Group Purchasing Organization

In the United States, a group purchasing organization (or GPO) is an entity that leverages the purchasing power of a group of businesses to obtain discounts from vendors based on the collective buying power of the GPO members. Many GPOs are funded by administrative fees that are actually paid by the vendors. Some GPOs are funded by fees paid by the buying members. These fees can be set as a percentage of the purchase or set as an annual flat rate. Some GPOs set mandatory participation levels for their members, while others are completely voluntary. Members participate based on their purchasing needs.

Group purchasing is used in many industries to purchase raw materials and supplies, but it is common practice in the grocery industry, health care, electronics, industrial manufacturing and agricultural industries.

Different GPOs

Healthcare GPOs

A healthcare group purchasing organization (GPOs) assists in promoting quality healthcare relief and assists diverse providers in effectively managing expenses.
Strategic partnerships with healthcare providers create new revenue streams and also reduce expenses, allowing for improved operating margins for the healthcare providers, while members enjoy value added benefits like clinical support, benchmarking data, supply chain support and comprehensive portfolios of products and services to address specific needs. ["Amerinet" http://www.amerinet-gpo1.com/Amerinet.aspx?tabid=148] ["Premier" http://www.premierinc.com/costs/tools-services/basics/general-benefits.jsp]

Foodservice or grocery GPO

A foodservice or grocery GPO focuses exclusively on the $400 billion foodservice marketplace, including food and food-related purchasing for multi-unit foodservice operators, contract negotiation and supply chain services.
These negotiations are made with supplier/manufacturing agreements and purchasing contracts. Categories for grocer purchases include: poultry, fresh produce, frozen food products, fresh and frozen meats, candy and snacks, dairy and bakery, dry goods, disposables and beverages. ["Foodbuy" http://www.foodbuy.com/foodbuy/]

Industrial manufacturing GPO

A manufacturer’s GPO succeeds in solving procurement and sourcing concerns by aggregating the demand for products and services used in the manufacturing and production process and delivering deep savings on raw materials, services and components by issuing rebates, discounts, and preferred pricing to its members.

The combined buying power helps manufacturers save money on their purchases and more effectively compete against the largest global manufacturers.

Savings can be delivered in two separate ways in GPOs like Prime Advantage. First, discounts and rebates are automatic savings, which are pre-negotiated. Then, manufacturers are also allowed to negotiate improved pricing privately with an endorsed list of suppliers. ["Prime Advantage" http://www.primeadvantage.com/]

History

GPOs are not new. The first healthcare GPO was established in 1910 by the Hospital Bureau of New York. For many decades, healthcare GPOs grew slowly in number, to only 10 in 1962.

Medicare and Medicaid stimulated growth in the number of GPOs to 40 in 1974. That number tripled between 1974 and 1977. The institution of the Medicare Prospective Payment System (PPS) in 1983 focused greater scrutiny on costs and fostered further rapid GPO expansion.

In 2007, there were many healthcare GPOs in the United States. They served 96 percent of all acute-care hospitals and 98 percent of all community hospitals. Importantly, 97 percent of all not-for-profit, non-governmental hospitals participated in some form of group purchasing.

With healthcare costs rising sharply in the early 1980s, the federal government revised Medicare from a system of fee-for-service (FFS) payments to PPS, under which hospitals receive a fixed amount for each patient with a given diagnosis. Other insurers also limited what hospitals could charge. At the same time, consolidation in the global medical products and pharmaceuticals industries meant that thousands of purchasers had to deal with fewer suppliers. The result was a financial squeeze on hospitals, compelling them to seek new ways to manage their costs.

In 1986, responding to this critical situation, the United States Congress explicitly recognized the value of group purchasing to the nation’s healthcare system by specifically exempting GPOs from the Federal Anti-Kickback Law if they met certain standards regarding the payment and reporting of administrative fees. This gave clear encouragement to the expansion of GPOs as a vehicle for healthcare institutions to manage costs.

Congress did not specify any limit on contract administration fees, but required the United States Department of Health and Human Services (HHS) to monitor such fees for possible abuse – particularly with respect to fees in excess of 3.0 percent.

In 1991, HHS promulgated safe harbor regulations, reflecting Congress’ intent to permit contract administration fees and creating the additional safeguard that GPOs inform members of administrative fees in excess of 3.0 percent.

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