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Group Purchasing Organizations Cost Healthcare System $37.5B A Year

In yet another illustration of why no, you really don't want government run like a business, a very interesting piece by Mariah Price from The Washington Monthly about hospitals' group purchasing operations: In theory, GPOs are supposed to lower

In yet another illustration of why no, you really don't want government run like a business, a very interesting piece by Mariah Price from The Washington Monthly about hospitals' group purchasing operations:

In theory, GPOs are supposed to lower hospitals' supply costs by buying in bulk from manufacturers. The problem is that GPOs make their money from commissions and fees paid by the manufacturers -- in essence, a form of kickback that in any other industry would be illegal but isn't in this industry, thanks to an obscure loophole in Medicare law. Reformers have wanted to get rid of that loophole for years, arguing that it allows big medical device makers to collude with the GPOs to set prices and terms and keep small manufacturers, which might offer cheaper and better products, out of the market. But despite several congressional investigations, no one could prove whether or not GPOs did what they claimed, which is lower the prices hospitals pay for supplies.

Blake, however, came upon a Texas-based company called MEMdata, which helps hospitals process their equipment bids, and therefore has in its database both the prices GPOs are charging hospitals and what they could get if they bargained directly with the manufacturers. MEMdata's CEO Bob Yancy showed some of this data to Blake and estimated that on average the GPOs' prices are 22 percent higher than the ones that hospitals can get on their own. "The bottom line is that hospitals are being systematically overcharged," Yancy told Blake. "GPOs are inflating the pricing."

Since that story was published, two economists, Robert Litan of the Brookings Institution and Hal Singer of the McDonough School of Business at Georgetown University, have looked deeper into MEMdata's records. On Wednesday they published a study funded by the Medical Device Manufacturers Association, an industry trade group, that confirms what Blake found. According to the study, GPOs increase health care costs nationwide by $37.5 billion a year, and cost the federal government $11.5 billion annually -- money that could be saved simply by getting rid of the anti-kickback provision.

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