Unreported GPO fees may cause hospital overpayments

A government watchdog agency wants to know if hospitals accurately report payments they receive from group purchasing organizations that could affect Medicare spending. Some say the reporting of these payments could have broader implications for the federal safe harbor that protects GPOs from anti-kickback rules.

The Government Accountability Office concluded in its Nov. 24 report, “Group Purchasing Organizations: Funding Structure Has Potential Implications for Medicare Costs,” that HHS' Office of the Inspector General does not routinely assess whether fees from GPOs to hospitals are accounted for on Medicare cost reports. Those reports are used to help set Medicare payment rates for hospitals.

“To the extent that administrative-fee revenue is not reflected on cost reports, Medicare could be overpaying hospitals,” according to the GAO.

The GPOs cited in the report are: Amerinet in St. Louis; HealthTrust in Brentwood, Tenn.; MedAssets in Alpharetta, Ga.; Novation in Irving, Texas; and Premier in Charlotte, N.C.

Underlying the issue is a decades-long debate about the federal safe harbor established in 1986 that allows GPOs to take administrative fees of 1% to 3% from medical suppliers and vendors, based on the price of their products, without violating the federal anti-kickback law. The safe harbor was created because GPOs were thought to help hospitals reduce the cost of medical supplies and other products, and therefore indirectly reduce costs for Medicare. The GAO said, however, that there is little empirical data available to explain the impact of the GPO model on healthcare costs.

“Repealing the safe harbor—which allows administrative fees—could eliminate the potential effects of the GPO funding structure on Medicare payment rate,” according to the GAO. But the agency added that “experts and others stated that this could be disruptive to the healthcare supply chain, at least in the near term.”

It's the first time the GAO has raised questions about repealing the safe harbor. But the watchdog agency pointed to a lack of empirical data needed to make the case for a repeal.

GPOs had been apprehensive about the report leading up to its release. But the report's recommendations were limited to ensuring that hospitals accurately report fees on their cost reports. The issue now is if HHS starts auditing cost reports and finds that hospitals are underreporting GPO-fee revenue that could raise questions about the safe harbor.

Still, the GAO's willingness to raise the question was notable. “The mere recognition that there is an issue of whether or not there should be safe harbors” represents a potential threat to GPOs, said Sean Wieland, an analyst for Piper Jaffray, who covers MedAssets and Premier, the two publicly traded GPOs.

Administrative fees generate the majority of GPOs' revenue and sometimes are shared with hospital customers. About 70% of the $2.3 billion in fees received by the five largest GPOs in 2012 went back to hospitals. The GAO said fees, on average, generated 92% of revenue for the five GPOs in 2012.

Medical suppliers and vendors have criticized the safe harbor because it means they have to pay GPOs a fee to work with them. Without the safe harbor, it's likely that many if not all GPOs would go out of business.

The GAO's findings failed to satisfy Physicians Against Drug Shortages, a small group of clinicians who want Congress to repeal the safe harbor. Phillip Zweig, the group's executive director and a longtime critic of the GPO industry, said his group had hoped the report would pave the way for the repeal of the anti-kickback safe harbor and “restore market competition and integrity to the hospital supply chain.”

Other experts say the report did not present any significant new findings about the GPO industry. Lawton Burns, chair of the healthcare management department at the University of Pennsylvania, and who recently led a study analyzing hospital perspectives on GPOs, said that given the GPO industry's push to provide new services to hospitals beyond group purchasing, the GAO report did not advance the discussion by focusing on administrative fees and cost reports.

Still, the majority of the hospital industry remains dependent on group purchasing through GPOs to reduce supply costs. Ninety percent of U.S. hospitals use one of the five national GPOs, according to Burns' October report.

The Healthcare Supply Chain Association, a trade group for GPOs, expressed concerns about the draft report but was not critical of the final version. “We feel we got a fair shake from the GAO,” HSCA President Curtis Rooney said.

He said there is a widespread lack of understanding about the GPO industry. “We're a small industry and not many people know about us,” Rooney said. “We are going to make an effort to become a lot more known.”

Follow Jaimy Lee on Twitter: @MHjlee