Free Sample Chapter from our GPO report - Group Purchasing Organization Market Dynamics
BY EDITOR, SEPTEMBER 5, 2006
February 2010 update: This report is no longer available for purchase. Learn more here.
This is a sample chapter from our research report on Group Purchasing Organizations. Find out more about the report here, and purchase and download it for $379 here.
GPO Market Dynamics and the Flow of Funds
Understanding where the money goes (and why) is complicated, but it is essential to understanding the motives for each party in the markets in which GPOs operate.
Diagram 2: GPO Market Dynamics
The "GPO Market Dynamics" diagram depicts the flow of payments and services among hospitals, GPOs, and manufacturers/distributors.
As discussed above, GPOs are organized as cooperatives of member hospitals. These member hospitals pay "member fees" in order to be able to purchase medical devices and services from vendors through GPO contracts. Member fees may be in the form of annual or shareholder fees. Shareholder fees are often paid by the founding or initial members of the GPOs and entitle them to a greater percentage of the administrative fee distributions, which are described below, compared to other members. Annual fees are typically in the range of $50,000 per year, though the member fees to any one GPO may vary by hospital. Notably, some GPOs do not require hospitals to pay any member fees in order to participate in the contracts the GPO has established with vendors. Also, often if a hospital decides to switch out of a GPO contract before the end of a fiscal year, then the hospital will typically not receive administrative fee redistributions from the GPO.
Vendors pay GPOs "administrative fees" to negotiate contracts for medical devices and services that will be purchased by hospitals. These administrative fees include company stock, marketing fees, licensing fees, stocking fees, switching fees, and growth fees. The GPOs then distribute a portion of the administrative fees to their member hospitals. The size of this distribution, which is an advantage of membership, varies by GPO. The proportion not paid out to the hospital is utilized for GPO operating expenses and profits. GPOs may also provide payments to hospitals in the form of coupons or credits that can be redeemed for services from GPO non-purchasing related enterprises, such as consulting. Hospitals pay vendors for goods and services provided and the vendors in turn award rebates to hospitals that meet purchasing contract targets.
For the greatest and high physician preference products, physicians often deal directly with the vendors. Vendors provide product customization, education, and consultation. Vendors provide these services to physicians regardless of whether the vendor contracts through GPOs or deals directly with physicians themselves.
Physicians provide hospitals with services for which the hospital receives payment. For their part, hospitals distribute some part of the payment they have received back to the physicians in the form of compensation. Also, hospitals provide physicians with various forms of cost savings benefits and incentives, including gainsharing programs.
See the table of contents for the full report here.
