Hospitals, group purchasing organizations, and the antitrust laws - Business

Healthcare Financial Management, March, 2003 by Thomas H. Brock

A group purchasing organization (GPO) charges its member hospitals a one-time, up-front fee to belong. A medical device manufacturer offers a member hospital a rebate if the hospital agrees to purchase products only from that firm. A GPO offers hospitals an exclusionary contract, effectively committing member hospitals to purchase supplies only from the manufacturers that contract with the GPO.

Complaints about these types of activities have led federal and state governments to renew their focus on GPOs last year. Historically, providers have used GPOs to increase their efficiencies through quantity discounts and shared administrative costs. However, some GPOs have expanded their activities, raising antitrust concerns.

The antitrust agencies continue to endorse the basic concept of GPOs. Nevertheless, the agencies are evaluating business practices that they believe may be unnecessary to a GPO's core operations. In particular, the agencies have become increasingly concerned that certain practices of GPOs are retarding product innovation. As a result, all providers participating in a GPO should carefully monitor their GPO to minimize their antitrust exposure.

Background

The historic purpose of a GPO is straightforward. By pooling the purchasing power of their members, GPOs can negotiate quantity discounts from both manufacturers and distributors. Through a GPO, member hospitals can eliminate duplicative transaction costs that each hospital would incur in a separate transaction. From an antitrust perspective, these basic results are commendable: a GPO allows each participating hospital to achieve efficiencies it could not otherwise realize.

Hospital GPOs have broadened their responsibilities as they have matured. As medical supplies have become increasingly sophisticated, GPOs have gathered information about products that an individual member could not obtain or evaluate. GPOs have conducted independent tests of new product lines that no one provider could finance or conduct. With this expertise, GPOs have chosen, on behalf of their members, medical equipment and supplies from among competing vendors.

Traditionally, GPOs have been subject to ongoing scrutiny under the antitrust laws. Section 1 of the Sherman Act (15 U.S.C. 1) prohibits buyers and sellers of goods and services from entering into contracts, combinations, and conspiracies in restraint of trade. Thus, section 1 of the Sherman Act condemns the agreements among businesses to set the prices at which they will jointly buy or sell goods.

Nevertheless, the Supreme Court has recognized that GPOs can yield efficiencies. (a) Therefore, the Court has reasoned that a GPO's activities should be condemned under the antitrust laws only if the anticompetitive effects of the GPO's operations outweigh the value of its efficiencies and other advantages for its members.

The 1996 Statements

Based on this Supreme Court precedent, the antitrust agencies have focused on the competitive impact of two aspects of a GPO's operations. This analysis is reflected in the Statements of Antitrust Enforcement Policy in Health Care, which were jointly issued by the U.S. Department of Justice and the Federal Trade Commission (FTC) in August 1996 (www.ftc.gov/reports/hlth3s.htm). In Statement 7, "Joint Purchasing Arrangements Among Health Care Providers," the federal agencies set forth their antitrust analysis of GPOs. The agencies' working premise was clear: "Most joint purchasing arrangements among hospitals or other healthcare providers do not raise antitrust concerns."

The 1996 Statements confirm the agencies' specific antitrust reservations about GPOs. First, the agencies describe how the membership's purchases through their GPO might account for "so large a portion of the purchases of a product or service that [the GPO] can effectively exercise market power in the purchase of the product or service." Second, the agencies contemplate that "the products or services being purchased jointly [could] account for so large a proportion of the total cost of the services being sold by the participants that the [GPO] may facilitate price fixing or otherwise reduce competition."

Based on these conclusions, the 1996 Statements establish an antitrust "safety zone" that limits antitrust exposure for GPOs if two conditions are met. First, membership purchases through the GPO must account for less than 35 percent of the total sales of the product or service. The purpose of this requirement is to ensure that the GPO and its members will not enjoy market power as buyers, enabling them to drive down the price of any products or services below competitive levels. Second, the aggregate costs of the products and services each hospital purchases through the GPO must account for less than 20 percent of the hospital's total revenues. This second condition ensures that the members' purchases through the GPO at a uniform price will not result in standardized costs of products they need to furnish hospital services, thus facilitating price fixing for the services sold by the member facilities.