Last year Senator Charles Grassley (R-Iowa) asked for proof that the purchasing intermediaries that buy medical products for hospitals, known as Group Purchasing Organizations (GPOs), actually save the government money. Based on two reports Mr. Grassley released last week, one from the Government Accountability Office (GAO) and one from his staff, despite evidence to the contrary, he asserted that there is no empirical data that GPOs provide any savings to the Medicare and Medicaid programs, which reimburse the hospitals for the care they provide to their beneficiaries.
Background
As the GAO report detailed, federal spending for health care services provided through Medicare and Medicaid has more than doubled from $333.9 billion in fiscal year 2000 to $749.9 billion in fiscal year 2009. The Congressional Budget Office (CBO) projects that, without any changes in federal law, federal spending on Medicare and Medicaid will rise from 5.3 percent of gross domestic product in fiscal year 2009 to almost 20 percent of the gross domestic product in fiscal year 2082. An important component of those costs is products that hospitals and other health care providers purchase to provide health care.
Over the years, hospitals and other health care providers, including those that participate in Medicare and Medicaid, have increasingly relied on GPOs as one means to help keep the cost of medical products in check. Providers use GPOs to negotiate contracts with vendors such as manufacturers, distributors, and other suppliers to purchase a range of products—from commodities such as cotton balls and bandages to high-technology medical devices such as pacemakers and stents. Consequently, in 2002, Congress raised questions about GPOs engaging in potentially anticompetitive business practices such as:
- Collecting excessively high contract administrative fees
- Sole-source contracting or contracting with only one vendor for a given product when multiple vendors of comparable products are available;
- Product bundling or linking price discounts to purchases of a specified group of products; and
- Limiting customer access to new and innovative technology
In 2003, GAO reported that selected GPOs had adopted or revised codes of conduct to respond to the questions about their business practices, but that it was too soon to evaluate the impact of those codes. As a result, Congress asked GAO to provide information regarding:
The types of services that GPOs provide and how the GPOs fund these services
Initiatives that GPOs have implemented since 2002; and
The reported impact of the GPOs’ codes of conduct and other initiatives
GAO Report
The GAO report released last week entitled, “Group Purchasing Organizations: Services Provided to Customers and Initiatives Regarding their Business Practices,” reviewed GPO documents and collected written responses to structured questions from the six largest GPOs based on their reported 2007 purchasing volume. Although there are over 600 GPOs in the United States, in 2007, the six GPOs reviewed by the study together accounted for almost 90 percent of all hospital purchases nationwide made through GPO contracts. The report also included follow-up interviews with these six GPOs. In addition, GAO interviewed representatives from six GPO customers—hospitals—that varied in size, the GPOs with which they did business, and whether they had an ownership stake in a GPO. The study also interviewed five medical product vendors of various sizes that do business with GPOs.
The six GPOs in their review reported providing a range of services for their customers and funding these services in two ways. All six GPOs reported offering to their customers the following three services—custom contracting, clinical evaluation and standardization of products, and assessments of new technology.
In reviewing GPOs revised codes of conduct, the report looked at the Healthcare Group Purchasing Industry Initiative (HGPII), a voluntary membership association focused on promoting best practices and public accountability among member GPOs. This association adopted a set of principles of ethics and business conduct that its GPO members are expected to follow, which include:
- Having a written code of business conduct
- Working toward high quality health care and cost effectiveness
- Working toward an open and competitive purchasing process
- Sharing best practices; and
- Being accountable to the public
HGPII members are also required to report annually information on their policies and business practices. One important finding showed that all GPOs have in place programs to evaluate innovative technologies that could provide a meaningful benefit to patients, and can take steps to rapidly introduce these technologies in the marketplace. Another significant finding from the report showed that all GPOs interviewed offered a broad range of services to hospitals, including individualized contracting services, product evaluation services such as clinical evaluation and standardization, and assessment of new technologies.
The report found that GPOs offered additional services including e-commerce and benchmarking services, patient safety services, clinical resource guides, and supply chain services to help manage in-house pharmacies, and provided many of these additional services at no cost to hospitals through collection of nominal administrative fees received from vendors under GPO contract.
Additionally, the GAO report found that the creation of the HGPII has led to increased transparency in contracting, increased number of multi-source contracts, and to the development of technology innovation provisions by all GPOS interviewed. In fact, all GPOs reported that their codes of conduct had an impact on their contracting practices, innovative product selection, administrative fees, conflict of interest policies, transparency, and accountability of GPO practices. Moreover, GPOs reported taking voluntary initiatives such as establishing and revising codes of conduct, creating ethics hotlines for employees, hiring compliance officers, and convening Best Practices Forums for Congressional staff to monitor progress. Other findings include:
- 90% of hospitals voluntarily contract with GPOs and these hospitals use an average of 2-4 GPOs per facility;
- GPOs have a broad range of services for hospitals and long-term care providers to improve quality, safety and economy;
- 3 of 5 device vendors interviewed indicated that they are now paying lower admin fees, and that fees are more consistent and predictable as a result of transparency initiatives voluntarily undertaken by GPOs;
- The average weighted contract administrative fee for the GPOs interviewed ranged from 1.22% to 2.25%;
- Multi-sourcing device contracts may be less cost-effective than anticipated, as some medical device suppliers have increased device prices in response;
From these findings, HGPII Chairman Lee Perlman noted that GPOs will continue to be transparent in the contracting process. Perlman announced new measures aimed at further increasing openness and accessibility, including the establishment of a supplier grievance evaluation process to resolve contracting disputes through the American Arbitration Association, and an Independent Advisory Council providing independent, third-party oversight of compliance with the code of conduct.
At the request of Congress, the GAO also reviewed existing peer-reviewed and non-peer reviewed academic literature and articles about the impact of GPOs on pricing for hospitals. All reviewed literature confirmed that GPOs reduce health care costs for hospitals by lowering product prices. Based on these findings, the Health Industry Group Purchasing Association (HIGPA) applauded the release of the GAO report.
HIGPA Chairman Rand Ballard noted that as “we move toward implementation of federal healthcare reform, the cost savings that GPOs provide to American hospitals are more critical than ever.” He added that HIGPA is “committed to further increasing price transparency in the healthcare sector, and to promoting access, competition, and choice so hospitals are able to identify and purchase the best products at the highest value.”
Senate Minority Staff Finance Report
Despite the clearly unbiased, non-political information the report provided, Senator Grassley was still not convinced about the impact GPOs are having on controlling health care costs. For example, in his staff’s minority report entitled “Empirical Data Lacking to Support Claims of Savings With GPOs,” he noted a number of concerns.
First, he pointed to a “safe harbor” within the 1986 Anti-Kickback Statute that allows GPOs to receive fees from manufacturers without violating antitrust and anti-kickback laws. Grassley asserted that although GPOs could save more health care dollars by receiving such fees, this safe harbor created an inherent conflict of interest because funding for many of the GPOs comes through manufacturers administrative fees collected as a percentage of the cost of products purchased under the GPO contract. For some, this creates a conflict because “there is a built-in incentive not to seek the lowest price because higher prices will yield higher fees,” since GPO fees are based on sales to members and customers.
However, in making this claim, the Finance report ignores the fact that GPOs have enacted codes of conduct, and transparency and conflict of interest policies to address these concerns. In fact, “GPOs informed the Committee that they have adopted conflicts of interest policies, such as prohibitions on equity ownership in manufacturers for individuals who are in the position to influence GPO contracting decisions, to prevent or reduce these types of relationships that GPOs and their members had with manufacturers.”
In ignoring the improvements GPOs have made since 2003, the Finance report also claimed “a lack of transparency in the types of payments made to GPOs by manufacturers and others and the services that these payments fund.” In response to these concerns, GPOs met with Finance Committee staff and asserted that any “adjustments or modifications to the safe harbor provision would, in their opinion, limit the important services that GPOs currently offer to their members, beyond the negotiation of better prices for drugs, devices, and medical supplies. These services they said include quality of care and patient safety initiatives.”
Another issue the Finance Committee report found was that of the “few studies conducted on GPOs in the available literature, none of them used empirical evidence.” This led to the Committee to conclude that there is “limited data on the actual savings that may or may not be achieved through GPOs.” To arrive at this conclusion however, the Finance Committee chose to interpret data in a light that is most favorable to them by pointing to minor limitations, when the reality is data does exist to show the positive impact GPOs are having on controlling health care costs.
For example, a recent survey from Hospitals & Health Networks and the Association of Healthcare Resource & Materials Management asked hospital vice presidents, directors of materials management, and chief financial officers to find out, among other things, the value of the goods and services hospitals purchase through their GPOs. The study, published in July 2010, found that 90 percent of the respondents were satisfied or very satisfied with their primary GPO and GPOs received the highest scores for pricing, savings, and customer service compared to the other services provided.
Another study, commissioned by HIGPA in Calendar Year 2008, found that GPOs saved the nation up to $64 billion – with savings to public health care programs ranging from $16 billion to $36 billion. The study also estimated that Medicare realized savings of between $8 billion and $17 billion in CY 2008 with savings to Medicaid ranging from $5.7 billion to more than $12 billion. In addition, a 2005 OIG review of three GPO’s found that 70 percent of the excess revenue GPOs generated was distributed to members and the rest was retained by the GPOs ―to provide reserves and venture capital for new business lines.
HIGPA
Ultimately, with 98% of all hospitals reliant on GPO low-cost contract pricing, HIGPA President Curtis Rooney recognized that based on GAOs unbiased and non-political information, it is clear that GPOs are firmly committed to “remaining the most transparent industry in health care.” He also acknowledged the evidence from academic research that has “documented the significant cost savings and the wide range of valuable services that GPOs provide to hospitals, which is why virtually all American hospitals voluntarily contract with GPOs.”
As a result, he noted that GPOs “aggressive efforts have yielded increased transparency and low administrative fees in health care contracting,” which confirms that GPOs “operate in a competitive market that is working and bending the healthcare cost curve.”