DOJ and FTC are responsible for enforcing federal antitrust laws, which  GPOs are required to follow. GPOs Reported Generally Utilizing a Three-Phased Approach to Competitively Negotiate Contracts with Vendors

According to the GPOs in our review, GPO contracting generally involves  three phases: (1) issue requests for proposals (RFP) or invitations for  vendors to competitively bid for a contract, (2) review proposals, and   (3) negotiate and award contracts. GPOs reported negotiating and  awarding different types of contracts to vendors in different situations. All  five of the GPOs in our review reported that the majority of the contracts  they negotiate are either dual-source or multi-source, meaning that the  majority of the products sold through their contracts have more than one  vendor available on the GPOs’ contracts. In addition, all five GPOs  reported that they did not bundle unrelated products, and awarded mostly  contracts with 3-year terms in 2012. The views of experts and others we interviewed on the effects of GPO  contracting practices varied. While  officials from the FTC told us that they continue to receive complaints  each year about the potential anticompetitive effects of GPO contracting  practices—including complaints that GPOs have contributed to recent  shortages of generic injectable drugs—in the last ten years, the FTC has  not initiated any enforcement actions directed at GPO conduct. GPOs Reported Being Predominately Funded by Vendors

The five GPOs in our review reported being predominately funded by  administrative fees collected from vendors, which were almost always  based on a percentage of the purchase price for products obtained  through GPO contracts. Experts’ Views on the Effects of the GPO Funding Structure Varied Widely, Though Empirical Data on the Effects Are Limited

The literature we reviewed and the views of experts we interviewed varied  widely on the effects of the GPO funding structure, specifically the  reliance on vendor fees. Some of the literature we reviewed and experts  we interviewed asserted that the vendor fee-based funding structure of  GPOs creates misaligned incentives for them to negotiate higher prices  for medical products in order to increase the amount of vendor fees that  that they receive. Other people we interviewed—including some experts and  representatives of the GPOs—stated that competition between GPOs to  retain their customers incentivizes them to negotiate the lowest possible  prices, and mitigates any theoretical principal-agent problem. To  the extent that the vendor-fee-based funding structure affects prices for  medical products and services—either by reducing or inflating the costs of  the products and services—Medicare payment rates may be affected  over time through the annual update to the Prospective Payment System  hospital payment rates. Moreover, Medicare payments could be affected if hospitals do not  appropriately account for any revenues they receive from GPOs. These  revenues are required to be reported as a reduction in costs on hospitals’  costs reports. This represents 70 percent of the $2.3 billion in administrative fees collected in 2012. The extent to which  hospitals are reporting this additional revenue is not known because  HHS-OIG has not reviewed cost reports for this information since 2005. In addition, CMS officials told us that the agency has not specifically  identified this as information that should be routinely audited by Medicare  Audit Contractors. Some experts that we interviewed stated that the potential effects of the  GPO funding structure on Medicare payment rates could be eliminated if  the GPO safe harbor were repealed and GPOs were no longer permitted  to collect fees from vendors. While a repeal of  the safe harbor provision would require a clearer understanding of the  impact of the GPO funding structure, hospitals’ potential underreporting of  administrative fee revenue presents an immediate risk that can be  addressed within the current GPO funding structure. Recommendation for Executive Action

To help ensure the accuracy of Medicare’s payments to hospitals, we  recommend that the Secretary of the Department of Health and Human  Services determine whether hospitals are appropriately reporting  administrative fee revenues on their Medicare cost reports and take steps  to address any under-reporting that may be found. We  received technical comments from HHS, FTC, and DOJ which we  incorporated as appropriate. However, the scope of this report is focused on GPO  contracting practices and funding structure. Appendix I: Scope and Methodology

Our objectives were to describe (1) Group Purchasing Organization  (GPO) contracting practices and the reported effects of these practices;  (2) how GPOs are funded and the reported effects of this funding  structure. We asked about their  contracting practices and sources of revenue, including administrative  fees collected from vendors. Through our questionnaire, we asked about  each GPO’s purchasing volume by fiscal year, from 2000-2012; purchasing volume by category of medical product for fiscal years  2000, 2004, 2008, and 2012; average, highest, lowest, and most frequent administrative fee  percentages received in fiscal year 2012, by category of medical  product;  total dollar amount of administrative fees received in fiscal years  2000, 2004, 2008, 2012, by category of medical product; average, highest, lowest, and most frequent licensing fee percentages  received in fiscal year 2012, by category of medical product;  total dollar amount of licensing fees received in fiscal years 2000,  2004, 2008, 2012, by category of medical product; average, highest, lowest, and most frequent fee percentages for any  fee that was based on a percentage of the purchasing price of a  product in fiscal year 2012, by category of medical product;  total dollar amount of total fees based on a percentage of the  purchasing price of a product received in fiscal years 2000, 2004,  2008, and 2012, by category of medical product;  total dollar amount of total fees based on the purchasing price of a  product received in fiscal years 2000-2012; average, highest, lowest, and most frequent administrative fee  percentages received in fiscal year 2012 for generic injectable drugs; average, highest, lowest, and most frequent licensing fee percentages  received in fiscal year 2012 for generic injectable drugs;  total dollar amount and percentage of administrative fees shared with  customers and owners in fiscal year 2012;  sources of revenue in fiscal year 2012;  services provided to customers in fiscal year 2012 and how those  services were funded; whether the GPO awarded, or had in effect, any sole-source, bundled,  non-bid, or long-term contracts with vendors; and  key ways that GPOs bring value to their customers. We also reviewed laws, legislative  history, regulations and guidance related to the GPO safe harbor.
Why GAO Did This Study

GPOs are purchasing intermediaries that negotiate contracts for medical products and services. GPOs contract with vendors and receive a fee from them when providers purchase from the vendor. These fees are a source of operating revenue for GPOs, and they are allowed to collect them if they meet the requirements of a safe harbor to the “anti-kickback” provision of the Social Security Act—known as the Anti-Kickback statute—which would otherwise prohibit such fees.
You raised questions about GPOs' contracting practices and about the impact of the GPO funding structure. This report examines (1) GPO contracting practices and the reported effects of these practices; (2) how GPOs are funded and the reported effects of this funding structure. To do this work, GAO sent a questionnaire to representatives of the 5 largest national GPOs about their contracting practices and sources of revenue; reviewed the literature on the effects of the GPO funding structure; reviewed laws, regulations, and guidance on the GPO safe harbor; interviewed representatives from HHS, FTC, the Department of Justice (DOJ), vendors, hospitals, trade associations, and economic and health care experts.

What GAO Found

According to representatives from the 5 large group purchasing organizations (GPO) in GAO's review, GPO contracting generally involves three phases: (1) issue requests for proposals or invitations for vendors to competitively bid for a contract, (2) review proposals, and (3) negotiate and award contracts. GPOs reported negotiating and awarding different types of contracts to vendors in different situations. All 5 GPOs reported that the majority of the contracts they negotiate are either dual-source or multi-source, meaning that the majority of the products sold through their contracts have more than one vendor available on the GPOs' contracts. In addition, all GPOs reported that they did not bundle unrelated products and awarded mostly contracts with 3-year terms in 2012. The views of experts and others GAO interviewed on the effects of GPO contracting practices varied on issues such as whether the practices affect product innovation. In addition, while officials from the Federal Trade Commission (FTC) stated that they continue to receive and review complaints each year about GPO contracting practices, in the last 10 years, the FTC has not initiated any enforcement actions directed at GPO conduct.
The 5 GPOs in GAO's review reported being predominately funded by administrative fees collected from vendors, which were almost always based on a percentage of the purchase price of products obtained through GPO contracts. The 5 GPOs reported that these fees totaled about $2.3 billion in 2012, and nearly 70 percent of these fees were passed on to GPO customers or owners. The literature and the views of experts varied widely on the effects of this funding structure. Some suggested it creates misaligned incentives for GPOs to negotiate higher prices for medical products in order to increase the amount of vendor fees that they receive. Others suggested that competition between GPOs incentivizes them to negotiate the lowest possible prices, and mitigates these concerns. There is little empirical evidence available to either support or refute these concerns. However, to the extent that the vendor fee-based funding structure affects prices for medical products and services, Medicare payment rates may be affected over time through the annual update to hospital payment rates, which relies, in part, on information that hospitals report to the Centers for Medicare & Medicaid Services (CMS)—an agency in the Department of Health and Human Services (HHS). Moreover, Medicare payments also could be affected if hospitals do not account for revenue they receive from GPOs, which they are required to report as a reduction in costs on their cost reports. However, the extent to which hospitals are reporting this revenue is not known because this has not been reviewed by HHS since 2005, and CMS officials stated that the agency has not specifically identified this as information that should be routinely audited. Repealing the safe harbor—which allows administrative fees—could eliminate the potential effects of the GPO funding structure on Medicare payment rates, but experts and others stated that this could be disruptive to the health care supply chain at least in the near term. Over the longer term, GPOs and hospital systems are likely to adapt to the new market environment. While a repeal of the safe harbor provision would require a clearer understanding of the impact of the GPO funding structure, hospitals' potential underreporting of administrative fee revenue presents an immediate risk that can be addressed within the current GPO funding structure.

What GAO Recommends

GAO recommends that the Secretary of HHS determine whether hospitals are appropriately reporting administrative fee revenues on their Medicare cost reports and take steps to address any under-reporting that may be found. HHS agreed with the recommendation. GAO also incorporated technical comments from HHS, FTC, DOJ, and GPOs.