Group purchasing organisations cost US healthcare $36bn more than open market

11 Oct 2010

A study commissioned by the US Medical Device Manufacturers Association (MDMA) has found that hospitals pay more for medical devices and equipment bought through group purchasing organisations (GPOs) than through the open market [1].

GPOs were established by hospitals to pool purchasing power to gain more favourable contracts with suppliers. Vendors bid for the right to supply a network of hospitals in competitive auctions and the GPOs cover their costs through charging the vendors administrative and other fees bases on a percentage of the proceeds of the auction.

The report describes the "complex and veiled nature" of the transactions that has meant that the GPOs gained more from higher bids and the bidding process was also distorted, resulting in higher prices for hospitals, exclusivity for dominant companies and reduced market access for new suppliers.

The authors liken the situation to the US-caused financial crisis where the debt issuers paid the credit ratings agencies, meaning the agencies increased their income from issuing more AAA ratings.

The study found that when hospitals put GPO prices up for bid in open competition after a GPO auction (aftermarket auction), hospitals saved on average 15% (2010 price data). Even device makers on a GPO contract reduced their own prices for the same product to the same hospital in over half of all the transactions studied. The study analysed 8,100 aftermarket transactions.

The authors estimate that changing the incentive structure to prevent the "kickbacks" would reduce federal healthcare spending by about $11.5bn annually and private healthcare costs by about $25bn annually. It would require a change in legislation introduced in 1986 (under the Reagan administration) to make the kickbacks illegal. Would this have happened any where else in the developed world?

Reference

1. Robert E. Litan and Hal J. Singer. Do group purchasing organizations achieve the best prices for member hospitals? An empirical analysis of aftermarket transactions. 2010. The report is available on the MDMA website at: http://www.medicaldevices.org/sites/default/files/
GPO_pricing_litan_singer_distribution_oct%202010.pdf