Group Purchasing Organizations
Use of Contracting Processes and Strategies to Award Contracts for Medical-Surgical Products
Gao ID: GAO-03-998T July 16, 2003
Hospitals have increasingly relied on purchasing intermediaries--GPOs--to keep the cost of medical-surgical products in check. By pooling purchases for their hospital customers, GPOs'in awarding contracts to medical-surgical product manufacturers--may negotiate lower prices for these products. Some manufacturers contend that GPOs are slow to select products to place on contract and establish high administrative fees that make it difficult for some firms to obtain a GPO contract. The manufacturers also express concern that certain contracting strategies to obtain better prices have the potential to limit competition when practiced by GPOs with a large share of the market. GAO was asked to examine certain GPO business practices. It focused on seven large GPOs serving hospitals nationwide regarding (1) their processes to select manufacturers' products for their hospital customers and the level of administrative fees they receive from manufacturers, (2) their use of contracting strategies to obtain favorable prices from manufacturers, and (3) recent initiatives taken to respond to concerns about GPO business practices.
The seven GPOs we studied varied in how they carried out their contracting processes. The GPOs were able to expedite their processes for selecting products to place on contract, particularly when they considered these products to be innovative. The GPOs also reported receiving from manufacturers administrative fees in 2002 that were generally consistent with the 3-percent-of-purchase-price threshold in regulations established by the Department of Health and Human Services. However, for certain products, they reported receiving higher fees--in one case, nearly 18 percent. The seven GPOs also varied in the extent to which they used certain contracting strategies as leverage to obtain better prices. For example, some GPOs, including one of the two largest, used sole-source contracting (giving one of several manufacturers of comparable products an exclusive right to sell a particular product through the GPO) extensively, whereas others used it on a more limited basis. Most GPOs used some form of product bundling (linking price discounts to purchases of a specified group of products), and the two largest GPOs used bundling for a notable portion of their business. In response to congressional concerns raised in 2002 about GPOs' potentially anticompetitive business practices, the Health Industry Group Purchasing Association (HIGPA) and GPOs individually established codes of conduct. The conduct codes are not uniform in how they address GPO business practices. In addition, some GPOs' conduct codes include exceptions and qualified language that could limit their potential to effect change.
GAO-03-998T, Group Purchasing Organizations: Use of Contracting Processes and Strategies to Award Contracts for Medical-Surgical Products
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Testimony:
Before the Subcommittee on Antitrust, Competition Policy and Consumer
Rights, Committee on the Judiciary, U.S. Senate:
United States General Accounting Office:
GAO:
For Release on Delivery Expected at 2:30 p.m.
Wednesday, July 16, 2003:
GROUP PURCHASING ORGANIZATIONS:
Use of Contracting Processes and Strategies to Award Contracts for
Medical-Surgical Products:
Statement for the Record by Marjorie Kanof:
Director, Health Care--Clinical and Military Health Care Issues:
GAO-03-998T:
GAO Highlights:
Highlights of GAO-03-998T, a statement for the record for the
Subcommittee on Antitrust, Competition Policy and Consumer Rights,
Committee on the Judiciary, U.S. Senate
Why GAO Did This Study:
Hospitals have increasingly relied on purchasing intermediaries”GPOs”
to keep the cost of medical-surgical products in check. By pooling
purchases for their hospital customers, GPOs”in awarding contracts to
medical-surgical product manufacturers”may negotiate lower prices for
these products.
Some manufacturers contend that GPOs are slow to select products to
place on contract and establish high administrative fees that make it
difficult for some firms to obtain a GPO contract. The manufacturers
also express concern that certain contracting strategies to obtain
better prices have the potential to limit competition when practiced
by GPOs with a large share of the market.
GAO was asked to examine certain GPO business practices. It focused on
seven large GPOs serving hospitals nationwide regarding
(1) their processes to select manufacturers‘ products for their
hospital customers and the level of administrative fees they receive
from manufacturers, (2) their use of contracting strategies to obtain
favorable prices from manufacturers, and (3) recent initiatives taken
to respond to concerns about GPO business practices.
What GAO Found:
The seven GPOs we studied varied in how they carried out their
contracting processes. The GPOs were able to expedite their processes
for selecting products to place on contract, particularly when they
considered these products to be innovative. The GPOs also reported
receiving from manufacturers administrative fees in 2002 that were
generally consistent with the 3-percent-of-purchase-price threshold in
regulations established by the Department of Health and Human
Services. However, for certain products, they reported receiving
higher fees”in one case, nearly 18 percent.
The seven GPOs also varied in the extent to which they used certain
contracting strategies as leverage to obtain better prices. For
example, some GPOs, including one of the two largest, used sole-source
contracting (giving one of several manufacturers of comparable
products an exclusive right to sell a particular product through the
GPO) extensively, whereas others used it on a more limited basis. Most
GPOs used some form of product bundling (linking price discounts to
purchases of a specified group of products), and the two largest GPOs
used bundling for a notable portion of their business.
In response to congressional concerns raised in 2002 about GPOs'
potentially anticompetitive business practices, the Health Industry
Group Purchasing Association (HIGPA) and GPOs individually established
codes of conduct. (See figure.) The conduct codes are not uniform in
how they address GPO business practices. In addition, some GPOs‘
conduct codes include exceptions and qualified language that could
limit their potential to effect change.
www.gao.gov/cgi-bin/getrpt?GAO-03-998T.
To view the full product, including the scope and methodology, click
on the link above. For more information, contact Marjorie Kanof at
(202) 512-7114.
[End of section]
Mr. Chairman and Members of the Subcommittee:
We are pleased to have the opportunity to comment on the role of group
purchasing organizations (GPO) in the marketplace for medical-surgical
products. Faced with persistent pressures to cut rising costs,
hospitals over the past two decades have increasingly relied on
purchasing intermediaries--GPOs--to keep the cost of medical-surgical
products in check. Hospitals buy everything from commodities--for
example, cotton balls and bandages--to high-technology medical devices,
such as pacemakers and stents,[Footnote 1] through GPO-negotiated
contracts. By pooling the purchases of these products for their
hospital customers, GPOs may negotiate lower prices from vendors
(manufacturers, distributors, and other suppliers), which can benefit
hospitals and, ultimately, consumers and payers of hospital care (such
as insurers and employers).
Some manufacturers--especially small manufacturers of medical devices-
-have contended that GPOs employ a slow process for selecting products
to place on contract and establish high administrative fees that have
made it difficult for some firms to obtain a GPO contract. They have
also expressed concerns about certain contracting strategies that GPOs
use as leverage to obtain better prices. They contend that these
strategies have the potential to limit competition when practiced by
GPOs with a large share of the market.
At the request of the subcommittee, we examined certain GPO business
practices that critics contend have the potential to create an uneven
playing field for manufacturers. This statement focuses on seven large
GPOs serving hospitals nationwide regarding (1) their processes to
select manufacturers' medical-surgical products for their hospital
customers and the level of administrative fees they receive from
manufacturers, (2) their use of contracting strategies to obtain
favorable prices from manufacturers, and (3) recent initiatives taken
to respond to concerns about GPO business practices. In a subsequent
report for this subcommittee, we will expand our earlier work and
examine the extent to which hospitals benefit from participation in
GPOs. In April 2002, we reported that for two products in one local
market, a hospital's use of a GPO contract did not guarantee that the
hospital paid a lower price.[Footnote 2]
We focused our current work on purchases made by acute care hospitals
for medical-surgical products, including commodities, such as cotton
balls and bandages, and medical devices, such as pacemakers and
stents.[Footnote 3] We did not investigate GPOs' business practices
with regard to other products that hospitals purchase, such as
pharmaceutical products, capital equipment, and food supplies. Our
findings are based on structured interviews with representatives of
seven major national GPOs. We also interviewed representatives of 13
medical-surgical product manufacturers of various sizes and
representatives of trade associations from the following industries:
group purchasing, medical-surgical product manufacturing, supply
distribution, and venture capital. We also consulted with experts,
including representatives from two hospitals, three venture capital
firms, two industry consultants, and one technology assessment company.
In addition, we reviewed literature on group purchasing and antitrust
law. We did not independently verify the information we obtained. The
information GPOs provided was self-reported. We conducted our work from
May 2002 through July 2003 in accordance with generally accepted
government auditing standards.
Results in Brief:
The GPOs we studied were able to alter the duration of their process
for selecting products to place on contract, particularly when they
considered these products to be innovative. GPOs' product selection
processes generally took 6 months, and ranged from as short as 1 month
to as long as 18 months. One GPO specifically reported expediting or
modifying its formal selection process when it considered a product to
be innovative and wanted to award a contract quickly. The seven GPOs
also reported receiving from manufacturers administrative fees in 2002
that were generally consistent with the 3-percent-of-purchase-price
threshold in regulations established by the Department of Health and
Human Services (HHS). However, for certain products, they reported
higher fees--in one case, nearly 18 percent.
The seven GPOs we studied, including two with the largest market
shares, used sole-source contracting (giving one of several
manufacturers of comparable products an exclusive right to sell a
particular product through a GPO), product bundling (linking price
discounts to purchases of a specified group of products), and other
contracting strategies to varying degrees to obtain favorable prices.
For example, while all seven GPOs reported using sole-source contracts,
some GPOs, including one of the two largest, used them extensively,
whereas others used them on a more limited basis. Most GPOs used some
form of bundling, and the two largest GPOs used either contracts or
programs that bundle multiple products for a notable portion of their
business.
In response to congressional concerns raised in 2002 about GPOs'
potentially anticompetitive business practices, the group purchasing
industry's trade association established a code of conduct that directs
member GPOs to, among other things, address their contracting
processes. The conduct code also includes reporting and education
responsibilities for the trade association. The seven GPOs we studied
drafted or revised their own codes of conduct, but the conduct codes
are not uniform in how they address GPO business practices. Moreover,
some GPOs' conduct codes include exceptions and qualified language that
could limit the potential of the conduct codes to effect change. It is
too soon to evaluate the effectiveness of these codes of conduct in
addressing concerns about potentially anticompetitive practices, as
many conduct codes are recently adopted and sufficient time has not
elapsed for GPOs to demonstrate results.
Background:
In seeking to provide their hospital customers with medical-surgical
products at favorable prices, GPOs engage with manufacturers in certain
contracting processes and sometimes use certain strategies to obtain
price discounts. Many manufacturers bid for GPO contracts because
hospital purchases with these contracts may increase manufacturers'
market share. GPOs are subject to federal antitrust laws. A statement
developed by enforcement agencies helps GPOs determine whether their
business practices are likely to be challenged under the antitrust
laws.
Manufacturers Contract with GPOs to Sell Their Medical-Surgical
Products:
Many manufacturers use GPO contracts to sell their medical-surgical
products. These products include two types--commodities and medical
devices. Commodities such as cotton balls and bandages are examples of
items for which physicians and other clinicians generally do not have
strong preferences. Manufacturers commonly use GPO contracts to sell
hospitals these non-preference products because hospitals purchase
these items in large quantities. In contrast, medical devices can be
"clinical preference" items--that is, those for which physicians and
other practitioners are likely to express a preference. High-technology
medical devices such as pacemakers and stents are examples of clinical
preference items. Some manufacturers prefer to sell these items
directly to hospitals.
A Few GPOs Dominate the Market for Medical-Surgical Products Sold
through Contracts:
The GPO industry that purchases products for hospitals is large and
moderately concentrated. Experts have not determined a precise number
of GPOs currently in business, but some estimate that there are
hundreds of GPOs. While some GPOs operate regionally, this study
focused on seven national GPOs with purchasing volumes over $1 billion
that account for more than 85 percent of all hospital purchases
nationwide made through GPO contracts. In 2002, the combined purchasing
volume of these GPOs totaled about $43 billion, excluding distribution
dollars. (See table 1.):
Table 1: Seven GPOs' Purchasing Volumes for Total Customer Purchases
Made through Contracts, 2002:
GPO: GPO 1; Purchasing volume (dollars in millions): $14,330.
GPO: GPO 2; Purchasing volume (dollars in millions): 14,413.
GPO: GPO 3; Purchasing volume (dollars in millions): 4,400.
GPO: GPO 4; Purchasing volume (dollars in millions): 3,233.
GPO: GPO 5; Purchasing volume (dollars in millions): 2,837.
GPO: GPO 6; Purchasing volume (dollars in millions): 2,564.
GPO: GPO 7; Purchasing volume (dollars in millions): 1,466.
GPO: Total; Purchasing volume (dollars in millions): $43,243.
Source: GPO-reported data.
Note: These purchasing volumes exclude distribution dollars.
[End of table]
Among the GPOs in our study, the two largest GPOs account for about 66
percent of total GPO purchasing volume for all medical products
(including, among other things, medical-surgical products,
pharmaceuticals, capital equipment, and food). These two GPOs also
account for 70 percent of the seven GPOs' total medical-surgical
product volume. One of the two largest GPOs has as members 1,569 of the
nation's approximately 6,900 hospitals; the other has 1,469 hospital
members.[Footnote 4] One of the two largest GPOs permits its members to
belong to other national GPOs, whereas the other largest GPO does not.
GPOs' Business Practices Encompass Contracting Processes and
Strategies:
A GPO's contracting process for manufacturers' medical-surgical
products generally includes several phases--namely, product
identification and selection, requests for proposals or invitations to
bid, review of submitted proposals and applications, assessment of
product quality, contract negotiation, and contract award. The contract
negotiation phase may include the negotiation of a contract
administrative fee. This fee is designed to cover a GPO's operating
expenses and serves as its main source of revenue.[Footnote 5] Contract
administrative fees are calculated as a percentage of each customer's
purchases of the particular product included in a GPO contract.
In negotiating contracts, GPOs use certain contracting strategies as
incentives for manufacturers to provide deeper discounts and for
hospital members to concentrate purchasing volume to obtain better
prices. These strategies are not limited to use by GPOs, as some
manufacturers also use them in negotiating contracts with GPOs to
increase market share. Key contracting strategies include the
following:
* Sole-source contracts give one of several manufacturers of comparable
products an exclusive right to sell a particular product through a GPO.
* Commitment refers to a specified percentage of purchasing volume
that, when met by the GPO's customer (such as a hospital), will result
in a deeper price discount. Commitment levels can be set either by the
GPO or the manufacturer. For example, a manufacturer might offer
greater discounts to GPO customers that purchase at least 80 percent of
a certain group of products from that manufacturer. Commitment
requirements can also be tiered, resulting in the opportunity for the
customer to commit to different percentages of purchasing volume: the
higher the percentage, the lower the price.
* Bundling links price discounts to purchases of a specified group of
products. GPOs award several types of bundling arrangements. One type
bundles combinations of products from one manufacturer. A manufacturer
may find this arrangement advantageous because it allows increased
sales of products in the bundle that may not fare well as stand-alone
products. Another type bundles products from two or more manufacturers.
Also, contracts can be bundled for complementary products, such as
protective hats and shoe coverings used in hospital operating rooms,
while others bundle unrelated products such as patient gowns and
intravenous solutions. Hospitals that purchase bundles of unrelated
products receive a price discount on all products included in the
bundle.
* Contracts of long duration--those in effect for 5 years or more--can
direct business to manufacturers for an extended period.
When used by GPOs with a large market share, these contracting
strategies have the potential to reduce competition. For example, if a
large GPO negotiates a sole-source contract with a manufacturer, the
contract could cause an efficient, competing manufacturer to lose
business and exit from the market and could discourage other
manufacturers from entering the market.
Federal Safe Harbor and Antitrust Safety Zone Exist for GPOs:
Certain aspects of GPOs' operations are specifically addressed by
federal statute, regulation, and policy. While "anti-kickback"
provisions of the Social Security Act prohibit payments in return for
orders or purchases of items for which payment may be made under a
federal health care program, the act also contains an exception for
amounts paid by vendors of goods or services to a GPO.[Footnote 6]
Therefore, GPOs are allowed to collect contract administrative fees
from manufacturers and other vendors that could otherwise be considered
unlawful. In addition, regulations issued by the Department of Health
and Human Services establishing "safe harbors" for purposes of the
"anti-kickback" provisions provide that GPOs are to have written
agreements with their customers either stating that fees are to be 3
percent or less of the purchase price, or specifying the amount or
maximum amount that each vendor will pay.[Footnote 7] The GPOs must
also disclose in writing to each customer, at least annually, the
amount received from each vendor with respect to purchases made by or
on behalf of the customer. The Office of Inspector General in the
Department of Health and Human Services is responsible for enforcing
these regulations.
Recognizing that GPO arrangements may promote competition among
manufacturers and yield lower prices in some cases and may reduce
competition in other cases, the U.S. Department of Justice and the
Federal Trade Commission issued a statement in 1993 for joint
purchasing arrangements. This statement sets forth an "antitrust safety
zone"[Footnote 8] for GPOs that meet a two-part test, under which the
agencies will not generally challenge GPO business practices under the
antitrust laws. Essentially, the two-part test in the context of
medical-surgical products is as follows: (1) purchases through the GPO
account for less than 35 percent of the total sales of the product in
the relevant market,[Footnote 9] and (2) the cost of the products
purchased through the GPO accounts for less than 20 percent of the
total revenues from all products sold by each GPO member.
GPOs Reported Modifying Contracting Processes When Desirable and
Receiving Administrative Fees That Were Generally Consistent with
Federal Regulations:
In recent years, some manufacturers of medical-surgical products have
contended that GPOs employ a slow product selection process and set
high administrative fees that have made it difficult for some firms to
obtain GPO contracts. These firms tend to be small manufacturers that
may have fewer financial resources available to successfully complete
GPOs' contracting processes than large manufacturers. The GPOs we
studied reported generally having contracting processes that can be
modified for certain types of products. They also reported receiving
from manufacturers administrative fees that were generally consistent
with federal regulations established by HHS.
GPOs Reported Expediting Reviews and Using a Public Solicitation
Process for Certain Products:
In discussing GPOs' selection of products and negotiation of fees,
several manufacturers we contacted pointed to the paperwork and
duration of these processes as burdensome. Not all manufacturers shared
the same perspective. One small manufacturer commented that the process
could sometimes be relatively easy but that the selection process can
be more difficult if the manufacturer is selling only one product.
The GPOs we studied were able to alter the duration of their process
for selecting products to place on contract, particularly when they
considered these products to be innovative. Based on their reported
information, GPOs' product selection processes generally took 6 months,
and ranged from as short as 1 month to as long as 18 months. One GPO
specifically reported expediting or modifying its formal selection
process when it considered a product to be innovative and wanted to
award a contract quickly. Most GPOs did not have a distinctly separate
process for selecting innovative technology but reported that these
products were generally selected in a shorter amount of time compared
with other products.
Figure 1 shows, across the seven GPOs, the average minimum, most
frequent, and maximum times taken for product selection.
Figure 1: Duration of the GPO Product Selection Process:
[See PDF for image]
Note: Averages weighted by GPO-reported dollar purchasing volume,
excluding distribution dollars.
[End of figure]
The GPOs in our study reported consulting various sources before making
a decision, including the GPO's customers requesting the product;
published studies about the product; internal and external technology
assessments; and different manufacturers of the product, both with and
without a GPO contract. In all cases, the GPOs cited customer requests
for products as the most important factor in identifying which products
to place on contract.
In selecting a manufacturer, six of the seven GPOs, including the two
largest, solicit proposals publiclyĉeither through requests for
proposals or requests for bids through their Web sites. The extent to
which these processes are open to all manufacturers varies by GPO and
by product. For example, one of the GPOs solicits proposals publicly
for clinical preference products, but not for commodities.
GPO-reported information on new contracts awarded in 2002 suggest that
GPOs' solicitations were not limited to manufacturers already on
contract. Nearly one-third of all the newly negotiated contracts
awarded by the seven GPOs in 2002 were awarded to manufacturers with
which the GPO had not previously contracted. The percentage of such
contracts ranged from 16 percent to 55 percent for the GPOs in our
study. For the two largest GPOs, this share was 29 percent and 55
percent. We could not determine, from the information provided, whether
these first-time contract awardees were, for example, small
manufacturers or companies new to the industry or whether the products
purchased through these contracts were clinical preference items or
commodities.
GPO-Reported Information Indicates That Contract Administrative Fees
Received Were Generally Consistent with Federal Regulations:
Manufacturers have expressed concerns that contract administrative
fees, which are typically calculated as a percentage of each customer's
purchase of products under contract, can be too high for some
manufacturers. These fees, combined with lower prices negotiated by the
GPO, may decrease revenue for manufacturers and may make it more
difficult to obtain a GPO contract for newer and smaller manufacturers
with fewer financial resources than for larger, more established
companies.
Five out of seven GPOs reported that the maximum contract
administrative fee received from manufacturers in 2002 did not exceed
the 3-percent-of-purchase-price threshold contained in federal
regulations established by HHS. The most frequent administrative fee
level that 4 out of 7 GPOs received from manufacturers in 2002 was 2
percent; the lowest fee level received by each GPO was 1 percent or
less. Except for one of the two largest GPOs, the GPOs reported that
they have not negotiated any new or renewed contracts in 2003 that
include administrative fees from medical-surgical product
manufacturers that exceed 3 percent.
In 2002, fee levels for private label products --products sold under a
GPO's brand name--were an exception: The typical contract
administrative fee paid by private label manufacturers was 5 percent.
For one of the two GPOs in our study with private label products, the
maximum administrative fee was nearly 18 percent. In addition to an
administrative fee, the other GPO charged a separate "licensing" fee
for private-label products.[Footnote 10]
Seven National GPOs Varied in the Extent to Which They Used Certain
Contracting Strategies:
GPOs use certain contracting strategies--which include sole-source
contracts, product bundling, and extended contract duration--to obtain
discounts from manufacturers in exchange for providing the manufacturer
with increased sales from an established customer base. Manufacturers
and other industry observers have expressed concerns that use of these
strategies by the two largest GPOs can reduce competition. For example,
when GPOs with substantial market shares award long-term sole-source
contracts to large, well-established manufacturers, some newer, single-
product manufacturers--left to compete with other manufacturers for a
significantly reduced share of the market--may lose business and be
forced to exit the market altogether.
The seven GPOs we studied, including two with the largest market
shares, used these contracting strategies to varying degrees. For
example, while all study GPOs reported using sole-source contracts,
some GPOs, including one of the two largest GPOs, used it extensively,
whereas others used it on a more limited basis. GPOs also varied in
their approach to requiring commitment levels from their customers.
With respect to bundling, most GPOs used some form of bundling, and the
two largest GPOs used either contracts or programs that bundled
multiple products for a notable portion of their business. With respect
to contract duration, the two largest GPOs typically negotiated longer
contract terms than the other five GPOs.
For Some of the GPOs, Sole-Source Contracts Accounted for a Substantial
Portion of the Purchasing Volume:
The use of sole-source contracting by the study GPOs varied widely with
respect to the relative amount of sole source contracting they did and
the types of products included in the contracts. For five of the GPOs,
sole-source contracts accounted for between 2 percent and 46 percent of
their medical-surgical product dollar purchasing volume.[Footnote 11]
For the rest--the two largest GPOs--the shares of dollar purchasing
volume accounted for by sole-source contracts were 19 percent and 42
percent. Such levels of sole-sourcing are worth noting, given the
sizeable market shares of these two GPOs.
GPOs also varied in their use of sole-source contracts for commodity
products as compared to medical devices for which providers may desire
a choice of products. Six of the seven GPOs in our study reported their
use of sole-source contracts for commodity products as compared to
clinical preference product. For one of the two largest GPOs, clinical
preference products accounted for the bulk--82 percent--of its sole-
source dollar purchasing volume.[Footnote 12] Two GPOs reported cases
in which manufacturers refused to contract with the GPO unless they
were awarded a sole-source contract. In contrast, commodities accounted
for the bulk--between 62 percent and 91 percent--of the dollar
purchasing volume that the smaller of the seven GPOs purchased through
sole-source contracts. GPO-reported data indicate that the proportion
of contracts that were sole source, as a share of all contracts for
medical-surgical products for the past 3 years, remained relatively
consistent for GPOs.
GPOs Considered Customer Commitment to Be Important, but Commitment
Requirements Varied:
The seven GPOs in our study reported that hospital customers'
commitment to purchase a certain percentage of their products through
GPO contracts was an important factor in obtaining favorable prices
with manufacturers, and all reported establishing commitment level
requirements to some degree. Most of the smaller of the seven GPOs
reported that customer adherence to commitment levels and contracts
were the most important factor in obtaining favorable pricing with
manufacturers. In principle, for GPOs with a smaller customer base, the
assurance of customer commitment to purchasing helps enable them to
achieve the higher volumes needed to leverage favorable prices from
manufacturers. The two largest GPOs reported that volume was the most
important factor for obtaining favorable prices and that customer
compliance with commitment level and contracts was next in importance.
For the two largest GPOs, a sizable customer base may provide the
volume levels needed to obtain favorable prices.
GPOs varied in their approach to requiring purchasing commitment
levels. One GPO requires customers to commit to an overall average
dollar purchasing level of 80 percent for those products available
through the GPO, although the percentage could vary for individual
products. The GPO reported terminating the membership of at least one
customer that did not meet this target. Other GPOs reported
establishing customer commitment levels in certain contracts in order
to obtain a certain price level, but customers were not required to buy
under the contract or buy at the commitment level in order to retain
GPO membership. Some GPOs' contracts include multiple, or tiered
commitment levels so that customers can choose from a range of
commitment levels and obtain price discounts accordingly.
Most GPOs Use Some Form of Bundling, and the Two Largest GPOs Use It
for a Notable Portion of Their Business:
All but one of the GPOs in our study reported using some form of
bundling, including the bundling of complementary products, bundling
several unrelated products from one manufacturer, and bundling several
products for which there are commitment-level requirements. One
bundling arrangement that GPOs reported using gave customers a discount
when they purchased a bundle of complementary products, such as
protective hats and shoe coverings. Four GPOs reported bundling
complementary products. These bundles were included in a small
percentage of the GPOs' contracts; each of the four GPOs reported
having no more than three contracts that bundle complementary products.
One GPO reported awarding only one bundling arrangement for two
complementary products--the only bundling arrangement the GPO had in
effect at the time it reported to us.
A second type of bundling reported by three GPOs, including the two
largest, gave customers a discount if they purchased a group of
unrelated products from one manufacturer. We define this type of
bundling as a corporate agreement. One of the two largest GPOs reported
that corporate agreements for medical-surgical products accounted for
about 40 percent of its dollar purchasing volume for medical-surgical
products under contracts in effect on January 1, 2003.
Four GPOs, including one of the two largest, used a third type of
arrangement that typically bundled products from different
manufacturers and required customers that chose this arrangement to
purchase a certain minimum percentage from the product categories
specified in the bundle in order to obtain the discount. We defined
this type of bundling as a structured commitment program. A structured
commitment program available through one GPO bundled brand name and GPO
private label items for 12 product categories and had a 95 percent
commitment-level requirement. In 2002, one of the two largest GPOs
reported receiving about 20 percent of its medical-surgical dollar
purchasing volume from its structured commitment programs.
The use of bundling arrangements may be declining. For example, data
reported by one GPO showed a decline in the percent of its contracts
that were corporate agreements from 2001 to 2003.[Footnote 13] This
trend was consistent with comments made by one manufacturer and two
medical-surgical product distributors. The manufacturer told us that
GPOs are less interested in bundling different manufacturers together.
Two distributors' representatives told us that since the summer of
2002, GPOs have fewer bundling arrangements and that some bundles were
"pulled apart.":
The Two Largest GPOs Typically Award Contracts with Longer Terms Than
the Other Five:
Our analysis of data reported by the study GPOs showed that, in 2002,
the two largest GPOs typically awarded 5-year contracts, whereas the
other five GPOs typically awarded 3-year contracts. For some of these
contracts, potential renewal periods constitute a portion of the
contract duration. Those contract terms remained fairly consistent
between 2001 and 2003, although two of the five GPOs reported that
their most frequent contract term declined by about 1 year. Some GPOs
reported implementing policies that may lead to a future reduction in
contract terms. One of the two largest GPOs began in the first quarter
of 2003 to exclude from new contracts the option for two 1-year
contract extensions, so that when a contract expires, this GPO will
solicit proposals for a new contract.
GPOs Have Taken Initiatives to Address Concerns about Business
Practices, but It Is Too Early to Evaluate Their Efforts:
In response to congressional concerns raised in 2002 about GPOs'
potentially anticompetitive business practices, the group purchasing
industry's trade association established a code of conduct that directs
member GPOs to, among other things, address their contracting
processes. The conduct code also includes reporting and education
responsibilities for the trade association. The seven GPOs we studied
drafted or revised their own codes of conduct, but the conduct codes
are not uniform in how they address GPO business practices. Moreover,
some GPOs' conduct codes include exceptions and qualified language that
can limit the potential of the conduct codes to effect change. It is
too soon to evaluate the effectiveness of these codes of conduct in
addressing concerns about potentially anticompetitive practices, as
many conduct codes are recently adopted and sufficient time has not
elapsed for GPOs to demonstrate results.
Trade Association Code of Conduct Laid Groundwork for Industry Self-
Regulation:
On July 24, 2002, the Health Industry Group Purchasing Association
(HIGPA) adopted a code of conduct providing principles for GPO business
practices. HIGPA represents 28 U.S.-based GPOs--including five of the
seven major GPOs that we studied. HIGPA members also include health
care systems and alliances, manufacturers, and other vendors. The HIGPA
code of conduct principles address GPO business practices and actual,
potential, or perceived conflicts of interest. Among other things, the
HIGPA code of conduct provides that GPOs:
* allow hospital and other provider members to purchase clinical
preference items directly from all vendors, regardless of whether the
vendors have a GPO contract;
* implement an open contract solicitation process that allows any
interested vendor to seek contracts with the GPO;
* participate in processes to evaluate and make available innovative
products;
* address conflicts of interest, such as disallowing staff in positions
of influence over contracting to hold equity interest in, or accept
gifts or entertainment from, "participating vendors";[Footnote 14] and:
* establish accountability measures, such as appointing a compliance
officer and certifying annually that the GPO is in compliance with the
HIGPA code.
The HIGPA code also includes several provisions regarding the trade
association's education and reporting responsibilities, including:
* assessing and updating the code of conduct to be consistent with new
developments and best business practices;
* implementing industry wide educational programs on clinical
innovations, contracting strategies, patient safety, public policy,
legal requirements, and best practices;
* making available a Web-based directory that posts manufacturers' and
other vendors' product information; and:
* publishing an annual report listing GPOs that have certified their
compliance for the year with the HIGPA code of conduct.
As of May 19, 2003, HIGPA's 28 U.S.-based GPO members certified that
they are in compliance with the HIGPA code of conduct principles.
Variations Exist in GPOs' Efforts to Address Business Practices:
Although the HIGPA code of conduct laid the groundwork for many GPOs to
change their business practices, its guidelines do not comprehensively
address certain business practices. Specifically, the HIGPA code of
conduct requires GPOs to address business practices associated with
contracting, conflicts of interest, and accountability, and it grants
GPOs discretion in using contracting strategies. It recommends that
GPOs consider factors such as vendor market share, GPO size, and
product innovation when using multiple contracting strategies. However,
the HIGPA code of conduct does not directly address levels of contract
administrative fees or the offering of private label products.
Since August 2002, the seven GPOs we studied, even those that were not
HIGPA members, drafted and adopted their own codes of conduct or
revised their existing conduct codes. One GPO stated that its revised
code, while consistent with the HIGPA code, was more specific than
HIGPA's principles, particularly in the GPO's rules on stock ownership,
travel, and entertainment. Another GPO reported expanding on HIGPA's
code by including provisions to cap administrative fees and prohibit
bundling. Similarly, GPOs who were not HIGPA members said they had
revised their existing codes of conduct and that their conduct codes
were in some respects stronger than HIGPA's.
Nevertheless, GPOs' individual codes of conduct varied in the extent to
which they addressed GPOs' business practices, such as contracting
processes and strategies. Figure 2 provides an overview of the seven
GPOs' conduct codes with respect to their business practices. The table
indicates whether a business practice was identified in a code of
conduct, but not how the practice was to be addressed.
Figure 2: Business Practices Identified in GPOs' Codes of Conduct:
[See PDF for image]
Note: A code of conduct was determined to identify a business practice
if it was mentioned in the conduct code's text.
[End of figure]
As figure 2 shows, the conduct codes of all the study GPOs explicitly
mentioned conflict of interest issues such as those dealing with equity
holdings and other conflicts such as receipt of gifts and entertainment
and the need for internal accountability. In addition, the conduct
codes of most GPOs, including the two largest, included provisions
dealing with the contracting strategies, such as sole-source
contracting and bundling. For GPOs that are HIGPA members, the lack of
additional provisions in their individual conduct codes for certain
business practices such as contracting processes may not be
significant, as provisions covering these areas are included in the
HIGPA code. However, for one of our study GPOs that is not a HIGPA
member, the conduct code lacked any provisions pertaining to
contracting processes, product selection, administrative fees, sole-
source contracting, commitment level requirements, contract duration,
and private labeling.
The code of conduct provisions for the GPOs in our study were not
uniform in how they addressed business practices. For example:
* Four GPOs, including one of the two largest, had unqualified
provisions for capping administrative fees at the 3-percent threshold
contained in federal regulations established by HHS. The other largest
GPO had a provision for capping administrative fees at 3 percent only
for clinical preference items and only for contracts awarded after the
establishment of the GPO's conduct code.
* Four conduct codes had provisions limiting the use of sole-source
contracts for clinical preference items specifically. Another conduct
code limited the use of sole-sourcing to contracts meeting certain
criteria, such as approval for use by a 75-percent majority of the
GPO's contracting committee. The language of one of the remaining GPO's
conduct codes was vague with respect to sole-sourcing, stating that the
GPO will provide customers with choices for each product or service,
without explicitly mentioning the use of sole-source contracts.
* In their conduct codes, two GPOs had provisions prohibiting the
practice of bundling of unrelated products, two GPOs prohibited and two
limited bundling for clinical preference items, and three GPOs
prohibited the practice of bundling products from different
manufacturers. One GPO's conduct code stated that the GPO would not
obligate its customers to purchase bundles of unrelated products,
allowing the possibility for bundles to be available to customers on a
voluntary basis.
Exceptions and qualified language in the provisions have the potential
to weaken the codes of conduct. Table 2 shows examples of exceptions
and qualified language that can limit the potential of the individual
GPOs' conduct codes to effect change.
Table 2: Examples of Exceptions and Qualifications in Code of Conduct
Provisions for the GPOs in Our Study:
Business practice: Product selection contracting processes; Specific
provision including exceptions and qualifiers (in italics): Will use
public request for proposal process for clinical preference products
but not for most commodities; Potential implications: Contract bids
for most commodities will not go through public solicitation process.
Business practice: Contract administrative fees; Specific provision
including exceptions and qualifiers (in italics): Will reduce contract
administrative fees that are greater than 3 percent to 3 percent for
clinical preference products on a prospective basis; Potential
implications: For clinical preference products, contract
administrative fees negotiated prior to adoption of conduct code are
not subject to provision; in future contracts, administrative fee for
all other items may continue to exceed 3 percent.
Business practice: Sole-source contracting; Specific provision
including exceptions and qualifiers (in italics): No sole-source
contracts for clinical preference products unless there is no other
means by which the GPO can obtain access to the product for customers;
Potential implications: Manufacturers have incentives to link price
discounts in return for exclusive contract awards.
Business practice: Bundling; Specific provision including exceptions
and qualifiers (in italics): No bundling of clinical preference
products on a prospective basis, and no bundling of products across
different vendors; Potential implications: For clinical preference
products, bundled contracts awarded prior to adoption of conduct code
are not subject to provision; contracts for bundles of unrelated, non-
clinical preference products with one manufacturer are not subject to
the provision.
Business practice: Commitment level requirements; Specific provision
including exceptions and qualifiers (in italics): No commitment level
requirements for clinical preference products, on a prospective basis;
Potential implications: For clinical preference products, commitment
levels negotiated prior to adoption of conduct code are not subject to
provision; all other products could have commitment requirements.
Specific provision including exceptions and qualifiers (in italics):
Business practiceConflicts of interest-equity: Commitment level
requirements not to exceed 80 percent of purchasing volume for clinical
preference products, unless relevant committee approves otherwise;
Potential implications: Business practiceConflicts of interest-equity:
Commitment-level requirements for clinical preference products have
potential to remain as high as 80 percent of purchasing volume and,
under certain circumstances, may be higher.
Business practice: Conflicts of interest-equity; Specific provision
including exceptions and qualifiers (in italics): No equity interests
may be held by GPO management and other staff with influence over
contracting in any participating vendors; Potential implications:
Other GPO staff may hold equity interest in participating vendors, that
is, those on contract or bidding for a contract; GPO staff with
influence over contracting may hold equity interest in nonparticipating
vendors.
Source: Individual GPOs' codes of conduct.
[End of table]
Too Soon to Evaluate Impact of GPOs' Codes of Conduct:
Given the individual GPOs' relatively recent adoption of codes of
conduct--since August 2002--sufficient time has not yet elapsed for
GPOs to develop a history of compliance with certain conduct code
provisions. Two of the manufacturers and two distributors we
interviewed reported noticing improvements, stating that some GPOs are
no longer using certain contracting strategies. This observation is
consistent with the suggestion that the use of bundling may be
declining. One manufacturer that had difficulty in obtaining a contract
with a large national GPO prior to 2002 said it has since been awarded
a contract for a clinical preference item. The manufacturer also noted
that, since September 2002, it has been awarded several new contracts.
However, two other manufacturers told us they are skeptical that
improvements have been made with regard to business practices.
Notwithstanding such anecdotal evidence, because of the recency of
GPOs' actions taken, the ability to assess the impact of the conduct
codes systematically remains limited. One year is not sufficient time
for the codes of conduct to produce measurable trends that could
demonstrate an impact on the industry.
Contact and Acknowledgments:
For more information regarding this statement, please contact Marjorie
Kanof at (202) 512-7101. Hannah Fein, Mary Giffin, Kelly Klemstine,
Emily Rowe, and Merrile Sing made key contributions to this statement.
FOOTNOTES
[1] A stent is a device used to provide support for tubular structures
like blood vessels. It can be made of rigid wire mesh or may be a metal
wire or tube.
[2] U.S. General Accounting Office, Group Purchasing Organizations:
Pilot Study Suggests Large Buying Groups Do Not Always Offer Hospitals
Lower Prices, GAO-02-690T (Washington, D.C.: Apr. 30, 2002).
[3] We did not include government hospitals, such as those of the
Department of Veterans Affairs, in our study.
[4] The approximately 6,900 hospitals include government hospitals such
as those of the Department of Veterans Affairs and county hospitals.
[5] In addition to using these fees to cover their operating expenses,
GPOs often distribute surplus fees to member hospitals. They may also
use administrative fees to finance new ventures, such as electronic
commerce, that are outside their core business.
[6] See 42 U.S.C. § 1320a-7b(b) (2000).
[7] See 42 C.F.R. § 1001.952(j) (2002).
[8] Statements of Antitrust Enforcement Policy in Health Care,
Statement 7, p. 23.
[9] Although the GPOs in this study each has less than 35 percent of
total GPO purchasing volume for all medical products, it is possible,
for example, that a GPO could have greater than 35 percent of the total
sales of one or more particular products.
[10] Some manufacturers pay this GPO licensing fees in exchange for
using the GPO's brand name.
[11] One GPO did not provide us information on purchasing volume for
medical-surgical products through sole-source contracts.
[12] One of the two largest GPOs in our study did not provide us
information on sole-source purchases represented by the two product
types.
[13] This period reflects contracts in effect on three dates--January
1, 2001, January 1, 2002, and January 1, 2003.
[14] Participating vendors are those that have a contract or submit a
bid or offer to contract with a GPO.