HSCA recently commissioned Dobson DaVanzo & Associates to conduct an analysis of the impact of group purchasing organizations (GPOs) on spending in the health care sector. This analysis, entitled “A 2014 Update of Cost Savings and Marketplace Analysis of the Health Care Group Purchasing Industry,” can be found here.
Our study finds that medical supplies purchased for hospitals and nursing homes through a GPO will save the healthcare sector between $392.2 billion and $864.4 billion over the 10-year period from 2013 to 2022. This may, in fact, underestimate the savings impact of GPOs, as hospitals and nursing homes are not the only providers that benefit from group purchasing (but are the most practical to quantify). Further, our findings reinforce those of Goldenberg and King who found that GPOs save the health care system up to $64 billion annually. (Goldenberg and King, A 2008 Update of Cost Savings and a Marketplace Analysis of the Health Care Group Purchasing Industry, 2009.)
This is very exciting news. As most readers already know, the U.S. faces the looming issue of health care costs that are increasing more rapidly than the rest of the economy. If this trend is not mitigated, health care costs will put unsustainable pressures on the entire economy. Numerous structural changes in the health care industry are underway in response to these growing pressures, and the further expansion of GPOs represents another strategy for providers to pursue to lower their costs now and in the future.
Background
GPOs play a significant role in the U.S. health care system, consolidating purchasing power across providers and bringing efficiency to sales supply chains, resulting in overall cost savings to providers and patients. While GPOs have existed for over 100 years, there was rapid expansion of GPOs in the 1980s as a direct response to the implementation of the prospective payments system (PPS) in hospitals. In passing the Anti-Kickback Act of 1986, Congress created a safe harbor provision for GPOs allowing them to negotiate on behalf of providers, therefore recognizing the importance of GPOs in providing savings to the health care system. (Kusserow et. al. (2013). Activities and Perspectives of the Office of the Inspector General in the U.S. Department of Health and Human Services Regarding Group Purchasing Organizations (GPOs). Report submitted to Healthcare Supply Chain Association.) This long history has produced an environment in which the medical supplies purchased by health care providers have a certain portion of “savings” built into them by decades of GPO impact. Recent estimates suggest that there are over 600 GPOs, and that 96% to 98% of hospitals utilize GPO contracts for their purchasing functions. (Healthcare Supply Chain Association. A Primer on Group Purchasing Organizations.)
Study Design and Key Findings
The goal of our analysis is to calculate what expenditures for hospitals and nursing homes would have been if GPOs were lowering the price of medical supplies. In order accomplish this, we:
- Used National Health Expenditure Data published annually by CMS to calculate baseline hospital and nursing home spending for 2012;
- Calculated cost of medical supplies by removing labor costs from total expenditures; (Center for Medicare and Medicaid Services, Federal Register, Vol. 78, No 160, August 19,2013, page 50507; Center for Medicare and Medicaid Services, Federal Register, Vol. 78, No 160, August 6,2013, page 47946)
- Isolated the proportion of expenditures for providers already utilizing GPOs; and (Muse & Associates. (2002). The Role of Group Purchasing in the Health Care System and the Impact on Public Expenditures is Additional Restrictions are Imposed on GPO Processes; Schneller, E. (2009). The Value of Group Purchasing- 2009: Meeting the Needs for Strategic Savings. Health Care Sector Advances, Inc.)
- Estimated the rate of savings associated with hospitals and nursing homes utilizing GPOs. (Muse & Associates. (2002). The Role of Group Purchasing in the Health Care System and the Impact on Public Expenditures is Additional Restrictions are Imposed on GPO Processes; Schneller, E. (2009). The Value of Group Purchasing- 2009: Meeting the Needs for Strategic Savings. Health Care Sector Advances, Inc.)
Assuming a GPO market penetration rate of 80% and a savings rate of 18%, we calculated that GPOs reduce hospital and nursing home expenditures by approximately $55 billion annually (Exhibit 1).
Exhibit 1: Savings Attributable to GPOs is Penetration rate is 18% and Savings Rate is 15% in 2012 ($ in billions)
Medical Supplies | Expenditures with Penetration Rate: 80% | Expenditures with Savings Rate: 18% | Savings Attributable to GPOs |
| Hospital | $268.2 | $214.6 | $261.7 | $47.1 |
| Nursing Home | $46.1 | $36.9 | $45.0 | $8.1 |
| Total | $314.3 | $251.4 | $306.6 | $55.2 |
Source: Dobson | DaVanzo analysis of the National Health Accounts 2012 as published by the Centers for Medicare and Medicaid Services.
Projecting these data forward we estimate that the savings attributable to GPOs could be as high as $864.4 billion over the 10-year window from 2013 to 2022.
Steven Heath is Manager of Research and Data Analytics for Dobson | DaVanzo and one of the co-authors of “A 2014 Update of Cost Savings and Marketplace Analysis of the Health Care Group Purchasing Industry.”