GPOs Come Out Swinging

Edition: December 2002 - Vol 10 Number 12
Article#: 1383
Author: Repertoire

The nation’s group purchasing organizations issued a high-profile warning about what could happen to the nation’s healthcare system if the government clamps down too hard on GPOs.

A new study, commissioned by the Health Industry Group Purchasing Association, says that just a 1 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 the 2002 calendar year. The one-percentage-point decline would occur if harsh restrictions were imposed on GPOs in the wake of this spring’s Senate hearings and subsequent developments, warns HIGPA.

The study, entitled “The Role of Group Purchasing in the Health Care System and the Impact on Public Health Care Expenditures if Additional Restrictions Are Imposed on GPO Contracting Processes,” was conducted on behalf of HIGPA by Muse & Associates, a health care research firm based in Washington, DC.

It was Muse who conducted a study for HIGPA in March 2000 that showed that GPOs saved hospitals between $12.8 billion and $19.2 billion in 1999, based on a telephone survey of 221 purchasing managers at community hospitals.



A Case for Savings

The study begins by stating that health care providers report they will save between 10 and 15 percent by channeling their purchases through GPOs in 2002, for a total savings of between $19 billion and $33.7 billion.

To estimate the savings attributable to GPOs, the analysts based their study on calendar year 2002 projected data regarding national health expenditures, accounts and projections produced annually by the Office of the Actuary at the Centers for Medicare and Medicaid Services. The study also says that hospital providers reported that 44.6 percent out of $476.1 billion of their expenditures for 2002 are non-labor-related. Nursing homes’ non- labor-related expenses for 2002 account for 25 percent of $103.8 billion of their health care expenditures. From these figures the study estimates that the GPO marketplace for 2002 is $238.3 billion.



The Impact of Cuts

Both the private and public sectors would suffer the consequences if restrictions on GPOs, such as those recommended by the Medical Device Manufacturers Association, were enforced, says HIGPA. For every one percentage point decline in the rate of GPO-generated savings:

· Total public and private expenditures for health services and supplies would climb $1.9 billion to $2.24 billion in 2002, between $10.8 billion and $12.8 billion over 5 years, and between $25.7 billion and $30.3 billion over 10 years.

· For all public programs, the increase would be between $1.13 billion and $1.34 billion in 2002, $6.5 billion to $7.6 billion between 2002 and 2006, and $15.3 billion to $18 billion between 2002 and 2011.

· Federal health care programs would be required to spend between $886 million and $1.04 billion more in CY 2002, $5.1 billion to $5.9 billion more over 5 years, and $12 billion to $14 billion more over 10 years.

· State and local programs would need to spend an additional $249 million to $294 million in 2002, $1.4 billion to $1.7 billion from 2000 to 2006, and $3.4 billion to $4 billion from 2002 to 2011.



Among federal programs alone, HIGPA warned of these consequences:

· Medicare expenditures would increase by $540 million to $641 million in 2002, between $3.1 billion and $3.7 billion over 5 years, and between $7.3 billion and $8.7 billion over 10 years

· Medicaid expenditures would increase by $395 million to $468 million in 2002, $2.3 billion to $2.7 billion from 2002 to 2006, and $5.3 billion to $6.3 billion from 2002 to 2011.

· Department of Veterans Affairs health care expenditures would increase $61 million to $73 million in 2002, $347 million to $416 million over 5 years, and $824 million to $986 million over 10 years.

· Department of Defense health care expenditures would increase by $36 to $73 million in 2002, $205 million to $239 million over 5 years, and $486 million to $567 million over 10 years.

· Workers’ Compensation health care expenditures would increase by $32 million to $39 million in 2002, $186 million to $222 million over 5 years, and $443 million to $527 million over 10 years.



MDMA is Major Irritant

The latest HIGPA study is aimed squarely at the Washington, DC-based Medical Device Manufacturers Association which, following Senate hearings in late April and a rash of negative articles in The New York Times, had recommended in July a strict “Code of Conduct” for GPOs. Among the provisions recommended by MDMA:

· GPOs will neither ask for nor accept any type of financial value or remuneration of any form (such as administration fees, marketing fees, advertising fees, research grants, etc.) from a vendor.

· GPOs will not create incentives for hospital purchasers to select certain products over others through bundling or tying unrelated products, or directing or encouraging the use of particular distributors of products.

· GPOs will not enter into “private labeling” arrangements with manufacturers.

· GPOs will not enter into “sole source” contracts with manufacturers.

· GPOs will allow for at least three bonafide sources (if available) for every individual product offered to a member hospital, with no “preferred” or other designated status or commitment to one vendor over another vendor that is on contract.

· GPOs will not enter into contracts with manufacturers that exceed two years in duration.

· GPOs will enter into standard contracts with any vendor that wishes to be on contract as long as the vendor has letters of interest from responsible clinicians of member hospital/s that represent 2,000 beds in aggregate.



In issuing its own proposed Code of Conduct in late July, HIGPA defended administrative fees from vendors and the use of sole-source agreements, commitment level requirements and multi-product line discounts as legitimate ways to foster competition among vendors.

Through the latest Muse study, the association presses the point again: “Imposing such restrictions as taking away the essential contracting tools available to GPOs to get the best deals on products for their members would tilt the marketplace in favor of manufacturers and have a negative impact on pricing, discounts, and savings that GPOs attain.”

HIGPA (www.higpa.org) is a chartered trade association of approximately 165 health care purchasing and supply chain organizations.