The Evolution of Group Purchasing Organizations
Somewhere in the United States, there may be a retail or specialty pharmacy that is not part of a group purchasing organization (GPO). If there is such a pharmacy, it is very hard to find.
The rise in the importance of GPOs is a big change from even 30 years ago, before being part of a GPO became the necessity it is now. An independent pharmacy or a small chain no longer has the time, manpower, or experience to do what even a small or regional GPO can do.
How a GPO Works
At its simplest, a GPO allows independent pharmacies and small pharmacy chains (and hospitals and other healthcare providers and other industries, for that matter) to buy goods and services at better prices than are usually available to them. It does this by leveraging the combined buying power of its member pharmacies and negotiating discounts with manufacturers, wholesalers, and other vendors. Because of the economies of scale, the little pharmacy gets to act like a big pharmacy chain.
According to the Healthcare Supply Chain Association (HSCA), GPOs in healthcare date back to 1910, when hospitals in New York formed the first one, the Hospital Bureau of New York. However, there was little growth in the number of healthcare GPOs for decades. The number of GPOs grew because of the advent of Medicare and Medicaid and reached about 40 in 1974. More stimulus came in 1986, when Congress passed the GPO Safe Harbor Law, which granted healthcare GPOs protection from statutes that punished practices that could be considered to be kickbacks.
There are now more than 600 organizations in the United States that participate in some form of group purchasing in healthcare, with about 30 being true GPOs that negotiate large contracts for their members, according to HSCA, and the rest may offer members access to the contracts of larger groups or negotiate with regional vendors for some services.
The key to the power of GPOs lies in increasing the strength of an individual pharmacy’s buying power, said Joshua Pirestani, president of American Pharmacy Purchasing Alliance (APPA) in Cerritos, CA. “There is an estimated 22,814 independently owned pharmacies,” he said in an email interview. “If independent pharmacies cooperate together, greater negotiation power will be achieved, their volumes and revenues will increase and a group purchasing power will be achieved from wholesalers,” said Pirestani.
The administration costs of GPOs are covered by the fees paid by vendors to finance the services that the GPOs offer their members, according to the HSCA. These fees are generally based on the purchase price that members pay for a product purchased through the GPO’s contracts. Some GPOs charge a fee to pharmacies for membership, but with many, membership is free, said Pirestani.
The GPO and the product manufacturer negotiate for a product and then develop a contract that covers many issues in the sale of that product, with price being one of them, said Todd Ebert, RPh, president and CEO of HSCA in Washington. HSCA includes pharmacy GPOs in its membership. A GPO may often have a contract with the distributor, so that the pharmacy gets a preferential manufacturer-negotiated price, he said. In many cases, the GPO may work with only one distributor, “which is another value point for the pharmacy,” he said.