	Background

In seeking to provide their hospital customers with medical-surgical  products at favorable prices, GPOs engage with manufacturers in certain  contracting processes and sometimes use certain strategies to obtain price  discounts. Key  contracting strategies include the following:    Sole-source contracts give one of several manufacturers of comparable  products an exclusive right to sell a particular product through a GPO. Bundling links price discounts to purchases of a specified group of  products. When used by GPOs with a large market share, these contracting  strategies have the potential to reduce competition. GPOs Reported Modifying Contracting Processes When Desirable and Receiving Administrative Fees That Were Generally Consistent with Federal Regulations

In recent years, some manufacturers of medical-surgical products have  contended that GPOs employ a slow product selection process and set  high administrative fees that have made it difficult for some firms to obtain  GPO contracts. The GPOs we studied were able to alter the duration of their process for  selecting products to place on contract, particularly when they considered  these products to be innovative. Five out of seven GPOs reported that the maximum contract  administrative fee received from manufacturers in 2002 did not exceed the  3-percent-of-purchase-price threshold contained in federal regulations  established by HHS. Seven National GPOs Varied in the Extent to Which They Used Certain Contracting Strategies

GPOs use certain contracting strategies—which include sole-source  contracts, product bundling, and extended contract duration—to obtain  discounts from manufacturers in exchange for providing the manufacturer  with increased sales from an established customer base. For example, while  all study GPOs reported using sole-source contracts, some GPOs,  including one of the two largest GPOs, used it extensively, whereas others  used it on a more limited basis. Most GPOs Use Some Form of Bundling, and the Two Largest GPOs Use It for a Notable Portion of Their Business

All but one of the GPOs in our study reported using some form of  bundling, including the bundling of complementary products, bundling  several unrelated products from one manufacturer, and bundling several  products for which there are commitment-level requirements. GPOs Have Taken Initiatives to Address Concerns about Business Practices, but It Is Too Early to Evaluate Their Efforts

In response to congressional concerns raised in 2002 about GPOs’  potentially anticompetitive business practices, the group purchasing  industry’s trade association established a code of conduct that directs  member GPOs to, among other things, address their contracting processes. The seven GPOs we studied drafted or revised  their own codes of conduct, but the conduct codes are not uniform in how  they address GPO business practices. Moreover, some GPOs’ conduct  codes include exceptions and qualified language that can limit the  potential of the conduct codes to effect change.
Why GAO Did This Study

Hospitals have increasingly relied on purchasing intermediaries--GPOs--to keep the cost of medical-surgical products in check. By pooling purchases for their hospital customers, GPOs'in awarding contracts to medical-surgical product manufacturers--may negotiate lower prices for these products. Some manufacturers contend that GPOs are slow to select products to place on contract and establish high administrative fees that make it difficult for some firms to obtain a GPO contract. The manufacturers also express concern that certain contracting strategies to obtain better prices have the potential to limit competition when practiced by GPOs with a large share of the market. GAO was asked to examine certain GPO business practices. It focused on seven large GPOs serving hospitals nationwide regarding (1) their processes to select manufacturers' products for their hospital customers and the level of administrative fees they receive from manufacturers, (2) their use of contracting strategies to obtain favorable prices from manufacturers, and (3) recent initiatives taken to respond to concerns about GPO business practices.

What GAO Found

The seven GPOs we studied varied in how they carried out their contracting processes. The GPOs were able to expedite their processes for selecting products to place on contract, particularly when they considered these products to be innovative. The GPOs also reported receiving from manufacturers administrative fees in 2002 that were generally consistent with the 3-percent-of-purchase-price threshold in regulations established by the Department of Health and Human Services. However, for certain products, they reported receiving higher fees--in one case, nearly 18 percent. The seven GPOs also varied in the extent to which they used certain contracting strategies as leverage to obtain better prices. For example, some GPOs, including one of the two largest, used sole-source contracting (giving one of several manufacturers of comparable products an exclusive right to sell a particular product through the GPO) extensively, whereas others used it on a more limited basis. Most GPOs used some form of product bundling (linking price discounts to purchases of a specified group of products), and the two largest GPOs used bundling for a notable portion of their business. In response to congressional concerns raised in 2002 about GPOs' potentially anticompetitive business practices, the Health Industry Group Purchasing Association (HIGPA) and GPOs individually established codes of conduct. The conduct codes are not uniform in how they address GPO business practices. In addition, some GPOs' conduct codes include exceptions and qualified language that could limit their potential to effect change.