Higher health care costs, lack of safety innovations traced to group purchasing organizations

The Washington Monthly‘s Mariah Blake writes about the ins and outs of group purchasing organizations (GPOs)  and their effect on the development of newer, potentially safer, medical equipment. She reports the system has kept potentially lifesaving innovations off the market and may be contributing to the rising costs of health care.

Among the products she cites as having been created but largely kept out of the supply chain as a result of the GPO system are a syringe with a retractable needle, a syringe designed to reduce bloodstream infections and a surgical towel that can be spotted on X-rays to keep towels from being left in the body after surgery. Those products were developed by small suppliers who seem to be squeezed out of the market by the system.

Photo by kreg.steppe via Flickr

Blake’s combination of narrative about the small suppliers who have been stymied by the system and her investigation into how GPOs became such a game changer will be of great interest to anyone who writes about health care costs and innovations in patient safety.

Blake explains the evolution of GPOs, “a system built on a seemingly minor provision in Medicare law that few people even know about.”

It’s a system that has stifled innovation and kept lifesaving medical devices off the market. And while it’s supposed to curb prices, it may actually be driving up the cost of medical supplies, the second largest expenditure for our nation’s hospitals and clinics and a major contributor to the ballooning cost of health care, which consumes nearly a fifth of our gross domestic product.

Through a series of court cases, one of which granted GPOs protection from antitrust actions, and their subsequent consolidation, GPOs revenues became “tied to the profits of the suppliers they were supposed to be pressing for lower prices.”

A former GPO employee explains, “But GPOs make their money by charging vendors fees. And if you get a percentage of sales, going with a lower bid from a little company just loses you money and pisses off the big vendors with multiple contracts.”

Blake reports that most small suppliers are wary of speaking out about GPOs. “Several talked to me off the record. At least a half dozen more agreed to speak, only to back out at the last minute or retract their statements after we had spoken.”

Blake points out that this incentive system has an effect on health care costs. GPOs contend that they keep costs down by pooling hospitals’ buying power, but Blake reports one company has kept data on hospital purchases and found that “bids hospitals got through their GPO contracts were substantially higher” than what could be had by negotiating directly with vendors for the same equipment.

More about GPOs

9 thoughts on “Higher health care costs, lack of safety innovations traced to group purchasing organizations

  1. Pingback: Health of Life » Blog Archive » Higher health care costs, lack of safety innovations traced to …

  2. Avatar photoSnoop

    The article is true, GPO’s do add cost and they protect the largest suppliers. GPO’s don’t care if a product is better or inferior. Most of them are private companies, they are not the FDA and they don’t represent Medicare or the government. For the GPO it’s all about which supplier can deliver the highest “contract compliance” and other financial incentives. It’s all a numbers game. There are some hospitals know they can get lower costs on their own, so they will contract directly with manufacturers, bypassing and beating the GPO price. Therefore, if GPOs truly leveraged the best price, why do some of their members get better prices “off GPO contract”. It’s a fact Jack, check it out!

  3. Avatar photoCindy Fithian

    Mariah Blake nailed it. Her article “DIRTY MEDICINE” in the Washington Monthly hit a home run. It’s an outrage that the healthcare industry – nearly 1/6 of the US economy, has legalized bribes and kickbacks in the medical marketplace. No wonder health care costs so much!

    Contact me @ cindyfithian@gmail.com if you’d like to receive the power point “The High Cost of GPOs”, explaining the inner workings of GPOs, and how everything changed in 1986 when Congress granted GPOs an exemption to the Medicare anti-kickback statute.

  4. Avatar photoTim

    Where were Modern Healthcare magazine and Healthcare Finance News on this GPO story? Why haven’t they commented in the week since release? Let me guess, GPOs buy a lot of advertising from them with their kickback dollars? Healthcare journalism was asleep at the wheel on this…..thank you Mariah Blake

  5. Pingback: GAO examines competition in hospital purchasing : Covering Health

  6. Avatar photoCurt Werner

    As someone who has covered hospital purchasing and GPOs for almost 20 years I am amazed at how many organizations run stories like this that are impossibly unbalanced both in nuance and fact. I am not a cheerleader for the group purchasing industry, but I do know that someone from that industry does deserve to comment in articles like this. The GPO industry and hospital supply in general have been through this issue many times for many years and there is no doubt that there are plusses and minuses to the notion of group purchasing. Some studies show effectiveness, others less so. This latest study was commissioned by a major foe of group purchasing and readers have the right to hear the other side of the story whether people agree with it or not.

  7. Pingback: Trade group says conflicts negate GPOs’ leverage : Covering Health

  8. Avatar photoethics healthcare

    In the current system, the health system pays a fee to the GPO to belong. The vendor also pays a fee to the GPO in order to compete for the business in the aforementioned health system. Seems that the GPO is making money on both sides of the transaction. It’s no wonder that there is a history of fraud related to contract pricing by vendors. The following situation is a great example: Toshiba has put itself in a position to be a party to both cronyism and fraud with the recent hire of Les Friend in the role of VP of Strategic Business (yes, most vendors have a role specifically designed to cater to the GPOs).
    Les was specifically named in a lawsuit (CIVIL NO. 2004-0116) accusing him of repeated instances of fraudulent pricing and discounting practices in dealings with government purchasing agents in his role of VP, National Accounts at Siemens. (see pages 10 and 11). Les will claim that the lawsuit was dismissed, but what he will not say is that the dismissal is based on a filing technicality and that his business practices have helped drive a parallel criminal investigation of Siemens’ equipment marketing practices by the Defense Dept. and the U.S. Attorney’s Office in Philadelphia.
    In the end, these practices add costs to the healthcare system, oftentimes paid by the taxpayer.

  9. Avatar photoMedical Group Purchasing Organization

    Joining a GPO is a good business decision. Joining one that is free and offers voluntary participation is a very good decision. at physicians’ alliance of America we have long used the expression good medicine meets good business to describe our goal.

Leave a Reply