Controversial Role of GPOs in Healthcare‐Product Supply Chains

Abstract

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.

Strategic Management of Operations in the Emergency Department

“…Many researchers in the OM area (Chen and Robinson 2014, Green and Savin 2008, Kc and Terwiesch 2009, Liu and Ziya 2014 have deployed queuing theory to examine the inter-dependency of performance of health care operations by linking dimensions such as capacity, wait time, customer priority, and demand patterns in service systems. Other researchers (Anderson et al 2014, Andritsos and Tang 2014, Hu and Schwarz 2011 have studied health care supply chain and quality of patient care.…”

The Perils of Group Purchasing in a Competing Supply Chain

“…The existing literature on group purchasing apparently has not modeled rm negotiations in a competitive setting, thereby cannot provide insights into this important trade-o in competing OEMs' purchasing decisions. Speci cally, most studies that have implemented a GPO in the supply chain assume that GPO's interests are aligned with buyers; thus, the GPO seeks to minimize the buyers' total purchasing costs [15][16][17]. All of these papers use a take-it-orleave-it negotiation format if necessary.…”

“…All of these papers use a take-it-orleave-it negotiation format if necessary. More recently, Hu et al [18] studied the role of a GPO as an independent entity in a healthcare supply chain that tries to maximize its own pro t. Their study along with their previous study [16] provides the rst theoretical analyses of healthcare GPOs. They studied the impact of GPOs on healthcare-product supply chains [18].…”

“…In this regard, the following rst-order conditions should be solved simultaneously: @ i @q i = 0; @ j @q j = 0 (i = 1; 2 and j = 3 i): (A. 16) This leads to Eq. (A.17) as shown in Box A.I.…”

The effects of rebate contracts on the health care system

“…Schlesinger and Schulenburg (1991) model quality differences explicitly but compared to search costs. Quality differences are also covered by Brekke et al (2006), Miraldo (2008) and Hu and Schwarz (2011) and specified very similar to our approach. In contrast to our paper, Brekke et al (2006) and Miraldo (2008) cover quality differences in the context of reference pricing and Hu and Scharz (2011) consider quality differences in combination with contract administration fees that GPOs demand from manufacturers.…”