I have worked with several GPOs, attended their conferences, presented, and participated in new technology committees, helping create guidelines and policies for regional and national purchasing groups. I have met some interesting people, and they have played an integral role in some of my successes within healthcare.

Throughout the years, I aim to have offered significant insights into the challenges of Supply Chain Management. With more than 43 years of experience in the field, I’ve observed the increasingly intricate relationship between healthcare and group purchasing organizations (GPOs). There are certain areas that necessitate further examination.

Group purchasing organizations (GPOs) have been a part of the U.S. healthcare system for over a century. They gained prominence in the late twentieth century by consolidating hospital purchasing. However, their performance and value have been subject to scrutiny. Let’s explore both sides of the argument:

Cost Savings and Efficiency

• GPOs aggregate purchasing power, negotiate contracts, and secure discounts on medical supplies, pharmaceuticals, and equipment.
• Hospitals benefit from cost savings, streamlined procurement processes, and access to a wide range of products.
• The total amount of dollars saved annually by GPOs is reported directly from the GPOs and not specifically from the healthcare systems. The definition of “savings” is very subjective and can be manipulated statistically.
• This figure is debatable when you measure potential savings versus actual savings within healthcare. What GPOs report and what is conveniently omitted is who is receiving the best pricing and why. Many of the largest health systems that command competitive pricing also report higher revenue, whereas rural systems struggle on both sides of the equation.
• When you lump healthcare into one bucket and fail to demonstrate the actual success of rural hospitals vs. larger systems, the data becomes murky and skewed in favor of the GPOs. Rural systems struggle to obtain competitive pricing compared to larger systems solely because of 1) market share and 2) volumes.
• GPOs offer regional purchasing group (RPG) memberships; however, the larger systems within these RPGs receive additional monetary incentives for their participation because of the market size.
• Closer reviews of GPO surveys require more scrutiny and analysis. Many pro-GPO reports are dated and originate from non-healthcare settings (Academia, Consultancies, or the GPOs).

Challenges and Criticisms

• Some critics argue that GPOs may hinder value analysis by limiting competition and innovation. This debate is written in the fine print of membership agreements and vendor contracts. When vendors are not allowed to negotiate contracts with GPO members, hospitals are isolated from receiving competitive pricing and forced to use GPO contracts or seek out non-GPO vendors.

• Allegations of exclusionary agreements and anti-competitive practices have surfaced. Bundling agreements are a perfect example of vendors’ and GPOs’ anti-competitive behavior. They have a 3 to 5-year commitment, and it is almost impossible to cancel from the customer side of the agreement. These agreements limit innovation and prevent customers from moving to more competitive agreements with other vendors.
• Concerns exist about access to innovative technologies and potential conflicts of interest. Vendors have stated that GPO administrative fee requirements (1.5% to 3%) directly impact unit costs and the bottom line. These additional costs are passed to the user. GPOs are projected to reach a 10% revenue growth by 2029, while many hospitals struggle to forecast 3%. This type of success on one side of the fence raises eyebrows.

Balancing Perspectives

No one denies that GPOs play a crucial role in cost management; their impact on value analysis must be considered. Hospitals must weigh the benefits of cost savings against potential limitations on choice and innovation. Collaborative efforts between GPOs, hospitals, and regulatory bodies can help strike the right balance. Customers are rarely included in the strategic awards of contracts, and what is provided online is a truncated version of the much larger relationship between GPO and vendor.

It’s important to remember that group purchasing organizations (GPOs) function differently across different types of hospitals, which requires a combined analysis of their impact. Contracts may legally affect specific customers. Non-profit hospitals typically fall under regulations designed to shield industries from anti-competitive practices, but they are not immune to all antitrust examinations. Such scrutiny focuses on HOW contracts are executed and WHY a particular vendor was selected. Customers are assumed to agree to contracts with full knowledge of the Terms and Conditions.

Value Analysis and Clinical Effectiveness

• Value analysis assesses the clinical and economic impact of products. What if a GPO contract contradicts this analysis?
• Hospitals evaluate whether a product improves patient outcomes and justifies its cost. What if the GPO agreement does not align with the VA analysis?
• GPOs may limit choice by favoring contracted suppliers, potentially hindering innovation. The value analysis could find a bundle agreement not in the system’s best interest.

Striking the Balance and Mitigating Risk

• Hospitals must weigh cost savings against clinical effectiveness. What is best for the patient and hospital could fall outside the GPO agreements.
• Ensuring access to innovative technologies while managing costs is challenging. There could be non-contracted vendors who meet or exceed the contracted vendor’s quality and price.

Hospitals must weigh the benefits of cost savings against potential limitations on choice and innovation. Collaborative efforts between GPOs, hospitals, and regulatory bodies can help strike the right balance. Customers are rarely included in the strategic awards of contracts, and what is provided online is a truncated version of the much larger relationship between GPO and vendor.

GPO’s Definition of Savings Could Conflict with Healthcare’s

The challenge in comparing group purchasing organizations (GPOs) with healthcare value analysis stems from the statistical interpretation of cost reductions. It involves balancing cost savings against clinical effectiveness and innovation and defining what constitutes “savings.” Let’s delve into this:

• Cost Savings via GPOs: GPOs award and renew vendor contracts every month. Competing definitions/reporting of savings, cost avoidance, cost effectiveness, cost containment, and value analysis can be confusing and contradictory.
• GPOs Negotiate Bulk Purchasing Contracts, Securing Discounts for Hospitals: On paper, the GPO pricing is negotiated below the book price. If vendors increase book prices by 5 to 7 percent per year, is the GPO reducing costs or reporting statistical increases? If hospitals report increased operating costs (supply expenses), how can GPOs report it as “savings?” NOTE: It is neither cost avoidance nor cost-effective; it disguises cost increases as savings.
• Cost Avoidance and Cost-Effectiveness Dilemma: Both concepts are valuable for financial management but should be distinct from actual cost savings or tangible reductions in current spending. Misrepresenting cost avoidance or cost-effectiveness as cost savings can lead to a distorted view of an organization’s financial health and performance.
• Hospitals Benefit from Reduced Costs of Medical Supplies, Pharmaceuticals, and Equipment: Again, it is all in how we define savings.
• Cost Containment is Crucial for Financial Stability: When compared to cost savings, which is the actual reduction of current spending, it’s clear that cost containment, avoidance, and effectiveness are more about managing and optimizing costs rather than simply reducing them. Cost containment is the overarching strategy to control costs without sacrificing quality. In contrast, cost avoidance and cost-effectiveness are tactics used within this strategy to prevent future costs and maximize the value of current spending, respectively.

Value Analysis and Clinical Effectiveness

• Value analysis evaluates the clinical and economic effects of products. What happens when a GPO contract conflicts with this analysis? This can become an epic debate between members and the GPO.
• Hospitals determine if a product enhances patient outcomes enough to warrant its expense. What occurs if the GPO agreement diverges from the value analysis?
• GPOs might restrict options by preferring contracted suppliers, which could impede innovation. The value analysis committee might reveal that a bundled agreement is not in the best interest of the system.

Balancing Act and Risk Mitigation

• Hospitals Must Balance Cost Savings with Clinical Effectiveness: The optimal choice for both patient and hospital may not align with GPO agreements.
• Securing Access to Cutting-Edge Technologies While Controlling Expenses is a Complex Challenge: Vendors not under contract might offer quality and pricing that match or surpass those of contracted vendors.
• Risk Mitigation: Local agreements outside the GPO could become risky because they lie outside the protective realm of the GPO and all the relationships (distribution) that come with GPO agreements.

The End-State Objective

Healthcare must reconsider and pose more challenging, insightful questions concerning the definition of savings. Collaborative efforts are crucial for maximizing GPO benefits and value analysis. It’s important to remember that the objective is improving patient care while preserving financial viability.

To truly grasp the motivation of GPOs in relation to revenue, one must consider a key question: What incentives exist to discourage GPOs from steering towards their contracts and to minimize costs and expenditures within their agreements?

Healthcare, it’s okay to stand up and say, “Hey GPO, we like what you have done, but it’s not good enough. We are seeing staff reductions, hospital closures, increased costs, and reduced reimbursements, but you are reporting record profits…………is that fair?”

Think about it.

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Tim Ingram, Sr. SME, Supply Chain Management, Paradigm Venture Group

Tim Ingram has had a remarkable 40-year career in supply chain management, which is marked by his visionary leadership and unwavering commitment to excellence. He has led operations in over 22 hospital systems, setting new benchmarks for success through his strategic guidance and operational skills.

Tim has demonstrated exceptional leadership through team building, achieving national benchmark results, and inspiring his teams to deliver outstanding operational outcomes within the healthcare supply chain.

His expertise in strategic sourcing, contract management, and compliance has been pivotal in his roles. Tim’s ability to exceed performance indicators has led to repeated recognition and rewards from his leadership teams for his exceptional contributions.

He is the Sr. Subject Matter Expert in Supply Chain Management for Paradigm Venture Group.

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