A study that used game theory to explore the impact of group purchasing organizations on healthcare supply chains has found that providers using GPOs experience lower total purchasing costs.
Sponsored by Purdue University, “The Impact of Group Purchasing Organizations on Healthcare-Product Supply Chains” will be published in an upcoming issue of Manufacturing & Service Operations Management, the operations management research journal of the Manufacturing and Service Operations Management Society.
“This is an excellent addition to a growing list of independent academic studies that continue to support and validate the value of group purchasing,” said Todd Ebert, president and chief executive officer of the Amerinet group purchasing organization and chairman of the Health Industry Group Purchasing Association board of directors. “What it shows ... is the total costs are reduced – something we, as group purchasing, have been saying for years.”
[See also: GPOs call Medtronic contract cancellations an ‘attack’ on hospitals; cancelling GPO contracts bad for hospitals, bad for patients.]
Purdue researcher Leroy Schwarz said price comparison studies aren't accurate in determining GPOs’ impact on healthcare-product supply chains, so he and his colleagues used game theory, because it allowed them to “examine scenarios in which different organizations or people have different goals.”
In a “game” played in the study, healthcare manufacturers tried to maximize profits and healthcare providers tried to minimize total purchasing costs (the cost of the given product plus the provider’s own fixed transaction costs). The game used only one GPO, was limited to a single product and featured fixed provider requirements.
“One has to say do the results make sense in context of the assumptions made? If I think about the real world and making the model more realistic, what might I expect?” said Schwarz. “That’s what lead me to believe that the results are applicable in the real world, but that’s subject to further study.”
According to Schwarz, the results of the game indicated that GPOs do lower total purchasing costs, with the greatest decreases found for smaller providers. The study noted that for smaller providers, there could be higher per-unit costs, but, ultimately, total purchasing costs were lower.
While the study didn’t explore this, Schwarz said, large providers generally break even on GPOs. They likely see lower total purchasing costs because they are often part-owners of GPOs, he said, and so may receive distributions and share-backs and lower per-unit costs.
The study also explored whether contract administration fees (CAFs), which manufacturers pay to GPOs, increase the cost of doing business for manufacturers, who in turn increase prices to providers. The study found that CAFs don’t increase the total purchasing costs of providers, but may result in higher per-unit prices.