Do GPOs Encourage Supplier Oligopolies?

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WITHIN A FEW MONTHS, political insiders say two senators will hold public hearings about the business practices of hospital group purchasing organizations (GPO). This will be the first time for GPOs to face this type of congressional scrutiny. The senators want to investigate whether GPOs have negatively affected competition among medical device and hospital supply companies.

Certainly GPOs have delivered benefits to their member hospitals over the years, but not without many flaws. Within the hospital laboratory profession, there is widespread dissatisfaction about specific methods employed by GPOs to select a limited number of designated vendors and then enforce compliance by individual hospitals with those contracts.

In Vivo magazine, discussing this topic, described the problem succinctly. It said the “criticism of group purchasing is simply that, whether intentionally or not, GPOs and their contract vendors have closed the market, creating a very insular world where very large, market share leaders play exclusively with very large, consolidated groups.” Few laboratorians would disagree with that characterization.

If GPO contracting practices become a public issue, it will probably be over concerns about how contracting practices for pharmaceuticals and large-ticket medical devices limit competition and thus contribute to higher healthcare costs. Diagnostic products are a smaller component of this larger game and so it’s unlikely they will undergo the same level of scrutiny as other product segments.

What I’ve always found interesting about GPO contracting practices is that, despite the national contract which supposedly establishes an attractively low price, larger hospitals and hospital systems can invariably negotiate lower-than-GPO-contract pricing for their particular purchases. I wonder if this phenomenon will surface in the congressional hearings.

THE DARK REPORT has long predicted that the formation of multiple hospital integrated delivery networks (IDNs) and e-commerce technology will force changes to how hospital GPOs conduct business. What will be interesting to watch is whether congressional hearings stimulate reforms to certain GPO practices. Among hospital lab administrators, there is lots of quiet support for restoring a greater degree of choice beyond the limited number of big vendors typically favored with GPO contracts.

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