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With a stormy economy, GPOs need a Safe Harbor

March 25, 2011
Derwood B. Dunbar, Jr.
From the March 2011 issue of HealthCare Business News magazine
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.

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