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The New GPOs in Healthcare

Per Preston Alexander, healthcare consultant, studies have shown hospitals are able to realize cost savings OFF contract.

If you are familiar with GPOs or PBMs, then you know it’s all spin and no benefit. Put them together and what do you get?

A recipe for savings a lower costs? Or another cost addition in the “value” chain?

When it’s GPO season here is what happens in the medical device world.

A number of companies decide to bid on a category.

The bid is supposed to be the “lowest and best offer.’

It never is

 

Device companies then do lots of analyses to benchmark competitors, understand margin impacts, determine potential market share gain, etc.

After all the analysis and revisions, the company bids on the contract.

The bid looks like a tiered price system based on spend levels. Discounts for buying more

For example, if hospital x spends y, its price is z. If the spend increases 10% pricing drops by 2%. Something like that.

In order to have the distinct honor of participating on a GPO contract, suppliers have to pay rebates to the GPO. It varies but usually in the neighborhood of 2-5%.

 

Suppliers are not interested in paying rebates.

The answer? Just slap on whatever the rebate is on top of the price.

Suppliers never feel the pain. Only the hospital. Which means only the insurer. Which means only us.

 

Suppliers never feel the pain. Only the hospital. Which means only the insurer. Which means only us. Click To Tweet

 

Hospitals also pay fees to have the opportunity to access pricing they assume they would never be able to access based on their relative size and purchasing power.

This is not really the case by the way.

Studies have shown hospitals are able to realize cost savings OFF contract.

To summarize, GPOs are a pay to play for suppliers and give hospitals the sense they are saving money by only contracting with the largest companies that game the system to make the same margins or higher on contract.

 

To summarize, GPOs are a pay to play for suppliers and give hospitals the sense they are saving money by only contracting with the largest companies that game the system to make the same margins or higher on contract. Click To Tweet

 

So what do we get when we add a PBM layer to this?

More rebates for the PBMs, lower margins for drug manufacturers, and no net savings for patients.

Likely increases in premiums. Somehow… even though the insurers own the PBMs… and the GPOs.

And the rebates are the only ways PBMs will allow drug manufactures to offer drugs on their contract (also known as a formulary).

In fact if the rebate is not high enough, the business won’t be considered either.

 

What is the definition of a kickback again?

GPOs represent yet another layer of cost addition to the healthcare system under the guise of savings.

It is critical that we are aware of the new GPOs and how they will affect drug pricing.

Hint: It is going to increase.

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