Business & Technology Nexus

Dave Stephens on technology and business trends

Group Purchasing Organizations – Are They Worth It?

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I got into a discussion recently about the value of outsourcing the establishment of contracts and pricing for an enterprise’s goods and services. And red flashing alarm bells went off in my head. Wait, I said, that’s just like Healthcare GPO’s here in the US. Popularized in the 90’s, today the shift is away from them. And for good reason – these middleman are sticking it to hospitals. At least according to a detailed report issued July 20th, 2006 by the International Center for Corporate Accountability. Some highlights:

“The genesis of GPOs can be found in the common and quite essential activity where a number of small organizations combine their purchasing power to gain buying leverage…”

“GPO’s, whose role should be to create efficiencies and economies in the delivery of services, have grown at the expense of the hospitals and their patients”

“..the Medicare anti-kickback safe harbor allowed the GPOs to charge an administrative fee of 3% from the suppliers on all purchases made by their member hospitals. However, various government investigations, private lawsuits, and reports in the news media indicated that in a significant number of instances, GPOs administrative fee had significantly exceeded the 3% level envisioned by Congress and ranged from 5% to as high as 18%.”

This report is an interesting read for those considering working through middlemen instead of negotiating their own contracts. With a good understanding of the profit margins, or better yet, an agreement on flat-fee based subscription, enterprises can save time and find great values. But any business model that involves a % markup on each SKU has to be suspect. Let’s face it, a 1% markup on prices for 10MM in spend is a lot of money to be paying. Unless the vendor can prove his pricing still beats what you could have negotiated on your own.

I would love to hear your own stories about working with GPO’s – either in healthcare or anny other industry. Comment here or drop me a line at drstephe at gmail dot com.


Written by Dave Stephens

10/5/06 8:07 PM at 8:07 pm

Posted in Opinion, Procurement

One Response

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  1. The business model of a GPO couldn’t be simpler – leverage aggregated purchasing volume to obtain discounts from suppliers. While some large integrated delivery networks are doing more self-contracting, purchasing volume through GPOs continues to rise every year (check the financial reports of Premier and VHA – both are publicly available on thier Websites). The increase is not due to medical supplies inflation or to increased patient volume. It is directly related to the fact that GPOs provide a valuable service to the healthcare industry. The core competency of a hospital is to treat patients, not negotiate discounts with suppliers – this is why hospitals belong to and own GPOs. The one-sided report from the ICCA was commissioned by the Medical Device Manufacturers Association – a disgruntled group that is having a hard time differentiating, marketing and selling their products against more established manufacturers. To be fair and balanced, I suggest you read the studies recently released by Lawton Burns of The Wharton School – completely contradicts the ICCA report.

    Mr. Supply Chain

    11/1/06 10:24 AM at 10:24 am

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