A government watchdog wants to know if hospitals accurately report revenue they receive from group purchasing organizations, a question that may have broader implications for the federal safe harbor that allows GPOs to earn and distribute such administrative fees.
The Government Accountability Office on Monday released a highly anticipated report (PDF) on GPOs that found HHS' Office of the Inspector General does not routinely assess whether fees from GPOs to hospitals are accounted for on Medicare cost reports, which are used to help set hospital payment rates for Medicare.
“To the extent that administrative fee revenue is not reflected on cost reports, Medicare could be overpaying hospitals,” the GAO said.
GPOs are allowed to operate under a safe harbor of the anti-kickback statute because they are expected to help hospitals negotiate better prices on medical supplies, yielding lower Medicare costs.
GPOs negotiate contracts with medical suppliers and device manufacturers on behalf of their hospital customers. The vendors then pay GPOs administrative fees of 1% to 3% of the price of their products. The fees generate the majority of most purchasing organizations' revenue. About 70% of $2.3 billion in fees received by the five largest GPOs in 2012 went back to hospitals.
The five largest GPOs are Amerinet in St. Louis, HealthTrust in Brentwood, Tenn., MedAssets in Alpharetta, Ga., Novation in Irving, Texas, and Premier in Charlotte, N.C.
The safe harbor, which was created in the 1980s, has been criticized by the medical suppliers and vendors that have to pay GPOs a fee to engage with them.
The GAO concluded that getting rid of the safe harbor could eliminate the potential distortion of Medicare payment rates but also notes that “experts and others stated that this could be disruptive to the healthcare supply chain at least in the near term.”
The GAO said the HHS' Inspector General's Office does not routinely request or review disclosures related to administrative fees but has collected information about administrative fees while auditing hospital cost reports. Audits the OIG performed in 2005 found that some hospitals did not fully account for fee revenue on their cost reports.
But since the CMS updated guidance in 2011 on reporting revenue distributions the OIG has not reviewed fee revenue on cost reports. HHS told the GAO it will incorporate reviews of GPO fee revenue in audits of cost reports.
The GAO also concluded there is little empirical data available to explain the impact of the GPO model on healthcare costs in the 30 years that the safe harbor has been in effect.
The group purchasing industry argues that GPOs help keep costs low for hospitals and that competition among rival GPOs pushes them to negotiate the lowest prices on behalf of their hospital customers.
“GPOs are part of the private-sector solution to healthcare cost containment,” said Curtis Rooney, president of the Healthcare Supply Chain Association, which represents GPOs. “Hospital purchasing executives are sophisticated shoppers in a competitive market, and they continually turn to GPOs to help deliver the best products at the best value.”
Critics of GPOs, however, say the safe harbor creates a market in which GPOs do not have an incentive to negotiate the lowest prices on medical supplies and medical devices because doing so would lower their revenue.
Shortages of generic drugs prompted House Democrats to ask the GAO to look into the contracting practices of GPOs as part of a broader report on drug scarcity. Some manufacturers have stopped making less profitable drugs, which means if another company has a recall or goes offline due to manufacturing issues there are few or no alternative sources of certain drugs. That GAO report came out in February, and it did not make any recommendations related to GPOs.
Although the new GAO report raises questions about the industry's safe harbor, it failed to satisfy Physicians Against Drug Shortages, a small group of clinicians advocating for lawmakers to repeal the safe harbor.
“We had hoped that this report would pave the way for an end to drug shortages and surging generic drug prices via repeal of the 1987 Medicare anti-kickback safe harbor, which would restore market competition and integrity to the hospital supply chain,” said Phillip Zweig, executive director of Physicians Against Drug Shortages and a longtime critic of the industry.
Repealing the safe harbor would likely mean that many if not all GPOs would go out of business because hospitals would be not be allowed to pay the fees that support the business.
Industry groups estimate that 95% of U.S. hospitals are GPO customers and use GPO-negotiated contracts. However, the GAO noted, as health systems get larger they may be able to pay GPOs for their services or negotiate with suppliers on their own.
Follow Jaimy Lee on Twitter: @MHjlee