Study: GPOs could play large role in Obama healthcare reform

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Group purchasing organizations (GPOs) save the U.S. healthcare industry $36 billion dollars annually in price savings and more than $2 billion dollars in savings associated with human resources uncommitted to the purchasing process, according to Eugene S. Schneller, PhD, principal at Health Care Sector Advances and professor at the Arizona State University School of Health Management and Policy.

Schneller said that as President Barack Obama and Congress look to rein in medical costs for healthcare reform, they should take a close look at GPOs, which already are achieving more than $36 billion in annual healthcare and related costs savings in the U.S.

GPOs aggregate healthcare buying volume and then use that leverage to negotiate discounts with manufacturers, distributors and other vendors. More than half of U.S. hospitals and systems use GPO pricing as the benchmark for starting their own negotiations for physician preference items, which are the more expensive purchase items. Similarly, more than half report the desire to improve GPO contract penetration.

Schneller surveyed 29 hospital systems, representing 429 hospitals and more than three million hospital admissions, with data collection by Mathematica Research. Organizations were surveyed as to their commitment to purchasing from GPO contracts for commodities, pharmaceuticals, physician preference items such as orthopedic implants, and capital equipment, as well as the savings achieved by levels of commitment (i.e., percentage of contract purchased off a GPO contract).

The study considered the extent to which GPOs reduce transaction costs associated with the employment of supply chain personnel for a variety of categories of products at both the hospital and system level. It also documented the various added value strategies associated with hospital/system GPO expectations, including outsourcing, utilizing GPO price as a benchmark for individual hospital contracting, and utilizing GPO pricing to obtain custom contracting, according to Schneller.

Respondents were asked about their total percent of all goods purchased through GPOs and estimated savings. U.S. hospitals have approximately $310 billion in non-labor expenses--much of which could theoretically be purchased through a GPO. The report's survey respondents purchased only 72.8 percent of all their goods through GPOs with an anticipated 18.7 percent in average savings. This figure, applied to the full non-labor expenditures, suggests as much as $42.2 billion dollars of savings attributed to GPO purchases, Schneller wrote.

However, the report noted that GPOs do not uniformly provide participants with access to a full range of purchased products and services or with access to all medical/surgical, pharmaceutical or capital products. Consequently, reducing the range of purchased products and services not carried by GPOs by 20 percent of all non-labor expenditures, would result an overall GPO savings estimated at $36 billion dollars nationally. This figure is consistent with the mid-range of other recent academic estimates.

The projected $36 billion in annual GPO direct price savings is distributed in the following way:

  • $6.8 billion for hospital pharmaceuticals;
  • $8.5 billion for medical/surgical purchases;
  • $1.9 billion in attributed savings in the $10.4 billion cardiology implant marketplace (either directly or indirectly by providing members with GPO purchased goods or reference pricing from directly engaging the marketplace); and
  • $840 million in attributed savings in the $7 billion dollar orthopedic implant marketplace (either directly or indirectly by providing members with GPO reference pricing for directly engaging the market).

By buffering the need to carry out outsourcing, contracting and other GPO activities for inpatient pharmacy, general medical products, orthopedic products, other clinical products and housekeeping products, GPOs have resulted in human resource savings of $1.8 billion, the report noted. Additional workforce expenditures of as much as $600,000 per system would be necessary for larger organizations. "Thus total workforce savings for hospitals and systems would exceed $2 billion dollars annually," Schneller wrote.

The Health Care Sector Advances survey and report had financial support from the Health Industry Group Purchasing Association, a trade association that represents 16 group purchasing organizations, including not-for-profit and for-profit corporations, purchasing