AN ANALYSIS OF GROUP PURCHASING ORGANIZATIONS’
Group purchasing organizations (GPOs) play an important role in the provision of health care services in the United States. As hospitals and other health care providers have come under pressure to reduce expenses, they have turned increasingly to GPOs to reduce the costs of the products and services they purchase. Today, virtually every hospital in the U.S. belongs to at least one GPO. More than seventy percent of all hospital purchases are made through GPO contracts, and GPOs contract for purchases with an annual value in the range of $150 billion.
The fundamental purpose of a GPO is to allow its members to join together to leverage their purchasing strength in order to purchase goods and services at lower prices, which in turn should enable them to lower their costs and become more competitive in the provision of their own services. In its basic form, a GPO is a cooperative of buyers. Over time, however, GPOs have evolved significantly to offer other competition-enhancing programs such as networking, bench marking, and educational quality improvement programs. These functions are pro-competitive and consistent with antitrust policy – they offer GPO members increased efficiency, eliminate wasteful administrative duplication, and they increase competition between manufacturers/vendors, and within the hospital members’ own markets, which translate into lower prices and higher quality for consumers.
At a time when increasing health care costs are a major policy concern, one would expect GPOs to be seen as a major force in the health care industry for increased efficiency and cost containment. In fact, GPOs currently are under attack from several different directions. On the political front, GPOs have come under attack by some manufacturers of medical devices that claim GPO contracting practices, including “sole-source contracts,” percentage of purchase or “market share” discounts, and multi-product or “bundled” discounts, favor large established manufacturers with the result that smaller companies with “innovative” products are effectively foreclosed from selling to a large number of the nation’s hospitals. These concerns have attracted the attention of the U.S. Senate, which held hearings last year scrutinizing GPO contracting practices; the Senate may hold additional hearings on GPOs in 2003. Similarly, the Federal Trade Commission (FTC) held a workshop last fall at which GPO contracting practices were a topic of discussion, and the FTC, together with the Antitrust Division of the Department of Justice (DOJ), are holding health care hearings in 2003 at which GPO contracting practices also are being discussed. Finally, a 2002 preliminary study by the General Accounting Office (GAO) raised questions about whether GPO contracts actually save hospitals money. GPO contracts also have been the subject of recent private litigation. In Kinetic Concepts, Inc. v. Hillenbrand Indus., Inc., a jury awarded more than $500 million in treble damages against a manufacturer of hospital beds that allegedly was using GPO contracts to exclude plaintiff, its competitor. In a suit more directly implicating GPO practices, Retractable Technologies, Inc. v. Becton Dickinson, et al., a manufacturer of safety syringes sued the two largest manufacturers of standard and safety syringes along with the two largest GPOs, alleging, among other things, a conspiracy between the GPOs and manufacturers to monopolize the needle and syringe market.
The important role GPOs play in the delivery of health care services, and the criticism that has been directed at them, raise important issues under the antitrust laws. Are GPOs the agents of efficiency they claim to be, or, as their critics charge, have GPOs become a vehicle for dominant manufacturers to achieve and/or maintain monopoly power? This article analyzes GPO contracting practices under the antitrust laws and whether these practices are likely to result in anti-competitive effects. As this analysis will show, in general, GPO contracts promote significant efficiencies and are unlikely to result in sufficient market foreclosure to injure competition. The policy implications of this conclusion are clear: instead of increasing competition, restrictions on GPO contracting practices are likely to result in less competition and higher prices for health care consumers.
I. History and Background of Group Purchasing Organizations Hospital GPOs trace their history back to the late 1800s, though the first known hospital GPO was the Hospital Bureau of New York, which appeared in 1910. Over the next half century, the GPO concept grew slowly and by the early 1970s there were forty hospital GPOs in the United States. The next thirty years witnessed an explosion of GPOs. From 1974 to 1999,the number of GPOs grew from forty to 633. Today, there are over 900 GPOs in the United States. While some of these are “child” GPOs that rely on contracts negotiated by larger “parent” GPOs, it is estimated that approximately 200 GPOs contract directly with suppliers, and that twenty-six of these operate on a national level.
It is not a coincidence that GPOs began to grow in popularity in the late 1970s and early 1980s. During this time, for-profit hospital chains began to expand and buy up not-for-profit hospitals, forcing not-for-profits to find ways to cut costs to remain competitive. In the early 1980s, Medicare instituted the Prospective Payment System through which hospitals were reimbursed a fixed rate based on a defined service rather than the cost to the hospital of providing that service. At the same time, growing pressure in the private sector to reduce health care costs in the form of Health Maintenance Organizations (HMOs) and other types of managed care also reduced hospital reimbursement. These external market factors made it important for hospitals to control costs. Part of this effort included forming or joining a GPO to lower the cost of goods and services that the hospitals purchased.
CONTINUE TO FULL ARTICLE WITH REFERENCES : http://www.ftc.gov/ogc/healthcarehearings/docs/030926bloch.pdf
MYTH AND REALITY©
Robert E. Bloch, Esq.
Scott P. Perlman, Esq,
Jay S. Brown, Esq.*
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