The Impact of Custom Contracting and theInfomediaryRole of Healthcare GPOs
Rajib Lochan Saha, Abraham Seidmann, Vera Tilson
Production and Operations Management · 2019 · Volume 28 · Issue 3
Abstract
Manufacturers and distributors of expensive implants and other medical supplies often require buyers to sign non-disclosure agreements treating all information concerning negotiated prices as trade secrets. Such agreements make it difficult for hospitals to obtain accurate pricing benchmarks. To save on procurement costs and to obtain pricing information, most hospitals in the United States join group purchasing organizations (GPOs). GPOs are believed to lower procurement costs by aggregating hospitals’ demand. Whether GPOs indeed add value to the healthcare supply chain and produce actual savings for hospitals are debated policy issues, as evidenced by the ongoing discussions on the topic in the US Congress. Some hospitals procure using GPO contracts, and some try to improve on prices available via GPO contracts, negotiatingcustom contractsdirectly with the GPO vendors. Using a game-theoretic model, we prove that GPOs that operate independently and allow forcustom contractinglimit the benefit of demand aggregation to smaller hospitals only. The larger hospitals gain primarily from using the GPO as aninfomediaryto obtain critical pricing information benchmarks. Our results further explain why the introduction of custom contracting lowers the value of access to this pricing information for the hospitals, and how the savings through custom contracting can be misleading. We reveal how GPO vendors can exploit information asymmetry about their prices and earn even higher profits, and why, contrary to the industry's belief, the resulting savings are never higher for any hospital, not even for the larger ones when the GPOs allowcustom contracting.
Keywords
group purchasing organizations (GPOs), healthcare supply chain, information intermediaries, custom contracts
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