Is the Group Purchasing Organization (GPO) Business Model Dead?

July 6, 2013 — 1 Comment

Business Model DeclineIs the Group Purchasing Organization business model dead in healthcare?  I was asked this question recently.  It’s a good question.  GPOs have had a long, and sometimes, controversial role in the healthcare supply chain (1).  Some argue that GPOs actually limit competition and don’t act in their members’ best interests (2).  On the other hand, some studies have shown GPOs to be a lever to help healthcare providers aggregate spend and reduce supply costs (3).  However, the central point of the person’s question was with all of the change occurring in healthcare in the United States, is the traditional GPO business model dead?

It’s helpful to go back in time to understand the history and original role of GPOs.  According to the Healthcare Supply Chain Association, GPOs date back to 1909, when the Hospital Superintendents of New York first considered establishing a purchasing agent for laundry services. In 1910, the first GPO was created, the Hospital Bureau of New York.  During the last quarter of the 20th century, the importance of GPOs grew as hospitals were faced with rising expenditures due to phenomenal advances in care and an aging population (4).

GPOs central role had been to aggregate member purchasing in order to try to negotiate better terms with suppliers.  Over time, GPOs also added other supply chain services such as benchmarking, consulting, and best practices.  Traditionally, the aggregation approach worked well with supplies that were less differentiated, non clinician-preference items.  For items that are physician-preference driven and with new technologies, GPOs have had much less success in leveraging buying power (5).  Let’s face it – many hospitals have struggled with aligning their own physicians in order to standardize purchasing and save costs.

Looking at the healthcare landscape, there are a number of reasons why it would be reasonable to assume that the old GPO aggregator model will substantially diminish in importance.  These drivers include:

  1. Healthcare reform:  The old volume based payment model (fee for service) is being replaced by a payment model that is focused on reducing overall healthcare costs and improving quality.   CMS programs such as value-based purchasing, re-admission reductions, hospital-acquired conditions, bundled-payments, and ACOs all will drive a focus on costs-out and quality-in.  This means there will be an increased emphasis on reducing the total cost to care for a patient.  The new questions providers will be asking will be ones such as – “what is the best care pathway for this patient that provides the best quality at the lowest cost possible?”
  2. Outcomes transparency: closely related to the first driver is outcomes transparency.  The big savings will come not from saving another nickel on a supply item, but rather on determining which of the competing technologies should be used to treat patients.  The new start-up SharedClarity – which is a joint venture of UnitedHealthcare and hospital systems – is trying to answer these types of questions.
  3. New supply disruptors:  An entire new set of start-ups have emerged to disrupt the old medical technology sales model.  These new start-ups are focused on physician preference items, which are supply items that GPOs traditionally could not provide the same level of leverage as commodity items.  These physician preference items typically account for roughly 60% of supply costs.  The new disruptors include MedPassage, CurvoLabs, OrthoDirect, Corcardia, and ProcuredHealth.
  4. Hospital consolidation and aggregation:  The formation of ACOs and the continued consolidation of the hospital market means that there will be mega-systems with enough buying power and leverage to take on supplier negotiations without the need of GPOs.  Moreover, unlike most GPOs, these systems should have the ability to drive compliance to agreements and standardize purchasing within their organization.  Studies have shown that GPO savings offered to members tends to be uneven and favors small to medium-sized hospitals (6).
  5. Hospital supply chain maturity:  Many believe that the hospital supply chain has been far behind the capabilities of supply chains in other industries.  Hospitals are beginning to recognize the strategic importance of the supply chain.  This means many will build their own capabilities to manage the supplier network strategically, and not “outsource” parts of purchasing to GPOs.  Particularly for larger hospitals and systems, the administrative savings of outsourcing purchasing to GPOs could be far outweighed by the potential to drive savings and develop strategic arrangements with suppliers.

Is the GPO business model dead?  The old role of an aggregator probably has been on the decline and will continue to diminish over time.  This is not to say that GPOs won’t play a role in trying to drive supply costs out.  With a $150B hospital supply market in the US and millions of supply items, providers will always need help to take costs out and make purchasing more efficient.

However, the bigger opportunity is to take the total cost of care down.  GPOs have already recognized this and are finding ways to morph themselves into value creating entities for their members.  For example, VHA and Cleveland Clinic announced a joint venture earlier this year to try to tackle the cost of physician preference items (7).  In addition, Premier and IBM announced services aimed at improving population health and reducing costs through predictive analytics (8).  What are the implications for suppliers?  Believe it or not, in the future, many medical technology suppliers may wish that the old GPO model was still in place.  More to come on this in part two of the article.


  1. Walsh, M., “Senators Investigate Hospital Purchasing” New York Times.  August 13, 2009.
  2. See:
  3. L. R. Burns, J. A. Lee, “Hospital purchasing alliances: Utilization, services, and performance”, Health Care Management Review 33, 2008, 203-215
  4. See:
  5. Saha, R., et. al. A Research Agenda for Emerging Roles of Healthcare GPOs and Their Evolution from Group Purchasing to Information Sharing to Strategic Consulting.  Proceedings of the 43rd Hawaii International Conference on System Sciences – 2010
  6. See GAO report at:
  7. Lee, J., Cleveland Clinic-VHA venture seeks to curb supply costs.  Modern Healthcare.  February 5, 2013
  8. Groenfeldt, T., IBM And Premier Target Populations Rather Than Just Individuals For Better Health. Forbes July 1, 2013.

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