Group purchasing organisations cost US healthcare $36bn more than
11 Oct 2010
A study commissioned by the US Medical Device Manufacturers
Association (MDMA) has found that hospitals pay more for medical devices and
equipment bought through group purchasing organisations (GPOs) than
through the open market .
GPOs were established by hospitals to pool purchasing power to gain
more favourable contracts with suppliers. Vendors bid for the right
to supply a network of hospitals in competitive auctions and the
GPOs cover their costs through charging the vendors administrative
and other fees bases on a percentage of the proceeds of the auction.
The report describes the "complex and veiled nature" of the
transactions that has meant that the GPOs gained more from higher
bids and the bidding process was also distorted, resulting in higher
prices for hospitals, exclusivity for dominant companies and reduced
market access for new suppliers.
The authors liken the situation to the US-caused financial crisis
where the debt issuers paid the credit ratings agencies, meaning the
agencies increased their income from issuing more AAA ratings.
The study found that when hospitals put GPO prices up for bid in
open competition after a GPO auction (aftermarket auction),
hospitals saved on average 15% (2010 price data). Even device makers
on a GPO contract reduced their own prices for the same product to
the same hospital in over half of all the transactions studied. The
study analysed 8,100 aftermarket transactions.
The authors estimate that changing the incentive structure to
prevent the "kickbacks" would reduce federal healthcare spending by
about $11.5bn annually and private healthcare costs by about $25bn
annually. It would require a change in legislation introduced in
1986 (under the Reagan administration) to make the kickbacks
illegal. Would this have happened any where else in the developed
Robert E. Litan and Hal J. Singer. Do group purchasing organizations
achieve the best prices for member hospitals? An empirical analysis
of aftermarket transactions. 2010. The report is available on the
MDMA website at: