Group purchasing organization
Encyclopedia
In the United States, a group purchasing organization (or GPO) is an entity that is created to leverage the purchasing power
of a group of businesses to obtain discounts from vendors based on the collective buying power of the GPO members.
Many GPOs are funded by administrative fees that are paid by the vendors that GPOs oversee. Some GPOs are funded by fees paid by the buying members. Some GPOs are funded by a combination of both of these methods. These fees can be set as a percentage of the purchase or set as an annual flat rate. Some GPOs set mandatory participation levels for their members, while others are completely voluntary. Members participate based on their purchasing needs and their level of confidence in what should be competitive pricing negotiated by their GPOs.
Group purchasing is used in many industries to purchase raw material
s and supplies, but it is common practice in the grocery industry, health care
, electronics
, industrial manufacturing
and agricultural industries
. With the introduction of the Non-Profit Purchasing Group in 2010, group purchasing is now a common practice for non-profit organizations. In the healthcare field, GPOs have most commonly been accessed by acute-care organizations, but non-profit Community Clinics and Health Centers throughout the U.S. have been engaging in group purchasing through organizations like Council Connections since 1979.
Medicare
and Medicaid
stimulated growth in the number of GPOs to 40 in 1974. That number tripled between 1974 and 1977. The institution of the Medicare Prospective Payment System (PPS) in 1983 focused greater scrutiny on costs and fostered further rapid GPO expansion. In 1986, Congress granted GPOs in healthcare "Safe Harbor" from federal anti-kickback statutes after successful lobbying efforts.
By 2007, there were hundreds of healthcare GPOs, "affiliates" and cooperatives in the United States that were availing themselves of substantial revenues obtained from vendors in the form of administrative fees, or "remuneration." 96 percent of all acute-care hospitals and 98 percent of all community hospitals held at least one GPO membership. Importantly, 97 percent of all not-for-profit, non-governmental hospitals participated in some form of group purchasing.
With healthcare costs rising sharply in the early 1980s, the federal government revised Medicare from a system of fee-for-service (FFS) payments to PPS, under which hospitals receive a fixed amount for each patient with a given diagnosis
. Other insurers also limited what hospitals could charge. The result was a financial squeeze on hospitals, compelling them to seek new ways to manage their costs.
In specifically exempting GPOs from the Federal Anti-Kickback Law, many healthcare providers interpreted the act as an encouragement to the expansion of GPOs.
Congress did not specify any limit on contract administration fees, but required the United States Department of Health and Human Services
(HHS) to monitor such fees for possible abuse – particularly with respect to fees in excess of 3.0 percent.
In 1991, HHS promulgated safe harbor regulations, reflecting Congress’ intent to permit contract administration fees and creating the additional safeguard that GPOs inform members of administrative fees in excess of 3.0 percent. Despite these safeguards, the Government Accounting Office (GAO) published a study in 2002 indicating that GPOs did not always in fact reduce the cost of supplies and equipment for hospitals, but in some cases increased these costs by as much as 37%. Further examining the practices of GPOs, the Federal Trade Commission (FTC) clarified that "safety zone thresholds do not prevent and should not be appropriately read as preventing antitrust challenges to any of the alleged anticompetitive contracting practices..." of GPOs.
In 2002, the Senate Judiciary Committee's Antitrust Subcommittee imposed stricter standards on GPOs in healthcare, requiring the adoption of a Code of Conduct to which GPOs must subscribe.
Critics of GPOs charge that, as long as GPOs receive fees from the vendors they are charged with policing, the industry has anti-competitive contracting potential that should be subjected to further scrutiny and/or regulation.
A healthcare group purchasing organization (GPOs) assists in promoting quality healthcare relief and assists diverse providers in effectively managing expenses. A GPO aggregates the purchasing volume of its members for various goods and services and develops contracts with suppliers through which members may buy at group price and terms if they choose to. GPOs typically provide contracted discounts on medical supplies, nutrition, pharmacy and laboratory. Some of the large GPOs have expanded contract portfolios to also offer discounts on office supplies and non-medical related services.
Several large healthcare GPOs are totally owned by non-profit hospitals and health systems, which in effect pool their sourcing and contracting in a cooperative or other corporate form. The larger scale of their pooled volume attracts pricing and terms more favorable than a single buyer can attract alone. The GPO owners achieve cost-savings on the goods they choose to buy through group contracts, and also receive distributions back from GPO earnings if operating revenues exceed expenses. GPO members that are not owners benefit from savings made possible by group contracts but typically do not share in GPO distributions of earnings. GPOs submit that their services allow for improved operating margins for healthcare providers, and that members enjoy value added benefits like clinical support, benchmarking
data, supply chain
support and comprehensive portfolios of products and services to address specific needs.
It is important to note, that GPOs may collect an "Administrative" fee up to 3.0% of all sales volumes from the vendors that they negotiate a contract from, upon selling products to their member hospitals. While it behooves GPOs to negotiate lower prices for their members, the lower the price they negotiate means also lower revenues that they receive. As a result, more health care industry GPOs are collecting 'bonus' payments from suppliers, which amount to kickbacks for the GPO. Additionally, some health care industry GPOs are signing single source contracts resulting in members of the GPO overpaying for supplies and sometimes, not being able to get access to superior products. However, privately owned GPOs that are not affiliated with a medical facility, such as a hospital, aim to beat market prices in order to win new members.
A foodservice
or grocery GPO focuses exclusively on the $400 billion foodservice marketplace, including food and food-related purchasing for multi-unit foodservice operators, contract negotiation and supply chain
services.
These negotiations are made with supplier/manufacturing agreements and purchasing contracts. Categories for grocer purchases include: poultry
, fresh produce
, frozen food products, fresh and frozen meats, candy
and snacks, dairy
and bakery
, dry goods
, disposables and beverages.
A manufacturer’s GPO succeeds in solving procurement
and sourcing
concerns by aggregating the demand for products and services used in the manufacturing and production
process and delivering deep savings on raw materials, services and components by issuing rebates, discounts, and preferred pricing to its members.
The combined buying power helps manufacturers save money on their purchases and more effectively compete against the largest global manufacturers.
Savings can be delivered in two separate ways in GPOs like Prime Advantage. First, discounts and rebates are automatic savings, which are pre-negotiated. Then, manufacturers are also allowed to negotiate improved pricing privately with an endorsed list of suppliers.
Christian based GPO
Shared Church Service - SCS is a program that offers products, resources, tools and services directly related to churches, Christian schools, camps and other ministries. SCS works with over 3000 ministries in 42 different states.
A horizontal indirect spend GPO succeeds in reducing procurement costs by aggregating the demand for non-strategic, or indirect cost supplies and services used by a broad horizontal market spectrum of member client organizations by consolidating purchasing power and establishing contracts to achieve preferred pricing, terms, and service standards.
The resulting combined buying power helps the usually mid-size and larger member client organizations save money on their purchases of categories such as temporary labor services, office products, safety supplies, office equipment, packaging supplies, uniform & laundry services, pest control, and expedited parcel delivery. The consolidation of purchasing effort with the GPO also allows member clients savings from reduced staffing overhead costs.
The suppliers to this type of GPO offer preferred pricing, terms, and service standards because they experience lower overall selling expenses and the increased volume usually associated with the addition of a single very large customer.
Savings provided by a horizontal GPO are delivered on the purchases each member client makes directly with the GPO contracted supplier due to best-in-class contracts in which all members receive the same price and service. Member client staff can focus on strategic sourcing activities while confidently knowing that the non-strategic sourcing is well managed within best-in-class contracts.
Lesbian, Gay, Bisexual and Transgendered (LGBT) GPO
The Collective GPO is the only national group purchasing organization dedicated to Lesbian, Gay, Bisexual & Transgendered (LGBT) owned/friendly businesses. It works with LGBT owned/friendly for-profit and non-profit organizations to help collectively leverage their spend and partner with LGBT owned/friendly vendor partners.[11]
Purchasing power
Purchasing power is the number of goods/services that can be purchased with a unit of currency. For example, if you had taken one dollar to a store in the 1950s, you would have been able to buy a greater number of items than you would today, indicating that you would have had a greater purchasing...
of a group of businesses to obtain discounts from vendors based on the collective buying power of the GPO members.
Many GPOs are funded by administrative fees that are paid by the vendors that GPOs oversee. Some GPOs are funded by fees paid by the buying members. Some GPOs are funded by a combination of both of these methods. These fees can be set as a percentage of the purchase or set as an annual flat rate. Some GPOs set mandatory participation levels for their members, while others are completely voluntary. Members participate based on their purchasing needs and their level of confidence in what should be competitive pricing negotiated by their GPOs.
Group purchasing is used in many industries to purchase raw material
Raw material
A raw material or feedstock is the basic material from which a product is manufactured or made, frequently used with an extended meaning. For example, the term is used to denote material that came from nature and is in an unprocessed or minimally processed state. Latex, iron ore, logs, and crude...
s and supplies, but it is common practice in the grocery industry, health care
Health care
Health care is the diagnosis, treatment, and prevention of disease, illness, injury, and other physical and mental impairments in humans. Health care is delivered by practitioners in medicine, chiropractic, dentistry, nursing, pharmacy, allied health, and other care providers...
, electronics
Electronics
Electronics is the branch of science, engineering and technology that deals with electrical circuits involving active electrical components such as vacuum tubes, transistors, diodes and integrated circuits, and associated passive interconnection technologies...
, industrial manufacturing
Manufacturing
Manufacturing is the use of machines, tools and labor to produce goods for use or sale. The term may refer to a range of human activity, from handicraft to high tech, but is most commonly applied to industrial production, in which raw materials are transformed into finished goods on a large scale...
and agricultural industries
Agriculture
Agriculture is the cultivation of animals, plants, fungi and other life forms for food, fiber, and other products used to sustain life. Agriculture was the key implement in the rise of sedentary human civilization, whereby farming of domesticated species created food surpluses that nurtured the...
. With the introduction of the Non-Profit Purchasing Group in 2010, group purchasing is now a common practice for non-profit organizations. In the healthcare field, GPOs have most commonly been accessed by acute-care organizations, but non-profit Community Clinics and Health Centers throughout the U.S. have been engaging in group purchasing through organizations like Council Connections since 1979.
History
The first healthcare GPO was established in 1910 by the Hospital Bureau of New York. For many decades, healthcare GPOs grew slowly in number, to only 10 in 1962.Medicare
Medicare (United States)
Medicare is a social insurance program administered by the United States government, providing health insurance coverage to people who are aged 65 and over; to those who are under 65 and are permanently physically disabled or who have a congenital physical disability; or to those who meet other...
and Medicaid
Medicaid
Medicaid is the United States health program for certain people and families with low incomes and resources. It is a means-tested program that is jointly funded by the state and federal governments, and is managed by the states. People served by Medicaid are U.S. citizens or legal permanent...
stimulated growth in the number of GPOs to 40 in 1974. That number tripled between 1974 and 1977. The institution of the Medicare Prospective Payment System (PPS) in 1983 focused greater scrutiny on costs and fostered further rapid GPO expansion. In 1986, Congress granted GPOs in healthcare "Safe Harbor" from federal anti-kickback statutes after successful lobbying efforts.
By 2007, there were hundreds of healthcare GPOs, "affiliates" and cooperatives in the United States that were availing themselves of substantial revenues obtained from vendors in the form of administrative fees, or "remuneration." 96 percent of all acute-care hospitals and 98 percent of all community hospitals held at least one GPO membership. Importantly, 97 percent of all not-for-profit, non-governmental hospitals participated in some form of group purchasing.
With healthcare costs rising sharply in the early 1980s, the federal government revised Medicare from a system of fee-for-service (FFS) payments to PPS, under which hospitals receive a fixed amount for each patient with a given diagnosis
Diagnosis
Diagnosis is the identification of the nature and cause of anything. Diagnosis is used in many different disciplines with variations in the use of logics, analytics, and experience to determine the cause and effect relationships...
. Other insurers also limited what hospitals could charge. The result was a financial squeeze on hospitals, compelling them to seek new ways to manage their costs.
In specifically exempting GPOs from the Federal Anti-Kickback Law, many healthcare providers interpreted the act as an encouragement to the expansion of GPOs.
Congress did not specify any limit on contract administration fees, but required the United States Department of Health and Human Services
United States Department of Health and Human Services
The United States Department of Health and Human Services is a Cabinet department of the United States government with the goal of protecting the health of all Americans and providing essential human services. Its motto is "Improving the health, safety, and well-being of America"...
(HHS) to monitor such fees for possible abuse – particularly with respect to fees in excess of 3.0 percent.
In 1991, HHS promulgated safe harbor regulations, reflecting Congress’ intent to permit contract administration fees and creating the additional safeguard that GPOs inform members of administrative fees in excess of 3.0 percent. Despite these safeguards, the Government Accounting Office (GAO) published a study in 2002 indicating that GPOs did not always in fact reduce the cost of supplies and equipment for hospitals, but in some cases increased these costs by as much as 37%. Further examining the practices of GPOs, the Federal Trade Commission (FTC) clarified that "safety zone thresholds do not prevent and should not be appropriately read as preventing antitrust challenges to any of the alleged anticompetitive contracting practices..." of GPOs.
In 2002, the Senate Judiciary Committee's Antitrust Subcommittee imposed stricter standards on GPOs in healthcare, requiring the adoption of a Code of Conduct to which GPOs must subscribe.
Critics of GPOs charge that, as long as GPOs receive fees from the vendors they are charged with policing, the industry has anti-competitive contracting potential that should be subjected to further scrutiny and/or regulation.
Vertical market GPO
A vertical GPO assists companies and organizations within a specific industry or market segment.Healthcare GPO
Examples - MedAssets, Veira Medical Group, Amerinet, HealthTrust, GroupSource, MediGroup, Provista, Novation, HPS, HPSI, GNYHA Services, and Care Purchasing Services.A healthcare group purchasing organization (GPOs) assists in promoting quality healthcare relief and assists diverse providers in effectively managing expenses. A GPO aggregates the purchasing volume of its members for various goods and services and develops contracts with suppliers through which members may buy at group price and terms if they choose to. GPOs typically provide contracted discounts on medical supplies, nutrition, pharmacy and laboratory. Some of the large GPOs have expanded contract portfolios to also offer discounts on office supplies and non-medical related services.
Several large healthcare GPOs are totally owned by non-profit hospitals and health systems, which in effect pool their sourcing and contracting in a cooperative or other corporate form. The larger scale of their pooled volume attracts pricing and terms more favorable than a single buyer can attract alone. The GPO owners achieve cost-savings on the goods they choose to buy through group contracts, and also receive distributions back from GPO earnings if operating revenues exceed expenses. GPO members that are not owners benefit from savings made possible by group contracts but typically do not share in GPO distributions of earnings. GPOs submit that their services allow for improved operating margins for healthcare providers, and that members enjoy value added benefits like clinical support, benchmarking
Benchmarking
Benchmarking is the process of comparing one's business processes and performance metrics to industry bests and/or best practices from other industries. Dimensions typically measured are quality, time and cost...
data, supply chain
Supply chain
A supply chain is a system of organizations, people, technology, activities, information and resources involved in moving a product or service from supplier to customer. Supply chain activities transform natural resources, raw materials and components into a finished product that is delivered to...
support and comprehensive portfolios of products and services to address specific needs.
It is important to note, that GPOs may collect an "Administrative" fee up to 3.0% of all sales volumes from the vendors that they negotiate a contract from, upon selling products to their member hospitals. While it behooves GPOs to negotiate lower prices for their members, the lower the price they negotiate means also lower revenues that they receive. As a result, more health care industry GPOs are collecting 'bonus' payments from suppliers, which amount to kickbacks for the GPO. Additionally, some health care industry GPOs are signing single source contracts resulting in members of the GPO overpaying for supplies and sometimes, not being able to get access to superior products. However, privately owned GPOs that are not affiliated with a medical facility, such as a hospital, aim to beat market prices in order to win new members.
Foodservice or grocery GPO
Example - FoodbuyA foodservice
Foodservice
Food Service or catering industry defines those businesses, institutions, and companies responsible for any meal prepared outside the home...
or grocery GPO focuses exclusively on the $400 billion foodservice marketplace, including food and food-related purchasing for multi-unit foodservice operators, contract negotiation and supply chain
Supply chain
A supply chain is a system of organizations, people, technology, activities, information and resources involved in moving a product or service from supplier to customer. Supply chain activities transform natural resources, raw materials and components into a finished product that is delivered to...
services.
These negotiations are made with supplier/manufacturing agreements and purchasing contracts. Categories for grocer purchases include: poultry
Poultry
Poultry are domesticated birds kept by humans for the purpose of producing eggs, meat, and/or feathers. These most typically are members of the superorder Galloanserae , especially the order Galliformes and the family Anatidae , commonly known as "waterfowl"...
, fresh produce
Produce
Produce is a generalized term for a group of farm-produced goods and, not limited to fruits and vegetables . More specifically, the term "produce" often implies that the products are fresh and generally in the same state as where they were harvested. In supermarkets the term is also used to refer...
, frozen food products, fresh and frozen meats, candy
Candy
Candy, specifically sugar candy, is a confection made from a concentrated solution of sugar in water, to which flavorings and colorants are added...
and snacks, dairy
Dairy
A dairy is a business enterprise established for the harvesting of animal milk—mostly from cows or goats, but also from buffalo, sheep, horses or camels —for human consumption. A dairy is typically located on a dedicated dairy farm or section of a multi-purpose farm that is concerned...
and bakery
Bakery
A bakery is an establishment which produces and sells flour-based food baked in an oven such as bread, cakes, pastries and pies. Some retail bakeries are also cafés, serving coffee and tea to customers who wish to consume the baked goods on the premises.-See also:*Baker*Cake...
, dry goods
Dry goods
Dry goods are products such as textiles, ready-to-wear clothing, and sundries. In U.S. retailing, a dry goods store carries consumer goods that are distinct from those carried by hardware stores and grocery stores, though "dry goods" as a term for textiles has been dated back to 1742 in England or...
, disposables and beverages.
Industrial manufacturing GPO
Example - Prime AdvantageA manufacturer’s GPO succeeds in solving procurement
Procurement
Procurement is the acquisition of goods or services. It is favourable that the goods/services are appropriate and that they are procured at the best possible cost to meet the needs of the purchaser in terms of quality and quantity, time, and location...
and sourcing
Sourcing
In business, the term word sourcing refers to a number of procurement practices, aimed at finding, evaluating and engaging suppliers of goods and services:*Global sourcing, a procurement strategy aimed at exploiting global efficiencies in production...
concerns by aggregating the demand for products and services used in the manufacturing and production
Production line
A production line is a set of sequential operations established in a factory whereby materials are put through a refining process to produce an end-product that is suitable for onward consumption; or components are assembled to make a finished article....
process and delivering deep savings on raw materials, services and components by issuing rebates, discounts, and preferred pricing to its members.
The combined buying power helps manufacturers save money on their purchases and more effectively compete against the largest global manufacturers.
Savings can be delivered in two separate ways in GPOs like Prime Advantage. First, discounts and rebates are automatic savings, which are pre-negotiated. Then, manufacturers are also allowed to negotiate improved pricing privately with an endorsed list of suppliers.
Legal GPO
A buying group for the law industry, like Prime Advantage Legal, is dedicated to driving down costs for the legal community by assembling a grouping of best-in-class suppliers that are designed to address many of the key procurement needs of law firms of all sizes. Members enjoy automatic savings through discounts and rebates, which are pre-negotiated. Then, law firms are also allowed to negotiate improved pricing privately with an endorsed list of suppliers.Non-Profit GPO
The Non-Profit Purchasing Group is a GPO dedicated to non-profit organizations nationwide (excluding those served by Healthcare GPOs) and continues to add best-in-class suppliers with a focus on the everyday purchases of typical non-profits. Unlike GPOs that earn money from commissions, rebates or administrative fees, the Non-Profit Purchasing Group passes through 100% of its negotiated discounts to its members.Christian based GPO
Shared Church Service - SCS is a program that offers products, resources, tools and services directly related to churches, Christian schools, camps and other ministries. SCS works with over 3000 ministries in 42 different states.
Horizontal Market GPO
Whereas a vertical GPO assists organizations in specific industries, such as health care, food service, legal, dairy, and industrial manufacturing, a horizontal GPO assists companies across a broad spectrum of industries.Non-strategic, or Indirect spend horizontal market GPO
Examples - ThePurchasingDept™, Corporate United, CoVest Sourcing Network, The Collective GPOA horizontal indirect spend GPO succeeds in reducing procurement costs by aggregating the demand for non-strategic, or indirect cost supplies and services used by a broad horizontal market spectrum of member client organizations by consolidating purchasing power and establishing contracts to achieve preferred pricing, terms, and service standards.
The resulting combined buying power helps the usually mid-size and larger member client organizations save money on their purchases of categories such as temporary labor services, office products, safety supplies, office equipment, packaging supplies, uniform & laundry services, pest control, and expedited parcel delivery. The consolidation of purchasing effort with the GPO also allows member clients savings from reduced staffing overhead costs.
The suppliers to this type of GPO offer preferred pricing, terms, and service standards because they experience lower overall selling expenses and the increased volume usually associated with the addition of a single very large customer.
Savings provided by a horizontal GPO are delivered on the purchases each member client makes directly with the GPO contracted supplier due to best-in-class contracts in which all members receive the same price and service. Member client staff can focus on strategic sourcing activities while confidently knowing that the non-strategic sourcing is well managed within best-in-class contracts.
Lesbian, Gay, Bisexual and Transgendered (LGBT) GPO
The Collective GPO is the only national group purchasing organization dedicated to Lesbian, Gay, Bisexual & Transgendered (LGBT) owned/friendly businesses. It works with LGBT owned/friendly for-profit and non-profit organizations to help collectively leverage their spend and partner with LGBT owned/friendly vendor partners.[11]
See also
- Group buy
- TuangouTuangouTuángòu , which loosely translates as team buying or group buying , is a recently developed shopping strategy originating in the People's Republic of China...
- Collective buying powerCollective buying powerCollective buying power is when a group of consumers come together and use the old rule of thumb, there's power in numbers, to leverage the group size in exchange for discounts.- In the marketplace :...
- Vertical marketVertical marketA vertical market is a group of similar businesses and customers that engage in trade based on specific and specialized needs. Often, participants in a vertical market are very limited to a subset of a larger industry...
- Horizontal MarketHorizontal marketA horizontal market is a market which meets a given need of a wide variety of industries, rather than a specific one.-Examples:In technology, horizontal markets consist of customers that share a common need that exists in many or all industries...