Derwood B. Dunbar, Jr.
With a stormy economy, GPOs need a Safe Harbor
March 25, 2011
This report originally appeared in the March 2011 issue of DOTmed Business News
By Derwood B. Dunbar, Jr.
Group Purchasing Organizations (GPOs) have been a critical part of the health care field for 100 years, and I have worked in the industry for at least half that time. I was around when Congress enacted the GPO “Safe Harbor” in 1987. At the time, Congress wanted to codify and protect the ability of GPOs to provide significant cost savings for American hospitals when Congress moved from fee-for-service to Diagnostic Related Group payments. Congress wanted to allow hospitals and other health care providers to continue to structure negotiations in the best, most transparent way possible. Congress’ goal was to continue to save Medicare and Medicaid programs billions through aggregated purchasing, whether achieved through discount agreements or through GPO administrative fees.
Since adoption of the Safe Harbor, GPOs have helped hospitals and other health care providers, such as long-term care facilities improve processes that maximize efficiency, patient safety, labor and expenses.
Congress recognized the benefits of GPOs and took decisive action to safeguard those benefits. To many involved in the health care supply chain, it wasn’t initially clear why the law was needed. They all knew GPOs weren’t receiving secret or illicit payments, so parties were not concerned about kickbacks or violating the existing Medicare/Medicaid regulations. In fact, most of the GPOs in existence at that time already had in place many of the practices mandated by the Safe Harbor, including written agreements with health care facilities, limits on the amount of fees and proper reporting systems.
As hospitals move toward adoption of federal health care reform, the savings GPOs provide hospitals – and thus, the Safe Harbor – are more critical than ever. Hospitals operating on razor-thin budgets need GPOs to negotiate the best prices. The health care industry as a whole is restructuring with limited resources on slimmer budgets. By taking on much of the external pricing negotiations, GPOs have allowed the purchasing and materials management personnel in hospitals to spend more time on policies and procedures within the facility to improve efficiency. They allow clinicians to concentrate on patient care. It is the Safe Harbor regulation helping to keep GPOs in existence to benefit hospitals and their patients.
Critics of the Safe Harbor regulation have insinuated that GPOs are receiving kickbacks from vendors in the form of administrative fees. What these critics either don’t understand or willfully ignore is that the fees are negotiated with sophisticated business vendors and generally remain 3 percent or less of the purchase price of the goods purchased through the GPO. These fees are used to alleviate some of the GPO’s operating costs and often return an efficiency dividend to member hospitals. Congress codified the GPO Safe Harbor to expressly make clear that GPO administrative fees, if done openly and transparently, would not trigger the potential scrutiny of the government under the broad sweep of the anti-kickback law. The GPO Safe Harbor does not protect fees that are paid in secret; it does not protect fees that are not in writing; and it does not protect payments that are otherwise illegal.
Another common misconception is that GPOs make decisions for the sake of GPOs, rather than responding to the wishes and needs of their health care facilities. Nothing could be further from the truth. hospital materials resource departments and clinicians within the hospital make the decision to go with a GPO contract or not based on the product and value, not the fact that there is or is not a GPO agreement. GPO membership is voluntary and can be terminated at any time with notice. Hospitals are not required to purchase through their GPO contracts, but most do, with 96 to 98 percent of all American hospitals voluntarily belonging to one or more GPO.
GPOs are among the most heavily studied and examined sectors within the health care industry. All independent, empirical, and non-industry studies of GPOs – including examinations by the Government Accountability Office, Federal Trade Commission, Department of Justice, various academics, and the 8th Circuit Court of Appeals – have found that GPOs save hospitals money.
Over my 50 years in the group purchasing sector, I’ve found the bottom line is cost savings. Congress recognized the cost savings benefits of GPOs and created regulations to protect these savings. The Safe Harbor regulation will continue to allow GPOs to benefit hospitals and other health care providers, especially during a time of reduced budgets and patient resources.
Derwood B. Dunbar, Jr. is the former president and chief executive officer of the Mid-Atlantic Group Network of Shared Services, Cooperative (MAGNET).