Controversial Role of GPOs in Healthcare-Product Supply Chains

This paper examines the controversial role that Group Purchasing Organizations (GPOs) play in the supply chains for healthcare products. Among the controversies, perhaps the most fundamental one is whether or not GPOs reduce purchasing costs for their members. However, the fiercest controversy is around the "contract administration fees (CAFs)" that GPOs charge to manufacturers. We examine these and other controversies using a Hotelling duopoly model. Among our conclusions: GPOs increase competition between manufacturers and lower prices for healthcare providers. However, GPOs reduce manufacturers' incentives to introduce innovations to existing products. We also demonstrate that the existence of lower off-contract prices is not, per se, evidence of anticompetitive behavior on the part of GPOs. Indeed, we demonstrate that, under certain circumstances, the presence of a GPO lowers off-contract prices. We also examine the consequences of eliminating the "safe harbor" provisions that permit healthcare GPOs to charge CAFs to manufacturers, and conclude that it would not affect any party's profits or costs.