Group Purchasing Organizations Cut Hospital Supply Costs by 13.1%

May 20, 2019 - Group purchasing organizations (GPOs) save the healthcare system up to $34.1 billion annually, with hospitals and nursing homes seeing a significant portion of the supply chain savings, a new analysis finds.

Released by the Healthcare Supply Chain Association (HSCA) on May 15, the analysis performed by Dobson DaVanzo & Associates examines National Health Expenditure (NHE) data published by CMS along with data collected from a survey of leaders at hospitals and nursing home – the healthcare sectors most influenced by GPO penetration.

The data shows that GPOs are generating significant supply-related savings for the providers. The organizations could reduce supply-related purchasing costs by 13.1 percent for hospitals and nursing homes, the analysis shows.

With GPOs significantly reducing supply chain costs, Dobson DaVanzo & Associates economists estimate that the organizations will reduce total healthcare spending for hospitals and nursing homes by up to $456.6 billion over the next ten years.

“America’s hospitals, physicians, and other healthcare providers face mounting pressure to reduce costs, and they consistently turn to GPOs to deliver the best products at the best value,” Khatereh Calleja, HSCA president and CEO, stated in the study’s announcement. “The new analysis of CMS health expenditure data confirms what virtually all of America's 7,000+ hospitals already know: GPOs are critical supply chain partners that reduce costs for the entire healthcare system, allowing physicians to focus on their core mission of providing first-class patient care.”

GPOs are a staple in the healthcare supply chain. For over 100 years, the organizations have helped hospitals and other healthcare providers reduce their supply-related costs by aggregating purchasing volume to negotiate discounts with supply manufacturers, distributors, and other vendors, the report states.

Hospitals and other providers end up saving through group purchasing because GPOs use economies of scale, have increased negotiating power, and are experts in purchasing high value supplies. The organizations also save providers money by reducing the administrative costs to providers related to purchasing supplies.

Generating supply chain savings is important to hospitals and providers.

Federal actuaries predict that the compound average growth rate (CAGR) for all healthcare expenditures will increase by 5.6 percent annually until 2026, with hospital and nursing home spending rising annually by approximately 5.6 and 5.0 percent, respectively.

As healthcare spending continues to grow, hospitals and nursing homes are projected to spend about six times more on non-labor expenditures through 2021 compared to baseline estimates from 2016, Dobson DaVanzo & Associates economists report. They project hospitals and nursing homes to spend $1,917.2 billion and $285.8 billion on non-labor expenditures, respectively, in the next couple of years.

GPOs have the ability to significantly influence these costs, the analysis shows. Based on the current 59.6 percent GPO penetration rate, economists find that the total amount of hospital and nursing home spending subject to the impact of GPOs is $226.2 billion for 2016 and $1,312.2 billion from 2017 to 2021.

Without GPOs, hospital and nursing home spending on supplies could be as high as $260.4 billion in 2016 and $1,510.9 billion from 2017 to 2021, the economists add.

Hospitals and other providers can substantially reduce their supply chain costs using GPOs. But the organizations also have the potential to influence care quality, the economists say.

“GPOs ensure that hospitals and providers are delivered the appropriate supplies for each patient,” they note in the report. “Collectively, GPO services lead to increased efficiencies, better use of staff, and lower total costs. Thus, the ongoing role played by GPOs result in a variety of savings to providers, to patients, and to the entire healthcare system.”

Hospital and provider savings through group purchasing can also benefit the system at large, the report states.

“It should be noted that the success GPOs have had in penetrating the healthcare marketplace has resulted in the GPO price structures becoming the de facto market price,” the economists write. “This benefits payers, including the Medicare and Medicaid programs, by reducing the costs of providing services. These costs are reported on the Medicare cost reports and are used as part of the mechanism by which payment rates are determined for Medicare and other payers.”

Medicare will account for over 25 percent of the estimated $456.6 billion in savings from GPOs through 2026, the report shows. Medicare will also represent about 20 percent of the cost savings.