Understanding Healthcare Group Purchasing

by John Strong



Healthcare Group Purchasing is a $235+ billion business.

Consolidation of GPOs

Healthcare group purchasing organizations (GPOs) started in 1910 in New York, but exploded in growth in the 1980’s. Today, the four largest GPOs cover about 98% of all U. S. hospitals as the result of waves of consolidation over the years.

A simple concept

The initial concept was simple: Aggregate member’s volume to gain volume discounts on hospital supplies and services. That volume, coupled by member use of the contract portfolio (“compliance”) and other services, such as data and analytics, are critical to their success. GPOs have a language all their own, and are represented in Washington, D. C. by the Health Industry Group Purchasing Association.

Profit at a not-for-profit hospital?

GPOs are highly profitable (up to almost an 80% net RoR historically) because they do not take title to any goods; they have few accounts receivable; and they collect contract administration fees (CAF) from suppliers for issuing contracts. Apparent conflict of interest? They are protected by a federal “safe harbor” because healthcare GPOs are believed to save hospitals money.

Value analysis committee and GPO impacts

Today’s healthcare GPOs provide contracts that can be voluntarily used by the nation’s hospitals, as well as ambulatory surgery centers (ASCs). Today, the first question from many supply chain managers is “Is there/do you have a contract with my GPO?” It is a lazy request that often results in new and innovative technology not being evaluated.

How to ask for your preferred product that is not in the GPO contract?

There is plenty of room for new products, even if your facility is using a GPO, you just need to know how to ask. First, learning which major GPO your facility is a member of. Ask the person in surgery or the unit who it is. Better yet, find out who the person in purchasing is, and send an email to them with a request. Even if your facility is using a GPO contract, the required compliance to the contract is only 80 or 90% of total use. If the GPO has no contract, especially for new or innovative technology, your ask can be to simply obtain the products or services.

John Strong is co-founder and chief consulting officer of Access Strategy Partners Inc., working with new and innovative medical technology manufacturers to prepare and help them scale commercialization.