Model savings

To bring a more theoretical bent to the debate, in the current study, the researchers decided to explore a simplifying, but mathematically challenging technique called game theory.

Game theory was partly developed by John Nash, whose life was chronicled in the movie "A Beautiful Mind." It's a tool used by economists to model what happens when self-interested agents try to reach the best deal for themselves, or come to an "equilibrium," where each party is satisfied with its final choice. Possibly the best known example is the "Prisoner's Dilemma," a tricky scenario developed in the 1950s that explains why two suspects might rat each other out when it's seemingly in their best interest to keep silent.

Schwarz compared the model to working in a laboratory, where researchers create a highly controlled environment to eliminate extraneous variables. He cautions that because it's simplified, care must be taken when extrapolating the results to the real world.

In the Purdue "game," Schwarz and his colleagues include several providers or hospitals with different product requirements, but only a single manufacturer, a single GPO and a "competitive source" that can also supply the product.

The study assumes, naturally, that the manufacturer is seeking to maximize profits. It also assumes the GPO is trying to maximize its profits (through fees from manufacturers and dues from member hospitals). And it assumes providers and hospitals are seeking to minimize the total cost of purchasing -- which includes not just the price of goods, but the expense of evaluating manufacturers and hammering out contracts.

The study includes other assumptions, too, such as perfect knowledge among all the players about what each player is doing and about prices -- knowledge that, obviously, in real life would be far from perfect.

In the "game," the end result of these different agents planning and negotiating, the researchers say, is that raising or lowering the contract administrative fees, or CAFs, bites into manufacturers' or GPOs' profits, but doesn't affect providers' purchasing costs, no matter their size.

"In other words, CAFs sliding up, slides dollars away from the manufacturer to the GPO, and vice versa," Schwarz said.

However, the study also found that providers with smaller purchasing requirements will experience lower total purchasing costs but may actually experience higher per-unit prices. The researchers explained this by saying one must take into account the total costs associated with purchasing, and not just unit price.

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