GPOs Driving Up Hospitals' Medical Device Costs, Say Manufacturers

Jeff Elliott for HealthLeaders Media, October 12, 2010

Fed up with what they say are supplier kickbacks to group purchasing organizations (GPOs), medical device manufacturers are spreading the message that these arrangements are actually driving up costs rather than lowering them as intended.

Their argument is presented in a study underwritten by the Medical Device Manufacturers Association (MDMA) and conducted by economists Robert E. Litan of the Kauffman Foundation and Hal J. Singer with Navigant Economics. Researchers concluded that even though GPOs are now entering "multisource" contracts—the result of Congressional pressure to create more competitive rates—compensation practices have incentivized GPOs "to maintain some monopoly pricing."

According to MDMA President and CEO Mark Leahey, eliminating the supplier-funded GPO model in which purchasing organizations receive a percentage (commonly 2 to 3 percent) of revenues generated under the contract would save public and private healthcare organizations more than $35 billion annually. "This study proves that GPOs not only fail to bend the cost curve for healthcare down, they are preventing hospitals and patients from getting the best products at the best prices."

The conclusions are the result of an analysis of more than 8,000 medical device aftermarket transactions in which the winning GPO price—determined by an auction held by the GPO that grants suppliers the right to provide their products to member hospitals—was put up for bids from other suppliers after the initial auction.

"The transactions data suggest that, when exposed to competition in the aftermarket, hospitals were able to achieve average savings of approximately 10 to 14 percent across the entire database (2001 through 2010)," the authors said in the report. Additionally it claims that in more than half of the aftermarket auctions, device makers were persuaded to lower their prices by an average of 7%.

MDMA is not hiding its agenda by publishing the report; it has lobbied Congress to remove safe harbor provisions granted to GPOs in the 1986 Social Security Act and change compensation practices, effectively making it illegal for GPOs to collect money from vendors. "So long as GPOs are compensated via an equity interest in the concession, they have an inherent conflict that limits their ability to negotiate the best prices for their member hospitals," concludes the study.

Margaret Dick Tocknell Margaret Dick Tocknell is a reporter/editor with HealthLeaders Media.
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