GPO Fees Under Scrutiny By The GAO

Article by Thomas S. Crane and Lauren Moldawer*

Last week, the Government Accountability Office (GAO) released a report examining group purchasing organization (GPO) practices. The GAO questioned whether the current structure of GPO funding through administrative fees is appropriate and urged the Department of Health and Human Services (HHS) to explore whether hospitals are appropriately reporting the revenue from GPO administrative fees on their cost reports when such fees are passed down to hospitals.

GPOs are purchasing intermediaries between health care providers - mostly hospitals - and vendors of medical and pharmaceutical products and services. Providers use GPOs because GPOs tend to take on the administrative burden of negotiating contracts, and they are seen as having better bargaining power given their ability to pool purchasing. GPOs are funded through an administrative fee charged to the vendors, which are permitted by a statutory exception and safe harbor under the Anti-Kickback Statute. To fall within the GPO safe harbor, the administrative fees must meet certain requirements; for example, the administrative fees must be 3 percent or less of the purchase price or the contract must specify the amount or maximum amount that each vendor will pay. GPOs are also allowed to distribute these fees to their health care provider customers through rebates and discounts. Hospitals are then required by the discount safe harbor to report the revenue from GPOs on their cost report submitted to the Centers for Medicare & Medicaid Services (CMS). The GAO made note of the continuing importance of this cost report information that is, for example, used by the OIG in its audit activities and by the MedPAC in its annual consideration of hospital payment updates.

The GAO indicates that this funding structure involves an inherent conflict: GPOs should negotiate the lowest rate for their customers; however, because they are funded through administrative fees that are a percentage of the contract costs, their incentives are not necessarily to seek the lowest price possible. Furthermore, the GAO questioned if hospitals are fully accounting for GPO revenue on their Medicare cost reports, and notes that CMS has not reviewed cost reports for this information since...