Who really funds GPOs?

It's time to take a good look at the GPO issue and make sure important facts are known. Because of hard-hitting articles, and persistent lobbying efforts by the Medical Device Manufacturers Association (MDMA), Washington, D.C., GPOs are being scrutinized.

Allegations of improper relationships between some manufacturers and the two largest GPOs have captured the attention of several senators, and the prime question is, "How should the groups be funded?" When GPOs were established, regulations were put into place that allowed the groups to collect administrative fees from suppliers. Fees were expected to hover around three percent of a contract, but GPO officials say as the supply chain has evolved the groups are doing more than simply negotiating deals on behalf of hospitals--including offering private label programs--and fees above the three percent mark are charged in some cases now.

Congress, GPOs and the MDMA can debate whether the fees are excessive, or if it's improper for suppliers to pay GPOs at all; however, hospitals and materials managers probably aren't fooled when it comes to the issue of who actually is funding the groups. No matter what suppliers pay to gain contracts with a GPO, ultimately the cost is reflected in the price of the products, and hospitals pay for those. Certainly that notion is given credence by the fact hospitals can afford to buy some discounted supplies from manufacturers that still can make a profit on the deal because they avoid paying a GPO for access to the buyer.

This is not to suggest that belonging to a GPO isn't beneficial to hospitals, or that direct purchasing is going to replace GPOs in the near future. For many hospitals, they have a legitimate cost-saving function, and predictions of the GPO industry's demise have been overstated in the past. However, hospitals are listening to the current battle over administrative fees a little differently than are senators on Capitol Hill or small manufacturers belonging to the MDMA.

It is about hospitals' money and who's getting a piece of it, and although facilities and health systems have been quiet observers, expect loud noise if anyone suggests changes that increase supply spending budgets.

But not everyone sees the situation in that light or has enough understanding of how health care's supply chain works to make decisions that won't cause hospitals some financial harm inadvertently. Anyone who's worked in materials management knows it can take years of hands-on experience to understand the mechanics of the system.

Officials at MDMA would like senators to make changes to give small manufacturers better access to hospitals, but hospital executives are probably more concerned whether legislators' crash course in health care purchasing will be sufficient for lawmakers to deliver wise and fair decisions.

Senators are being lobbied heavily on both sides of the issue, and before the matter is settled, it could become more intense. It wouldn't be surprising to see the AHA get involved if there's a sign costs could shift to hospitals, but for now, officials at both organizations say they'll stay on the sidelines.

Robert Neil is a health care business writer and analyst whose syndicated column appears monthly in Materials Management in Health Care. To contanct him, visit his Web site at www.RobertNeilOnline.com

This article first appeared in the May 2002 issue of Materials Management in Health Care