A PRIMER ON GROUP PURCHASING ORGANIZATIONS

Why are GPOs an essential part of the administration’s push for greater efficiencies and savings
in health care?
President Obama has made clear his commitment to comprehensive health care reform and that this
commitment would be paid for in part by efficiencies in our system. Group Purchasing Organizations
(GPOs), large national purchasing organizations and smaller regional purchasing entities, produce
tremendous efficiencies for the American people.
The Health Industry Group Purchasing Association (HIGPA) looks forward to working with the
administration, especially on its efforts to reform the health care system, bring down costs and place a
down-payment on the principle that we must have quality, affordable health care for every
American. “During this time of economic crises, the country is searching for proven methods to keep
health care costs low while preserving service quality. Few activities rival the success of the health care
group purchasing industry in accomplishing these dual goals.”, said Curtis Rooney, President of HIGPA.
“GPOs afford health care providers with access to the right products, at the right time and the right
price. It has been estimated that GPOs save hospitals and other health care providers billions annually
through aggregated purchasing power. This saving is regularly passed on to vital government programs
such as Medicare.”, said Rooney.
To most Americans, the health care group purchasing industry remains an unknown success story. By
saving hospitals, nursing homes and other heath care institutions money on virtually everything they
buy, (discounted prices range from surgical supplies and medical equipment to pharmaceuticals and
data processing and equipment maintenance), GPOs enable these institutions to employ additional
doctors and nurses and invest in other resources and activities that improve patient care. Most
importantly, GPO-related cost savings help ensure that more people get the health care they deserve
and need.
What are the benefits of a GPO? How much money do GPO’s really “save”?
GPOs aggregate the purchasing power of many hospitals to balance the negotiating equation between
purchasers and vendors. Group purchasing plays an important role and has a significant impact on the
U.S. heath care system, providing efficiencies that directly lead to major cost savings for hospitals and
patients.
GPO members and customers receive up-front pricing discounts of between 10 and 15 percent,
dividends and distributions and reduced administrative costs. Purchasing organizations also make
contributions to the U.S. health care industry overall by helping hospitals improve systems and
processes that maximize efficiency, labor and expenses. Overall, this means GPOs enable hospitals
to save the U.S. health care industry tens of billions each year.. A recent study by Dr. Eugene S.
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Schneller1, entitled, ‘The Value of Group Purchasing 2009: Meeting the Needs for Strategic Savings’,
finds that GPOs save the U.S. health care industry $36 billion dollars annually.
II. WHY GPOs? HOW DO THEY WORK?
What is a GPO?
A GPO is an entity that helps health care providers (such as hospitals, ambulatory care facilities,
nursing homes and home health agencies) realize savings and efficiencies by aggregating purchasing
volume and using that leverage to negotiate discounts with manufacturers, distributors and other
vendors.
How does a GPO “work”?
GPOs do not purchase or buy any products. They negotiate contracts that hospitals can use when
making their own purchases. With input from members and clients, GPOs work to negotiate contracts
with healthcare manufacturers, distributors and other suppliers. After a group purchasing contract is
created, it is still up to the hospital to decide which product is most appropriate in each circumstance
and make the most appropriate purchase.
Most health care providers make purchasing selections in a committee setting, usually comprised of
healthcare professionals, such as doctors, nurses and other clinicians. These committees help
determine which medical supplies are most appropriate from a clinical standpoint.
Hospitals and other health care providers remain free to make non-GPO contracted purchases and
often do.
What type of services do GPOs provide?
Hospitals and other health care providers are increasingly relying on GPOs to help manage the complex
system of purchasing. Many GPOs offer hospitals e-commerce solutions to help manage their
purchasing. The GPO community are leaders in the effort to reduce medical errors by helping to
standardize some of the product use in hospitals, educating clinicians on best practices, and leading the
drive to institute bar coding for medical products.
GPOs provide a unique mechanism for a group of hospitals to coordinate not only purchasing power,
but also brain power. By drawing upon their broad-based memberships or client base, GPOs give
doctors, nurses, pharmacists and other clinical experts a pathway to evaluate new products and assess
their impact on the quality of care. GPOs take the old adage that two minds are better than one, and
apply it to health care decision-making.
What is the history of GPOs?
GPOs date back to 1909, when the Hospital Superintendents of New York first considered establishing

1 Dr. Schneller is Principal in the Health Care Sector Advances, Inc. He has held teaching and research posts at Montefiore
Hospital and Medical Center, Duke University Medical Center, Union College, Albany Medical Center, and Columbia
University. Dr. Schneller is currently Dean’s Council of 100 Distinguished Scholar in the School of Health Management and
Policy where he is Co-Director of the Health Sector Supply Chain Research Consortium.
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a purchasing agent for laundry services. In 1910, the first GPO was created, the Hospital Bureau of New
York. During the last quarter of the 20th century, the importance of GPOs grew as hospitals were faced
with rising expenditures due to phenomenal advances in care and an aging population, as well as falling
reimbursements from both the government and private sector payers.
For many decades, healthcare GPOs grew slowly in number, to only 10 in 1962. Medicare and Medicaid
stimulated growth in the number of GPOs to 40 in 1974. That number tripled between 1974 and 1977.
With healthcare costs rising sharply in the early 1980s, the federal government revised Medicare from a
system of fee-for-service (FFS) payments to Prospective Payment System (PPS), under which hospitals
receive a fixed amount for each patient with a given diagnosis. In 1983, the institution of the PPS
focused greater scrutiny on costs and fostered further rapid GPO expansion. By 2007, there were
hundreds of healthcare GPOs, affiliates and cooperatives in the United States. Ninety six percent of all
acute-care hospitals and 98 percent of all community hospitals held at least one GPO membership.
Importantly, 97 percent of all not-for-profit, non-governmental hospitals participated in some form of
group purchasing.
Are there different types of GPOs?
If you’ve seen one GPO, you’ve really only seen one GPO, as they vary greatly in size, type of
ownership and the services they offer their members and clients. Some GPOs are owned by hospitals,
while others do not have a link to the facilities they serve. Some GPOs only serve not-for-profit
hospitals, while others serve just proprietary facilities, and some serve a mix of the two. Some GPOs
offer hospitals the ability to purchase nearly every conceivable type of product, while others focus on
specific product categories. In addition, some GPOs specialize in certain types of health care, such as
long-term care.
Are GPOs used solely in health care?
No, outside of the health care arena, the concept of group purchasing is seen throughout the economy.
Indeed, GPOs provide hospitals and other health care providers the ability to use fundamental economic
principles to reduce the cost of purchasing products and improve the quality of care. In addition to
healthcare, the federal government, namely the General Services Administration, Department of
Defense, and Department of Veterans Affairs, use many of the same techniques for purchasing
products as GPOs.
How many GPOs are there in the United States?
There are more than 600 organizations in the United States that participate in some form of group
purchasing. About 30 of the 600 are very large GPOs that negotiate sizeable contracts for their
members. The remaining organizations may offer their members access to larger groups’ contracts and
negotiate agreements with regional vendors for some services.
Why are GPOs used/important in the health care industry?
Hospitals and other health care providers use group purchasing to obtain the right products at the very
best price. On average, about 72% of purchases that hospitals make are done using GPO contracts.
What type of health care entities use GPOs?
All types of health care organizations use group purchasing. Nearly every hospital in the U.S.
(approximately 96% to 98%) chooses to utilize GPO contracts for their purchasing functions.
Additionally, estimates are that hospitals across the United States use, on average, two to four GPOs
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per facility. A growing portion of the long-term care, ambulatory care, home care, and physician practice
markets are using group purchasing to help lower costs and improve efficiency. Further, the federal
government also provides group purchasing services to various executive branch agencies.
How do GPOs finance their operations?
GPOs rely, in part, on administrative fees paid by vendors to finance the services the GPOs offer health
care providers. These administrative fees are generally based upon the purchase price that the health
care provider pays for a product purchased through a GPO contract. The administrative fee is paid
when a GPO’s member or client utilizes a GPO contract.
What are administrative fees?
The contracting services that GPOs provide to hospitals, other health care providers and product and/or
service vendors are financed in part by administrative fees paid to GPOs by vendors. These fees are
generally based on the purchase price the health care provider pays for a product purchased through a
GPO contract. The fee is paid only when a GPO’s healthcare provider, or member, utilizes a GPO
contract for that vendor’s product(s) or service(s), and not before. In general, administrative fees are
used to support a portion of GPO operating expenses and in many instances return an efficiency
dividend to member hospitals. GPOs are required to report all administrative fees to their customers;
these customers must then report to the Medicare program as part of the cost report.
Why are administrative fees an essential part of the GPO business model? What is the value in
allowing GPOs to earn administrative fees from vendors?
The value in GPOs earning administrative fees is that it allows hospitals and health care providers to
dedicate more financial resources to the direct provision of patient care, such as employing additional
doctors or nurses, purchasing the most advanced products, or a host of other goals.
Administrative fees provide strong incentives for vendors (e.g., product and commodity manufacturers)
to provide deeper discounts and for hospital members to concentrate purchasing volume to obtain better
prices. In 2003, when the Government Accountability Office studied how GPOs operate, it found that in
addition to using these fees to cover their operating expenses, GPOs often distribute surplus fees to
member hospitals. They may also use administrative fees to finance new ventures, such as electronic
commerce, that are outside their core business.
Without the ability to earn administrative fees, hospitals would be in a terrible situation. They would have
to choose between diverting financial resources from the direct administration of patient care to fund the
operations of GPOs or they would have to stop using GPOs altogether, thereby loosing the volume
discounts and raising the cost of healthcare.
Why did Congress grant GPOs “Safe Harbor” from federal statutes?
The purpose of GPO “Safe Harbor” regulations is to reduce costs and assist hospitals in their
purchasing needs. In 1991, HHS promulgated safe harbor regulations, reflecting Congress’ intent to
permit contract administration fees. “Safe Harbor” regulations describe how health care providers
should structure their financial transactions so they can comply with federal law and charge vendors’
administrative fees.
The “Safe Harbor Provision” in the Medicare and Medicaid Patient Protection Act of 1987 states: “GPOs
may be allowed to provide goods or services to a hospital or health care provider as long as both of the
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following two standards are met – (1) The GPO must have a written agreement with each hospital or
healthcare provider, that provides for either of the following agreements: (a) The vendor from which the
hospital or health care provider will purchase goods or services will pay a fee to the GPO of 3 percent or
less of the purchase price of the goods or services provided by that vendor, and (b) In the event the fee
paid to the GPO is not fixed at 3 percent or less of the purchase price of the goods or services, the
agreement specifies the exact percentage or amount of the fee. (2) The GPO must disclose in writing to
the hospital or health care provider at least annually, the amount received from each vendor with
respect to purchases made by or on behalf of the hospital or health care provider.”
Congress should leave this Safe Harbor provision the way it is because the system is designed to
ensure hospitals get the best deal possible. GPOs do not get paid their administrative fee from suppliers
until a hospital buys something off the contract. GPOs also adhere to an industry Code of Conduct that
ensures protection against conflicts of interest, opportunities for small manufacturers to obtain GPO
contracts, and compliance with anti-kickback and anti-trust laws. This self-regulation requires
transparency of GPO-vendor relationships and allows GPOs to respond most effectively to the needs of
the health care marketplace.
Do GPOs limit vendor competition? Or limit new innovative technologies and related firms from
entering the health care market?
No. In 2008, Lawton Burns, professor at the Wharton School, University of Pennsylvania, conducted a
national survey of health care provider materials management executives and found, among other
things, that there was no merit to the accusation that GPOs limit innovation or inhibit competition in the
marketplace. The study was funded by the National Science Foundation. When asked this question,
Professor Burns replied, “There was no great feeling among the survey respondents that the GPOs
were blocking access to newer innovative technologies. That whole claim has basically been brought by
a handful of small start-up companies…“I’ve been studying that issue for some time. I believe that’s a
bunch of bunk. One of the other criticisms that’s been leveled at the GPOs has to do with the sole
source contracts and dual source contracts and how those allegedly exclude new companies, as well as
the issue of multi-product, multi-vendor bundling. Those practices are always at the center of those
disputes. Critics of the GPOs complain these are anti-competitive practices. I don’t believe that either.
The study shows that materials managers actually find those practices that the GPOs utilize to be very
helpful.” (Source: The Journal of Healthcare Contracting, November/December 2008).
What is HIGPA?
The Health Industry Group Purchasing Association  is a broad-based trade
association that represents 16 group purchasing organizations, including not-for-profit and for-profit
corporations, purchasing groups, associations, multi-hospital systems and health care provider
alliances. HIGPA’s mission is to advocate on behalf of health care group purchasing associations, to
provide educational opportunities designed to improve efficiencies in the purchase, sale and utilization
of all goods and services within the health industry and to promote meaningful dialogue between GPOs.

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