For most long-term care communities, using a Group Purchasing Organization (GPO) is a standard part of operations. But have you ever wondered how GPOs actually work? Or whether the role they play in procurement is beneficial to your organization?
At Healthcare Margin Specialists, a common question we get asked is whether we’re simply another GPO. No, we are not a GPO. But if you choose to work with one, we can work with yours to find cost savings.
We believe in helping you to be an informed and educated consumer – which is why we’ve written a 3-part series on GPOs. This first article is intended to provide an overview of GPOs. It includes definitions, how they make money, the history, and some considerations when using one.
What is a GPO?
GPOs are the middle man to help their members buy goods and services. Once an optional value-add, GPOs have emerged as central players in modern procurement. Some see this as a positive reality, while others point to this as a sign of a broken system.
The Role of GPOs
History of GPOs
GPOs have been around for over a century, with the concept originating in the healthcare industry. The earliest GPOs were formed as purchasing cooperatives by regional groups of hospitals or healthcare institutions.
Purpose and Function
The purpose of GPOs is to provide cost savings, streamlined procurement processes, and access to a wider range of suppliers. They aim to do this in two main ways:
- Aggregating Purchasing Power: GPOs can get cost savings for members simply by pooling together their buying strength.
- Negotiating Contracts: GPOs negotiate contracts with suppliers on behalf of their members, aiming to secure cost savings while maximizing quality.
Types of GPOs
Sectors of Operation
While GPOs had their genesis in healthcare, their influence has transcended the sector. Today, GPOs are key players in other industries, as well.
In healthcare, GPOs play a large role in procuring medical supplies, equipment, and pharmaceuticals. Their negotiation of bulk purchases aims to deliver cost savings for hospitals and healthcare providers.
Beyond healthcare, GPOs have extended their influence into various industries such as manufacturing, hospitality, and education.
GPOs can also specialize in their reach:
- Regional GPOs tailor their services to the unique requirements of local businesses and organizations.
- National GPOs cater to the procurement needs of organizations on a larger scale.
- Specialty GPOs focus on specific markets or types of products and services.
How GPOs Make Money
Membership
GPOs use a membership model, with members that range from small businesses to large enterprises. Think of it like a Costco membership for a healthcare facility, but with a more stringent application process.
Supplier Relationships
The relationships between GPOs and suppliers goes beyond price negotiations for members. Suppliers provide rebates and incentives to GPOs based on member purchases. This can set up a dynamic where the GPO acts more like an affiliate or salesforce for suppliers than a negotiator. This is an increasingly important component of how GPOs sustain their operations.
Aren’t Kickbacks Illegal?
Yes, but… Safe Harbor regulations established in the 1980s protect certain arrangements between GPOs and suppliers from being unlawful. These regulations were an attempt to reduce abuse, but perhaps backfired. Just a few years later, concerns about the potential for unethical or anticompetitive practices thanks to these regulatory protections emerged.
Challenges and Considerations for Long-Term Care Communities
While GPOs promise enticing advantages to their members, there are downsides. A high-level overview is considered here, with additional information in future parts of this series.
Limited Pricing Negotiation
GPOs provide member organizations with pre-negotiated contracts. This can streamline the procurement process, but it limits individual organizations to negotiate based on their specific needs.
The standardized pricing offered by GPOs may provide consistency but does not accommodate the unique circumstances of all members.
Transparency Variability
When GPOs are more transparent, it can increase the perceived value of the membership. Some GPOs tout transparency, providing detailed information about contracts, pricing, and supplier relationships.
Unfortunately, GPOs have been criticized for a lack of transparency in regards to their pricing, kickbacks, conflicts of interest, and potential misconduct. It is not always easy to discern transparent practices in this industry.
Challenges and Considerations for the Healthcare System
Influence over Healthcare
Over the years, the GPO industry has seen consolidation, with some larger GPOs acquiring smaller ones. This has led to a small number of dominant players in the market.
Critics argue that this consolidation could have a significant and negative impact on the healthcare system by encouraging anticompetitive behavior, discouraging innovation, and even causing higher costs for members.
Additional accusations range from conflicts of interest in supplier relationships to nepotism to self-serving business practices.
(Lack of) Regulatory Oversight
In a 2006 hearing before the US Senate Subcommittee on Antitrust, Competition Policy and Consumer Rights Attorney Richard J. Bednar testified to the industry’s commitment to high ethical standards. The GPO Initiative, established in 2005, was a voluntary, self-governing organization whose members pledged to adhere to six core principles.
Dr. S. Prakash Sethi, the University Distinguished Professor at Baruch College at the City University of New York at the time of the hearing, also testified. He brought up concerns that the Initiative was government mandated but self-regulated. Research has identified eight conditions that demonstrate whether industry code provides measurable and credible compliance.
“In my professional opinion, the size principles of the GPO Initiative fail to measure up even at the very minimal level to any of the eight criteria that we have indicated. There is a total lack of independence in the Initiative’s governance structure, which is entirely controlled by the top executives of the member companies. Although the Initiative includes a coordinator, the [position] has no real authority.” (pg. 9)
Hospital group purchasing: Are the industry's reforms sufficient to ensure competition? Hearing before the Subcommittee on Antitrust, Competition Policy and Consumer Rights, Committee on the Judiciary United States Senate. 109th Cong, 2nd sess., 2006.
Conclusion
In this article, we discussed how GPOs work and some factors to consider if you choose to work with one. The purpose of this series is to help your long-term care community be an informed and educated consumer.
At HMS, we review and negotiate your facility’s recurring expenses in 8 key areas to lower costs, increase your purchasing power, monitor continued savings, and improve your margins. We're not a GPO, but we can work with yours.
Ready to see how much you can save – with or without a GPO? Schedule a FREE Revenue and Margin Assessment Call with our team or email us at getstarted@hmspecialists.com.
This article is 1 in a 3 part series on GPOs. The other articles will be published in upcoming HMS blog posts.
