Does it pay to save?

A newly released Government Accountability Office report may provide the clearest glimpse yet into how much revenue the largest healthcare group purchasing organizations generate annually through contract administrative fees.

According to the report, Group Purchasing Organizations: Services Provided to Customers and Initiatives Regarding Their Business Practices, supplier contracts negotiated by the six largest GPOs accounted for nearly $109 billion in healthcare provider-purchased goods and services in 2008. GPOs collected roughly $1.7 billion—or an average of approximately 1.6%—in related contract-administrative fees during that same period. GPOs collected another $320 million from other revenue sources, including separate fees charged to hospitals for supply-chain outsourcing, revenue-cycle management and other consulting services, bringing the six GPOs' total 2008 revenue to just over $2 billion.

The administrative fees, which are paid by suppliers, have been a particular source of concern and target of inquiry by some lawmakers. That's because GPOs, under a nearly 25-year-old congressional safe-harbor agreement, receive special protection from anti-kickback laws in order to collect the fees. Over the years, the arrangement has generated questions about GPO contracting practices, financial transparency and the value of the services they provide.

Last year, Senate Finance Committee ranking member Chuck Grassley (R-Iowa) asked the GAO to investigate and provide answers about certain GPO practices. They included the types of services that GPOs provide, initiatives that the organizations have implemented in recent years to address concerns over compensation and contracting transparency, and the reported impact of such initiatives.

Part of the GAO report “confirms what we were hearing about how the GPOs operate in terms of fees,” said a Senate Finance Committee aide who spoke on the condition of anonymity. “Also, we wanted the GAO to update their previous report from 2003. At that time, a lot of voluntary codes were being put together (by GPOs), and the GAO couldn't comment on their impact,” the aide added.

The aide didn't provide details on the Finance Committee's take on the GAO report. But, in a simultaneously issued minority report, the committee suggested that information provided by the newly released report along with previously collected data on GPO compensation models still provide an unclear picture of what impact administrative fees have on the overall cost of medical care, of which payers such as Medicare indirectly foot the bill (See story below).

Under the compensation arrangement, GPOs return a portion of administration fees they collect to their hospital members. Also, GPOs sometimes use a portion of the fees they collect to pay for the development and delivery of member-requested consulting services such as technology assessments and clinical evaluation and standardization.

According to the new GAO report, group purchasers distributed roughly 64%, or $1.1 billion, of the $1.7 billion in fees collected in 2008 to their members. But the GAO report does not provide a breakdown of whether those returned-fee figures include the cost of certain consulting services provided by the GPOs, or if, instead, those consulting services are covered by a portion of the remaining $600 million in contract administrative fees collected by the GPOs. “Not surprisingly, calculating the savings achieved by GPOs is complicated by the use of administrative fees to provide additional services that may or may not be of significant value to hospitals,” the Senate Finance Committee report noted.

Other interested parties are chiming in with their own take. The Medical Device Manufacturers Association funded a study of the GPO structure expected to be released Oct. 8. That study, co-written by Hal Singer, a managing director at Navigant Economics, a subsidiary of Navigant Consulting, and Robert Litan, senior fellow in economic studies at the Brookings Institution, estimates that hospitals could save $37.5 billion annually in the U.S. healthcare system by changing GPO compensation structures to eliminate what the report calls manufacturer kickbacks and other conflicts of interest, according to a spokeswoman for Navigant.

The report also concludes that GPOs often operate according to a compensation system that provides incentives to keep prices artificially high. Its findings suggest that when the hospital purchasing process is exposed to greater competition, hospitals were able to achieve a savings of up to 18% on average for 2010 data,according to the spokeswoman.

But Curtis Rooney, president of the Healthcare Industry Group Purchasing Association, a trade association representing GPOs, said that he believes the GAO report was favorable and that GPOs have succeeded in bringing transparency to their business model on multiple levels. “I think GPOs feel their fees are quite transparent,” Rooney said. “And that's reflected in the safe harbor law where it's required that GPOs disclose their fees to hospitals and that hospitals put that info in their annual cost reports, which can be reviewed” by federal officials.

In addition to providing a glimpse into GPO revenue, the GAO report also looked at the impact of contracting initiatives launched by the GPO industry. According to the GAO study, GPOs have adopted industry-wide codes of conduct to address potential conflicts-of-interest associated with their vendor-contracting practices and tackle concerns that some vendors may be locked out of opportunities to supply products and services to healthcare providers.

The impact of those codes met with mixed assessment from healthcare providers and vendors, however. GAO officials found, for example, that GPOs' efforts to add more innovative products to their contract portfolios has met with little success. None of the six hospitals and only one of five vendors queried for the study mentioned the effort as having an impact on available products. That lone vendor said that the GPOs' provisions for adding innovative technology products are rarely used.

And, while a number of GPOs have moved away from sole-source contracting—which typically provides lower pricing as a result of the higher purchasing volumes that are directed to a single vendor—in order to address concerns about vendor lockout, the move to multisource contracts has in some cases resulted in higher prices for products. The GAO report noted that two of the six hospitals and all five of the suppliers queried for the study reported that the negotiation of multisourced contracts resulted in higher prices for GPO-contracted products.

Lawton Robert Burns, a healthcare management professor at the University of Pennsylvania's Wharton School of Business, said he doesn't view that outcome of the change in GPOs' contracting practices as a barometer of the value of GPOs. “It's to be expected that when you shift away from solo-source contracting to multiple sources you'll get higher pricing” as a result of lost aggregation, Burns said. “What you have here is a balancing act. You have free choice and access on one hand and sole-source and low prices on the other. You can't get both.”