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What is a group purchasing organization?

A group purchasing organization (GPO) is an entity that helps healthcare providers-such as hospitals, nursing homes and home health agencies-realize savings and efficiencies by aggregating purchasing volume and using that leverage to negotiate discounts with manufacturers, distributors and other vendors.

How is group purchasing used in healthcare?

Hospitals and other healthcare providers use group purchasing to obtain the right products at the very best price. Overall, about 72 percent of purchases that hospitals make are done using GPO contracts.

How do GPOs save money for health facilities?

Because GPOs represent many healthcare facilities, GPOs offer economies of scale to the healthcare supply chain. By aggregating the purchasing power of hospitals, GPOs help balance the negotiating equation between purchasers and vendors.

How much money do GPOs save hospitals?

GPOs save hospitals and free standing nursing homes between 10 to 15 percent off their purchasing costs. Overall, this means GPOs enable hospitals to save up to $33 billion each year through lower product prices.

Additionally, GPOs provide valuable cost-avoidance savings to hospitals and other providers by helping them standardize and streamline their purchasing, as well as reduce the number of non-clinical staff that hospitals must employ to negotiate purchasing contracts.

How does group purchasing work?

Most healthcare providers make group purchasing selections in a committee setting, usually comprised of healthcare professionals, such as doctors, nurses and other clinicians. These committees help determine which medical supplies are most appropriate from a clinical standpoint. Once a decision is made, GPOs work to negotiate contracts with healthcare manufacturers, distributors and other suppliers.

After a group purchasing contract is created, it is still up to the hospital to decide which product is most appropriate in each circumstance and make the most appropriate purchase. GPOs do not purchase or buy any products. They negotiate contacts that hospitals can use when making their own purchases.

What types of healthcare entities utilize group purchasing services?

All types of healthcare organizations use group purchasing. Nearly every hospital in the U.S. (approximately 96 to 98 percent) chooses to utilize GPO contracts for their purchasing functions. Additionally, estimates are that hospitals across the United States use, on average, at least two and as many as four GPOs per facility. A growing portion of the long-term care, ambulatory care, home care, and physician practice markets are using group purchasing to help lower costs and improve efficiency. Further, the federal government also provides group purchasing services to various executive branch agencies.

Are there different types of GPOs?

If you've seen one GPO, you've really only seen one GPO, as they vary greatly in size, type of ownership and the services they offer their members. Some GPOs are owned by hospitals, while others do not have such a link to the facilities they serve. Some GPOs only serve not-for-profit hospitals, while others serve just proprietary facilities, and some serve a mix of the two. Some GPOs offer hospitals the ability to purchase nearly every conceivable type of product, while others focus on specific product categories. In addition, some GPOs specialize in certain types of healthcare, such as long-term care.

How many GPOs are there in the U.S.?

There are more than 600 organizations in the United States that participate in some form of group purchasing. About 30 of the 600 are true-GPOs that negotiate sizeable contracts for their members. The remaining organizations may offer their members access to larger groups' contracts and negotiate agreements with regional vendors for some services.

What types of services do GPOs provide beyond volume discounts?

Hospitals and other healthcare providers are increasingly relying on GPOs to help manage the complex system of purchasing. Many GPOs offer hospitals e-commerce solutions to help manage their purchasing. The GPO community is also a leader in the effort to reduce medical errors by helping to standardize some of the product use in hospitals, educating clinicians on best practices, and leading the drive to institute bar coding for medical products.

GPOs provide a unique mechanism for a group of hospitals to coordinate not only their purchasing power, but also their brain power. By drawing upon their broad-based memberships, GPOs give doctors, nurses, pharmacists and other clinical experts a pathway for evaluating new products and what their impact could be on the quality of care. GPOs take the old adage that two minds are better than one, and apply it to healthcare decision making.

How are GPOs financed?

GPOs rely, in part, on fees paid by vendors to finance the services the GPOs offer healthcare providers. These administrative fees are generally based upon the purchase price that the healthcare provider pays for a product purchased through a GPO contract. The fee is paid when a GPO's provider-member utilizes a GPO contract.

What is the value in allowing GPOs to earn administrative fees from vendors?

The value in GPOs earning administrative fees is that it allows hospitals and healthcare providers to dedicate more financial resources to the direct provision of patient care, such as employing additional doctors or nurses, purchasing the most advanced products, or a host of other goals.

Without the ability to earn administrative fees, hospitals would be in a terrible situation. They would have to choose between diverting financial resources from the direct administration of patient care to fund the operations of GPOs or they would have to stop using GPOs altogether, thereby loosing the volume discounts and raising the cost of healthcare.

How long have GPOs been working with hospitals?

GPOs date back to 1909, when the Hospital Superintendents of New York first considered establishing a purchasing agent for laundry services. In 1910, the first GPO was created, the Hospital Bureau of New York. During the last quarter of the 20th century, the importance of GPOs grew as hospitals were faced with rising expenditures due to phenomenal advances in care and an aging population, as well as falling reimbursements from both the government and private sector payers.

Do GPOs only exist in the private sector of healthcare?

Absolutely not. In healthcare, the federal government, namely the General Services Administration, Department of Defense, and Department of Veterans Affairs, use many of the same techniques for purchasing products as GPOs.

Outside of healthcare, the concept of group purchasing is seen throughout the economy. Indeed, GPOs simply give hospitals and other healthcare providers the ability to use fundamental economic principles to reduce the cost of purchasing products and improve the quality of care.

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