With or without GPOs?

Misaligned interests – they happen far more often than we think. At the core of the 2008 financial crisis for instance were rating agencies being compensated by the very firms whose securities they assessed that lead to unreliable ratings leading bankers and investors astray. The Enron mess – ring a bell? Did we not learn anything for that? In the healthcare space – we see this happen too. Robert Litan and Hal Singer write a great article in HBR drawing our attention to broken compensation structures that result in higher cost outcomes for healthcare consumers. I don't mean the dysfunctional fee-for-service payment model for doctors.

What am I trying to get at? GPOs. GPOs or group purchasing organizations are organization whose role is to serve their member hospitals money by relieving them of some of the transaction costs associated with procuring medical supplies on their own. Without a doubt, they play a very critical role in cost containment by leveraging buying power in the market. If hospitals were to independently contract for medical supplies they would be stumped with astronomically higher costs for supplies. We're talking in the billions here. In essence, GPO's "seem" indispensible.

The issue however is not that they stand to serve a critical function but how reliable they are. A recent GAO report questions the price saving intent of GPOs. Drawing on the most relevant conclusions from the article reveal that GPO contracts did not ensure that hospitals saved money. In many cases, among hospitals of all sizes, GPO negotiated contracts were often higher for supplies like pacemakers and safety needles. The GAO study is in stark contrast to the GPO funded studies touting substantial cost savings for hospitals – go figure!

This brings us to examine how GPO's make their money. By hospitals themselves. By charging a percentage of the total outlay their member hospitals pay to preferred medical suppliers on the negotiated contracts. The economics of it are simple – higher the expenditures - higher the GPO compensation. Are you thinking about kickbacks? Back in the 1980's GPOs convinced Congress of their indispensible role in reining in healthcare costs and they are thus exempt from the "general statutory ban on kickbacks where the government covers health care costs".

A recent article I read over the summer, does a great job in bringing to light GPOs engaged in a partly dirty business under the guise of helping hospitals. What the author here focuses on is how GPOs stifle innovation and even went as far in stating that GPOs keep life saving devices from entering the market. He relates his particular experience of getting a needless-syringe proven to lessen catheter infections into hospitals. His product was significantly less expensive and more effective. That's why he was thwarted time and again.

With the perverse incentives for GPOs, their "intended" pro-competitive stand is questionable. What is needed here? The HBR article concludes that these perverse incentives need to be reversed by repealing the safe harbor provisions that exempt GPOs. Over and above policy change – how about transparency of GPO contracts to start with?