Group Purchasing Organization - History

History

The first healthcare GPO was established in 1910 by the Hospital Bureau of New York. For many decades, healthcare GPOs grew slowly in number, to only 10 in 1962.

Medicare and Medicaid stimulated growth in the number of GPOs to 40 in 1974. That number tripled between 1974 and 1977. The institution of the Medicare Prospective Payment System (PPS) in 1983 focused greater scrutiny on costs and fostered further rapid GPO expansion. In 1986, Congress granted GPOs in healthcare "Safe Harbor" from federal anti-kickback statutes after successful lobbying efforts. By 2007, there were hundreds of healthcare GPOs, "affiliates" and cooperatives in the United States that were availing themselves of substantial revenues obtained from vendors in the form of administrative fees, or "remuneration." 96 percent of all acute-care hospitals and 98 percent of all community hospitals held at least one GPO membership. Importantly, 97 percent of all not-for-profit, non-governmental hospitals participated in some form of group purchasing.

With healthcare costs rising sharply in the early 1980s, the federal government revised Medicare from a system of fee-for-service (FFS) payments to PPS, under which hospitals receive a fixed amount for each patient with a given diagnosis. Other insurers also limited what hospitals could charge. The result was a financial squeeze on hospitals, compelling them to seek new ways to manage their costs.

In specifically exempting GPOs from the Federal Anti-Kickback Law, many healthcare providers interpreted the act as an encouragement to the expansion of GPOs. Congress did not specify any limit on contract administration fees, but required the United States Department of Health and Human Services (HHS) to monitor such fees for possible abuse – particularly with respect to fees in excess of 3.0 percent.

In 1991, HHS promulgated safe harbor regulations, reflecting Congress’ intent to permit contract administration fees and creating the additional safeguard that GPOs inform members of administrative fees in excess of 3.0 percent. Despite these safeguards, the Government Accounting Office (GAO) published a study in 2002 indicating that GPOs did not always in fact reduce the cost of supplies and equipment for hospitals, but in some cases increased these costs by as much as 37%. Further examining the practices of GPOs, the Federal Trade Commission (FTC) clarified that "safety zone thresholds do not prevent and should not be appropriately read as preventing antitrust challenges to any of the alleged anticompetitive contracting practices..." of GPOs.

In 2002, the Senate Judiciary Committee's Antitrust Subcommittee imposed stricter standards on GPOs in healthcare, requiring the adoption of a Code of Conduct to which GPOs must subscribe.

Critics of GPOs charge that, as long as GPOs receive fees from the vendors they are charged with policing, the industry has anti-competitive contracting potential that should be subjected to further scrutiny and/or regulation.