estimate the size of the GPO marketplace and the savings GPOs provide for their members, as well as to assess the impact of additional restrictions on the contracting process. The study revealed that health care providers report they save between 10 and 15 percent by channeling their purchases through GPOs, totaling savings of $19.0 billion to $33.7 billion in savings for CY 2002. Researchers also found that implementing additional restrictions on the way GPOs conduct business would result in an increase in expenditures for several public health care programs in CY 2002. The study confirmed that combined Medicare and Medicaid expenditures could increase by as much as $1 billion if cost savings provided by GPOs were reduced through restrictions on the GPO business model. Any restrictions on essential contracting tools used by GPOs to negotiate the best prices on products for their members would have a negative impact on pricing, discounts and savings GPOs continue to provide, according to the report. The report documented that a one percent decline in the rate of GPO-generated savings would result in an increase in total public and private expenditures for health services and supplies of between $1.9 billion and $2.24 billion in CY 2002. Thus, the report concludes if GPOs’ ability to negotiate is curtailed, providers, payers, and ultimately consumers will be forced to pay more for products and services they purchase through GPOs.

Herbert Hovenkamp, a professor of law at the University of Iowa and a highly respected antitrust authority, conducted this ground-breaking study applying the fundamental principles of antitrust law to group purchasing organizations (GPOs). He found GPOs to be pro-competitive, socially beneficial agents of hospitals and other health care providers that reduce costs by allowing sellers to bid for high volume sales. Hovenkamp exposes GPOs’ ability to obtain lower prices than their members can by purchasing individually, with health care institutions citing savings of 10 to 15 percent. GPOs operate in a highly competitive health care buying market, with approximately 800 GPOs controlling contracts for about 45 percent of supplies and equipment purchased by hospitals and health care systems. Hovenkamp further supports claims of the competitive nature of GPOs by investigating the competitive effects of group purchasing in the health care market and distribution process, as well as the GPO contracting and product selection process. He found GPOs to use a generally member driven product selection process, with attention to obtaining the best quality at a highly competitive price. Addressing concerns regarding the capacity for GPO contracting practices to result in anticompetitive activities, Hovenkamp observed that relatively few GPO contract arrangements are exclusive dealings, but rather are agreements encouraging hospitals to increase purchasing volumes through a GPO contract. Hovemkamp’s study reinforces the positive, pro-competitive nature of the group purchasing industry by dispelling misconceptions that any structural or behavioral reasons exist that would cause GPOs activities to be viewed as anticompetitive.

The Lewin Group conducted a first-of-its-kind study to determine the benefits group purchasing organizations (GPOs) offer from a clinical perspective through an investigation of the extent to which GPOs and health systems use clinical review processes to inform their technology decision making. The main question Lewin researchers aimed to uncover through the study was whether clinical review processes support the timely adoption of clinically-informed and cost-effective decisions regarding which medical products will offer the highest quality of care to patients. Based on interviews with five health systems and six major GPOs during February and March of 2002, the Lewin Group study found that the clinical review processes of health systems and GPOs rely upon comprehensive systems of expert committees, and also conduct rigorous clinical reviews when deciding which health care technologies will be listed in contracts. The study further analyzed the different manners of clinical review for the three separate product categories of medical-surgical devices, pharmaceuticals and capital equipment. Researchers concluded that GPOs monitor and incorporate breakthrough technologies as well as operate mechanisms for the ongoing review of the pipeline through continuous market assessment. The report also outlines a comprehensive list of attributes and technologies that are addressed in the clinical review process and identifies mechanisms used to communicate clinical review findings to purchasing decision-makers.

Muse & Associates examined the role of group purchasing organizations (GPOs) in the health care industry in the United States. The study marked the first time a sample of hospital purchasing executives had been interviewed regarding their utilization of GPOs for non-labor expenditures. GPO savings were measured against a baseline constructed from analyses of general economic trends within the health care sector, accompanied by data collected from health care providers on GPO purchasing and other savings. The report found GPOs to save hospitals, nursing homes, and other sectors of the U.S. health care system between 10 and 15 percent on their purchases, translating into $15 to $22 billion in overall savings to the health care system in 1999. The study found that hospitals channel approximately 72 percent of their non-labor expenditures through GPOs, which in 1999 amounted to 44.6 percent of hospitals’ total expenditures. Beyond cost savings to hospitals and health systems, the report cites GPOs as saving significant amounts of provider time that otherwise would have been used to conduct purchasing activities. In addition, GPOs were found to provide value to their clients, through product information and standardization, comparison shopping and streamlining of health care products and services. The study concludes by articulating that the GPO industry operates in a continuously evolving health care marketplace, with GPOs possessing tremendous capability to offer further savings to the hospitals and health systems they serve.