Medical Device Daily Washington Editor

WASHINGTON — As part of ongoing government scrutiny into the practices of hospital group purchasing organizations (GPOs), the Office of the Inspector General (OIG) in the Department of Health and Human Services (HHS) released the results of an audit of some of the largest GPOs and their members conducted over a five-year period.

GPOs essentially are buying consortiums that are designed to leverage the purchasing power of their members — primarily hospitals and other healthcare providers — allowing them to obtain discounts on medical supplies. Vendors pay administrative fees to GPOs in exchange for administrative services and to sell to the GPO membership.

The ongoing debate is between GPOs that believe their organizations save money for hospitals and consumers and small- to mid-sized device manufacturers that argue that GPO practices are exclusionary and make it harder for innovative products to reach the market.

HHS said its report was designed to determine how much revenue GPOs received from vendors and how the revenue was distributed. The report also examined how members treated the distributions of administrative fee revenue from GPOs on their Medicare cost reports and whether members properly recorded rebates received from vendors on the cost reports.

Over the past few years, the Senate Judiciary Committee has investigated the GPO industry and conducted hearings, most recently in September of last year (Medical Device Daily, Sept. 16, 2004).

According to the HHS report, although the department does not directly regulate GPOs, Medicare regulations provide guidance on the reporting of rebates that hospitals receive from vendors. Those regulations require that healthcare providers offset purchase discounts and refunds against expense on their Medicare cost reports. That information is one of the primary sources that the department's Medicare Payment Advisory Committee (MedPAC) uses in reviewing Medicare payment levels.

The OIG said that of the GPOs it reviewed, $1.8 billion in administrative fee revenue was collected during the audit period, with $1.3 billion in net revenue in excess of operating costs. The report said GPOs retained $415 million of the net revenue to provide reserves and venture capital for new business lines. The remaining $898 million was distributed to members.

The OIG's report reviewed how the 21 members accounted for the net revenue distributed by the three GPOs. The members received a total of $255 million, roughly 28% of the $898 million distributed.

“These members did not fully account for the net revenue distributions on their Medicare cost reports,“ the report said. “While members of one GPO offset 92% of the distributions, members of another offset only 54%. In total, the 21 members offset on their Medicare cost reports $200 million of the $255 million distributed by the GPOs.“

Collectively, the reports said that overall, the members credited 78% of the net revenue they received on their cost reports, leaving 22% of net revenue distributions that were not offset.

HHS recommended that the Centers for Medicare & Medicaid Services (CMS; Baltimore) provide better specific guidance on the proper Medicare cost report treatment of net revenue distributions received from GPOs. The department also recommended that CMS prepare some sort of bulletin to remind institutional providers that all rebates from vendors must be shown as credits on Medicare cost reports.

The OIG reported that CMS acknowledged that the policy guidance did not specify that GPO revenue distributions be used to reduce costs on cost reports, but that the policy as written was clear that additional guidance was not necessary.

A spokesperson for the Health Industry Group Purchasing Association (HIGPA; Arlington, Virginia) told Medical Device Daily that the association “was pleased“ to see that the HHS Inspector General recognized the value healthcare group purchasing organizations provide in redistributing their revenue in excess of operating costs back to their hospital members.

“Given the continuous financial strain that is placed on providers, GPOs play a pivotal role in the healthcare supply chain by saving providers money through aggregate purchasing, which ultimately helps hold down healthcare costs at the national level,“ the spokesperson said in a statement. “In addition to saving money through the aggregation of purchases, GPOs provide other services, such as contract negotiation, contract management, market surveying and product evaluation that their provider members cannot perform as efficiently.“

HIGPA represents more than 150 healthcare suppliers and most major GPOs in the U.S.

Following last September's hearing into GPO practices, Sens. Herb Kohl (D-Wisconsin) and Mike DeWine (R-Ohio) introduced the Medical Device Competition Act of 2004. DeWine is chairman of the Finance Subcommittee on Antitrust, Competition Policy and Consumer Rights. Kohl is the ranking member. The bill would authorize HHS to oversee the hospital purchasing industry to prevent hospital buying groups from engaging in anticompetitive or unethical practices. No action was taken before the end of the year, and the bill is expected to come up again early in the new session.

DeWine's office told MDD it had no statement yet on the results of the report, and Kohl could not be reached for comment.

The Medical Device Manufacturers Association (MDMA; Washington) said the need for additional reform “has never been greater“ in light of the report's findings.

“Action must be taken to address not only the clinical and competitive concerns raised as a result of certain GPO practices, but the financial waste some of these middlemen add to the healthcare system,“ MDMA said in a statement.