Controversial Role of GPOs in Healthcare-Product Supply Chains r2

8/3/2019 Controversial Role of GPOs in Healthcare-Product Supply Chains r2

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By Qiaohai Hu and Leroy B. Swarz

Purdue Krannert School of Management

Group 1 :

Babu John

Parlin Marbun

Petri Lahdekorpi

Controversial Role of GPOs in

Healthcare-Product Supply Chains


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Contents

Facts of GPOs

GPOs Controversies

Flow chart of GPO

GPOs Benefits and Criticism Research Model Hotelling Duopoly

Model

Different Research Questions

Research Results


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Facts

Group PurchasingOrganizations are profit ornon-profit organization owned

typically by hospitals 7280% of every healthcare

dollar is acquired throughgroup purchasing

GPOs account for over 85% ofhospital purchases

Largest GPO, Novation,contracted for over 2,400

hospitals with purchasing


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Facts

Highest cost with lowest life expectancy?


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The Research Qiaohai and Leroy:

Build a highly style modelthat include the contractadministration fees.

Address questionsrelevant to healthcare-product supply chains.

To view of the gaps

between the simplicity ofthe model and thecomplexity of GPOs.


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GPO Group PurchasingOrganizations

Lower Prices through

product expertise over a wide range of products

buying power of their members

Non profit organizations which want to maximizetheir owners/members surplus.

GPO revenue sources

Contract administration fees charged to

Manufacturers. membership fees charged to provider-members

administrative fees charged to distributors Miscellaneous fees for services


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GPOs Controversies The fees GPOs charge to Manufacturers (3% of

contracted sales), forcing them to charge higherprices for products.

The role they play in healthcare-product supplychains.

The concentration of their purchasing power.

Some of business practices they employ.

GPOs promote or stifle competition ?


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GPOs Controversies Total annual revenue generated:

$5 Billion - $6 Billion

which legitimately belongs to their member

hospitals! GPO contract did not guarantee that hospital

saved money:

GPOs prices were often higher than prices paid

by hospital negotiating with vendors directly. GPO contract blocks or slows the innovation or

improvement of existing products.


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GPOs Reaction to Criticisms Arguing that GPOs

reduce prices andcompetitive in 2 ways:

Pool purchasing

leverage of hospitalsbuying products onnationwide contracts.

Establishment of price

ceilings beneath whichhospitals negotiate ontheir own.


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GPO Flow chart

Author: http://www.ccpharm.com/01_wholesaler.php 12th December 2011 4.19pm


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Top 5 Areas in Hospitals Interest


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The Research Model - TheHotelling Model - Example

The cost and choice of ice-cream is the same for eachdistributor. Buyers are evenly distributed along thebeach. The first pattern of market share has the twosalesmen positioned so that each is at the centre of

his half of the beach and the market is split up evenly.

Author: http://www.answers.com/topic/hotelling-model 12th Dec 2011 2.39pm


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The Hotelling Model - Example

If A now moves nearer to the middle of the beach,he will increase his market share.



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The Hotelling Model - ExampleThe logical outcome of this will have both salesmen back to backat the centre of the beach, as long as some customers are willingto walk nearly half a mile for an ice-cream, i.e. that the consumerprovides the transport. This analogy indicates that locationaldecisions are not made independently but are influenced by the

actions of others.



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Hotelling Model is to representcontracting costs:

Product-search cost

(what alternatives areavailable?)

Product-assessment cost

(which is best?)

Contract-negotiation cost

(what price for whatquantity?)

Transaction processingcost

(buying or selling?)


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Will GPO be formed?

Symmetric preference

Two identical manufacturers

Contracting costs are lower due to competition

Contracting costs are moving up supply chain tomanufacturers

Asymmetric preference

Two un-identical manufacturers due to:

Product Brand

GPO preferred charges lower CAFs, less profitfor manufacturer


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Can off-contract price be lowerfrom on-contract?

There is no obligation to buy on contract products

Compliance is the ratio between on/off contract

Higher compliance means higher market share

and bigger purchasing power and lower prices

GPO results lower off-contract prices

GPOs are not anticompetitive, instead it

presents the equilibrium that maximizesmanufacturers profits


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Competition and Safe harbor

provisions (CAF)

Should GPOs be allowed to charge CAFs?

CAFs charged to manufacturers result lessinvestment on innovation or R/D

However, there is no effect on any parties profit


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Extensions

Monopoly

If contracting through the GPO, it lowers theproviders contracting cost

The monopolist can charge a higher price

Profit seeking GPO

the safe-harbor provisions of the Social SecurityAct are limited to average 3%, reports are

required providers equilibrium price is unaffected by the

size of the CAF


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Extensions

Profit seeking GPO

Sources of revenue GPOs profits are extracted from the manufacturers

profits, not the providers surplus

GPOs is to charge their provider-members a fixed

contracting fee GPOs offer a wide range of additional business

services to their members that can be used either togenerate profit or to offset contracting costs

Given the 3% CAF, that for-profit GPOs have anincentive to reduce their own contracting costs

Whether GPO operates on a profit or not-for-profitbasis, the result for providers is the same.


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Research Results GPO increases competition between the manufacturers

and lowers costs, if there is no monopoly

price competition, lowers the manufacturers incentive to

introduce innovation

off-contract price might be lower than the on-contract priceso GPOs are not anticompetitive

Lower off-contract prices are not evidence ofanticompetitive behavior on the part of GPOs.

Eliminating CAFs have no effect on any partys profit or

cost

Results are same whether GPO operates for profit or notfor profit

for-profit GPOs reduce manufacturers profits

for-profit GPOs have an incentive to reduce contracting


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Thank YouQuestions and Answers?

Group 1 : Babu John, Parlin Marbun, Petri Lahdekorpi

Documents

Controversial Role of GPOs in Healthcare-Product Supply Chains r2