Healthcare Revenue Cycle Management, ICD-10, Claims Reimbursement, Medicare, Medicaid

Policy & Regulation News

GPO Funding Structure Could Impact Medicare Costs

By Ryan Mcaskill

A lack of HHS oversight created an environment where GPO fees are unchecked and increasing Medicare Costs.

- A recent study by the U.S. Government Accountability Office examined five large group purchasing organizations (GPO). GPOs are purchasing intermediaries that negotiate contracts for medical products and services. They contract with vendors and receive a fee when a purchase is made from that vendor, which is the operating revenue for these organizations. This is allowed because it meets the safe harbor requirements under the “anti-kickback” provision of the Social Security Act.


However, there has been some concern raised over GPO’s contracting practices and about the impact of the GPO funding structure. The reason for this is because fees could be passed on to customers and healthcare providers, which would then be passed on to consumers.


The study examined two factors. The first is GPOs’ contracting practices and their reporting efforts and the second is how GPOs are funded and the effects of this funding structure. It was discovered that GPOs are predominantly funded by administrative fees collected from vendors, which is almost always based on a percentage of the purchase price of products obtained through contracts. These fees totaled an estimated $2.3 billion in 2012 and nearly 70 percent of these fees trickled down to customers or owners.


“The views of experts varied widely on the effects of this funding structure,” the report reads. “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.”



While this is true for medical products and services, the report states that it could be different for Medicare payment rates, which could have been affected over time through annual updates to hospital payment rates. This is because of the information that hospitals report to the Centers for Medicare & Medicaid Services (CMS) and the Department of Health and Human Services, which set Medicare rates. If a hospital does not account for the revenue it receives from GPOs, which is required as a reduction in costs, it creates a misrepresentation of funds that is used to set rates.



The biggest problem to this process is a lack of checks and balances when it comes to reporting these numbers. The extent to which hospitals are reporting this revenue is unknown because it has not been reviewed by HHS since 2005. Furthermore, CMS officials have stated that the agency has not specifically identified this as information that should be routinely audited.



GAO recommended the Secretary of HHS should determine whether hospitals are appropriately reporting administrative fee revenues on their Medicare cost reports and improve the under-reporting. HHS agreed with these recommendations.



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