* Corresponding author: Huang Zhe, professor. Major research areas:knowledge management, E-commerce. Tel: 13998874590, E-mail:huangzhe2000@sina.com.

Abstract Objective To study the characteristics, specific functions and policy improvement process of the Group Purchasing Organizations (GPOs) in the U.S. and to provide references for drug group purchasing practices in China. Methods Domestic and foreign relevant literatures, websites were reviewed or searched to analyze the functions and policy improvement process of the GPOs in the U.S. so as to provide references for drug group purchasing practices in China. Results and Conclusion As a third party in the U.S. GPOs has formed a relatively integrated business process and projects service system after long-term development. Supported by corresponding policies and industrial regulations, GPOs have made a great contribution to control the growth of medical and healthcare expenses and improve the efficiency of medical institutions, and its development experience can enlighten the practices in China.

Keywords: group purchasing organization (GPO); drug purchase; the U.S.

Drug purchase plays an important role in the supply chain system as a key circulation link to ensure drug quality and control costs. Drug procurement mode in China has become better as the reform deepens, and all the provinces are actively exploring suitable procurement methods. The group purchasing organizations (GPOs) mode has also been adopted in China, but many problems arise in the development process in China. GPOs first appeared in the U.S. in 1910[1]. After more than 100 years of development,GPOs become mature in terms of aggregating volume purchasing, professional negotiation, and value-added service modes. GPOs have made great contributions to the control of health expenditure, but also faced with doubts about suspected monopoly, drug shortages, and suppression of innovation. Therefore, many reforms have been carried out in its development. Learning from foreign experience, Shenzhen, Shanghai and other places in China also actively explored the GPOs mode, but the effect was not satisfactory. GPOs in Shenzhen and Shanghai were criticized for suspected monopoly by NDRC and SARC in April 2017 and February 2018 respectively because they forced medical institutions to purchase through GPOs[2].The mode of GPOs also has the problem of opaque operation mechanism in the implementation process in China[3]. This paper analyzes the characteristics,the relevant control mechanisms and policy reform paths of the GPOs procurement mode in the U.S., and provides some reference for drug bidding procurement in China.

1 Problems of drug bidding procurement in China

1.1 Excessive attention to prices leads to drug shortages

After many changes, China’s drug procurement system is becoming perfect, but it still lacks a scientific evaluation system. In the process of drug bid evaluation, price indicators are often excessively emphasized. In many cases, the bid is awarded at a low price. This mode seriously reduces the profit of drugs. At the same time, the cost of production goes up year by year, resulting in many low-price winning companies to abandon the production of low-cost drugs, which causes a certain shortage of drugs[4].

1.2 The volume purchase lacks scientific basis for forecast

In the past, the procurement method of bidding was carried out on a provincial basis, which failed to combine actual drug consumption with the price to achieve the volume purchase. The current “4+7”procurement mode of the pilot project realized the volume purchase for the first time. The number of drugs that would be purchased in the pilot cities was summarized and negotiation was carried out with drug companies. However, due to the lack of scientific predictions of drug volume and the standardization of clinical drugs, the volume in current procurement is the previous amount used by medical institutions[5], accurate predictions of drug volume in medical institutions have not been fully realized.

2 History and characteristics of GPOs in the U.S.

GPOs are entities that help medical institutions(including hospitals, nursing homes, and home health agencies) negotiate discounts with suppliers such as manufacturers and distributors to realize savings and efficiency[6]. In 1910, the New York Hospital Authority established the first GPO in the U.S. based on the blueprint for joint purchases portrayed by Thorn at the New York Hospital Conference. In the second half of the century, GPOs have developed slowly[7].Since the 1970s, medical expenses have risen sharply.In 1983, in order to achieve the control of medical insurance costs, the U.S. began to implement the method of disease-based payment (DRG). Hospitals began to seek ways to reduce costs, thus promoting the development of the GPOs industry. In 1987, the Social Security Act enacted the Safe Harbor clause, which allowed GPOs to collect Contract Administration Fees(CAFs) from suppliers, which further promoted the rapid development of GPOs.

After more than a hundred years of development,GPOs are widely used in the U.S. The Healthcare Supply Chain Association (HSCA) is an industry association of GPOs, representing 16 leading US GPOs. HSCA’s latest evaluation report on GPOs[8]shows that 96%-98% of hospitals are using GPOs for procurement, and many long-term care facilities,surgery centers, clinics and other medical providers in the U.S. work with GPOs as well. In addition,each hospital has an average of 2 to 4 GPOs working together[9]. GPOs have become the key to cost savings for US healthcare providers.

2.1 GPO is a profitable third-party procurement agency

As a third party, GPOs do not purchase or buy any products. Negotiating contracts through volume purchase is the core function of GPOs. Most medical institutions, with the help of a committee of health care professionals, decide on the varieties and quantities according to clinical needs and purchase them through GPOs. At the same time, hospitals and other health care institutions can purchase medicines and other products themselves without going through GPOs[10].

GPOs only represent purchasers to negotiate with suppliers, and purchase drugs through the Global Healthcare Exchange (GHX) platform. GPOs do not build their own platforms. The sources of funding for GPOs to maintain day-to-day operations are mainly from suppliers and medical institutions[11]. CAFs collected by GPOs are used for daily expenses, or excess fees are returned to member hospitals in the form of discount to develop new businesses. Some GPOs also receive membership fees from member medical institutions. At the same time, GPOs will also earn money by providing other value-added services(such as clinical analysis, budget analysis, supply chain management, etc.) to medical institutions.

2.2 The core functions of GPOs: professional price negotiation and procurement agency

GPOs purchase a wide range of products, not only drugs, but also medical supplies and equipment.First of all, GPOs help member medical institutions to make decisions on types and quantity of purchases through value-added services such as data analysis.Then summarizing the purchase amount of each member medical institutions, they negotiate the price with suppliers. Generally speaking, the larger the purchase volume, the greater discounts medical institutions will get. But at the same time, GPOs also provide a purchase ratio discount. When a member medical institution’s purchase volume in a specific manufacturer accounts for a higher proportion of its total purchase volume, the greater the discount it receives. This discount method enables small-scale medical institutions to enjoy the discount benefits brought by GPOs. A certain additional discount will also be awarded when the hospital agrees to purchase the product combination provided in advance by the supplier.

GPOs have a comprehensive process of procurement negotiation. In 2014, the Government Accountability Office (GAO) conducted a questionnaire survey on the top five GPOs and summarized the operation processes of GPOs. It has three stages: requesting for quotation, evaluating bid,negotiating and signing a contract.[12]

In the long-term development, GPOs have also formed a scientific evaluation system that takes various aspects of suppliers and products into consideration, including price indicators and nonprice indicators. Among them, the price indicators include prepayments and discounts, and the non-price indicators include FDA inspections, product quality and safety, raw material sources, readability of bar code and other supporting documents which can prove the supplier’s capability. GPOs will also review the quality and the price of the product through clinical committee formed by member hospitals to ensure the rationality of the evaluation.

2.3 GPOs provide value-added services

The main function of GPOs is to help medical institutions negotiate purchase prices through group purchases. However, as competition becomes increasingly fierce, in order to increase market share,simple price negotiations cannot meet the needs of medical institutions. Therefore, GPOs continue to improve services and innovation. HealthTrust is the third-ranked GPO in 2017 and offers a variety of services to more than 1,400 hospitals[13](See Table 1).From the types of value-added services it provides, it can be seen that the leading GPOs in the market have provided all-round services to medical institutions in various fields such as clinical, budget and operation.Clinical analysis, benchmarking and value analysis are representative of additional features of GPOs in the U.S.

2.3.1 Clinical analysis

Clinical data analysis: GPOs analyze the number of patients with various diseases through the database.Combined with the types and quantities of services provided by other medical institutions, they can obtain treatment projects with relatively large clinical needs,and provide advice for medical institutions. GPOs also provide sufficient evidence to support the purchasing decisions of medical institutions through analysis of clinical doses and effects of products.

Table 1 Key value-added services provided by GPOs

Comparison of clinical efficacy: A group of representatives from each member medical institution will jointly evaluate the clinical efficacy of the product, and then they can obtain the effective data of the product and the best use method among hospitals to promote rational use of drugs.

Clinical research and training: The clinical research and education team conducts a comprehensive assessment of products, devices, and technologies through literature searches of GPOs databases and FDA-related data. The team also carries out practical education courses, seminars, and webinars to provide product teaching to member hospitals, enabling them to increase their understanding of contract products so that they can have rational drug use and devices to reduce unnecessary expenses.

2.3.2 Benchmarking management

Benchmarking means that GPOs use national benchmarking data to determine and identify the price level of products and services of member medical institutions. MedPAR is a database of the US Centers for Medicare & Medicaid Services (CMS), which contains information on all Medicare participants,including the total cost of each disease, reimbursement expenses, total days and average days in hospital[14].GPOs analyze the information of each disease product and service cost through MedPAR and its own relevant database. A comparison with the national benchmark price is made to identify the treatment items with a higher cost in member medical institutions, thus they can optimize it.

2.3.3 Value analysis

Value analysis is a hospital-wide process made by cooperation between clinical and administrative departments, led by physicians and based on evidence.It gives priority to the quality of product while reducing costs. Traditionally, decisions from supply chain are based on cost. Value analysis enables doctors to participate in decisions-making in supply chain to achieve a comprehensive value assessment of products, technologies and services. Meanwhile it can promote cost savings through sharing best practices across teams. Establishing a value analysis process has become a trend in the U.S. healthcare organizations.Currently, 70% of hospitals have formal value analysis procedures, but only 10% of them are conducting real value analysis[15]. Establishing a comprehensive value analysis requires hiring doctors across specialties and regions. A standardized and accredited clinical evidence review process should be established, and special physicians must take part in the value analysis process. Combing with thousands of tested value analysis practices in the database, GPOs help hospitals build powerful value analysis process by hiring the talents they need from healthcare organizations.

3 The role of GPOs in the U.S.

At present, GPOs in the U.S. use big data analysis and introduce doctors into supply chain decision-making to help medical institutions improve their efficiency. While reducing prices through group purchases, they also save procurement labor costs for medical institutions and focus on providing comprehensive services to improve efficiency of medical institutions. Therefore, GPOs have realized the control of health costs in the U.S. from three aspects, cost saving, quality focus and efficiency improvement.

A study in 2014 showed that[16]GPOs made contract purchases for hospital pharmacies, medical products, orthopedic products, and other clinical products, saving $1.8 billion in human resources for hospital procurement each year. By studying the health expenditures in the U.S. in recent years, we can see that the total health expenditure has decreased significantly since the legalization of contract management fees collected by GPOs in 1987 (see Fig. 1). A study of HSCA in 2018 shows that[17]GPOs will have saved 466.6 billion US dollars for the health care system in the U.S. from 2017 to 2026.

Fig. 1 Changes in the average annual growth rate of national health expenditures in the U.S.

The introduction of GPOs has saved health care expenditures in the U.S. Take Medicare and Medicaid,two important U.S. health insurance expenditures, as an example, GPOs saved $8.7 billion for Medicare in 2016 and they are expected to save $50.4 billion in the five-year period from 2017 to 2021. In 2016,GPOs saved $ 6.8 billion for Medicaid and will save approximately $39.1 billion in the five years from 2017 to 2021[18](see Table 2).

Table 2 Costs saved by GPOs for Medicare and Medicaid in the U.S.

4 Problems and challenges faced by American GPOs

The mode of GPOs in the U.S. has a history of more than a hundred years, but some problems and doubts have arisen in the development. (1) The shortage of medicines: The large-scale transaction of GPOs results in a few producers of specific varieties.Once problems occur in related enterprises, there may be shortage of medicines and the supply of medicines cannot be guaranteed[19]. (2) Forming a monopoly:Medical institutions unite to purchase drugs through the GPOs organization, making the GPOs organization have strong purchasing power, which may lead to a reduction in competition and the drug market can be monopolized by a few GPOs and their suppliers[20].(3) The opaque operation mechanism: In view of the important role of GPOs in drug procurement, it is necessary to know if they have violations in the process. Therefore, ensuring the transparency of GPOs with fair and justice operation is prominent. (4)Suppression of innovation: Because GPOs aggregate orders from a large number of medical institutions and obtain discounts from suppliers through volume purchase. This will enable only a small number of powerful pharmaceutical companies to sign contracts with GPOs. Meanwhile, some small companies that are committed to innovation but lack economic strength cannot survive. Therefore, GPOs may inhibit corporate innovation to a certain extent[11].

5 GPOs policy improvements in the U.S.

While GPOs help medical institutions reduce costs, the U.S. government and GPOs industry association have issued a series of policy reforms and management measures to promote the healthy development of GPO industry.

5.1 Measures to prevent drug shortages

The industry associations and GPOs work together to prevent drug shortages through cooperation with hospitals, manufacturers, distributors, Congress,HHS,FDA, and other stakeholders. To avoid shortage of drugs, GPOs have established the concept of signing contract with as many suppliers as possible.Only when there is no shortage of products will GPOs work with limited suppliers to maximize the benefits for medical institutions to prevent the absence of contracts that may lead to a shortage of medicines[20].

As an industry association of GPOs, HSCA is taking steps to work with its members to reduce the impact of drug shortages[21]. Some specific measures are taken to avoid such problems. First, there is a dynamic price adjustment. The contract price of GPOs is the result of market competition negotiations. This price will be dynamically adjusted according to the supplier’s situation. When the supplier encounters difficulties in producing products, such as the actual production cost is higher than the expected cost,he has the right to request price adjustment. GPOs manage thousands of price changes every year.Second, there is product substitution. GPOs work with healthcare providers to ensure timely and safe product replacement in the event of a drug shortage.Thirdly, manufacturer should be evaluated. GPOs will consider the reliability of the manufacturer when signing contract and reduce the risk of drug shortages.Fourthly, communications among producers are enhanced. In the event of a drug shortage, GPOs will notify all the manufacturers to work together to increase the production in need.

5.2 Measures for transparent operational mechanism

In order to make the profit mechanism transparent, besides the “safe harbor” clause, in 1991, HHS issued a further regulation requiring GPOs to satisfy the protection of a safe harbor.(1) Sign a written agreement with the customer,stipulate that the contract management fee is smaller than 3% of the transaction amount, or specify the contract management fee or the maximum contract management fee for each supplier. (2) The contract management fee from the suppliers is announced to the members and reported to HHS upon request each year[22].While ensuring the transparency of the fee mechanism, industry associations have also taken measures to ensure the fairness of the operation of GPOs. The nine leading GPOs in the U.S. established the Healthcare Group Purchasing Industry Initiative in 2005 to oversee the business activities of GPOs and form good ethics. HGPII has introduced internal ethicists to review the GPOs’ complaint procedures to ensure fair and impartial bidding. Therefore, GPOs must have a standardized appeal process. If the suppliers had any objections, they could formally raise the objection to the GPOs. After the GPOs receive the objection, they must respond in detail.

5.3 Antitrust measures

In view of the strong purchasing power of GPOs, the government of the U.S. has adopted a series of measures to reduce monopoly and promote competition. In 1996, in the anti-monopoly policy of U.S. healthcare, the following two indicators were used to control the procurement behavior of GPOs[23].Firstly, the number of products or services purchased by a single medical institution through a GPO should not exceed 35% of the total product or service in the medical institution. Secondly, the total amount of purchases by a single medical institution through a GPO must be less than 20% of the total purchases of the GPOs.

In 2002 and 2003, the Senate Judiciary Committee held a hearing on complaints from small medical device manufacturers about unfair contracts for GPOs. After the hearing, HGPII developed the GPO Code, which aimed to make the procurement market for health care products more competitive and transparent. HGPII requires all major GPOs to sign an agreement to ensure compliance with the Code of Conduct and to review it annually[24].

5.4 Measures to promote product innovation

The GPOs industry promotes product innovation by taking certain measures. HGPII requires its members to have policies that encourage members to purchase innovative medical technologies and products[24]. GPOs also encourage the development of innovative products in a variety of ways. For instance,small suppliers can use innovative products to sign contract with GPOs to increase their sales[25]. GPOs also promote innovations through the innovation summit to increase the understanding of products by procurement executives and clinicians.

Many healthcare organizations are under pressure to use the limited resources to provide the high quality of service, which means that products can only be purchased when they are in need. So when faced with innovative products, it is difficult for medical institutions to make choices. By forming expert committees, GPOs help healthcare organizations assess the best innovative products for their budgets.At the same time, GPOs carry out the promotion of innovative products. They act as promoters of innovative products through the establishment of a database of procurement and analysis information for these products[8].

6 Enlightenment from the experience of American GPOs to China

As a third-party of group purchase, GPOs in the U.S. have formed a complete business process and service project through long-term development.Coupled with corresponding policy support and industry norms, they play an important role in the current U.S. medical supply chain. They make an outstanding contribution to controlling the health care costs and improving the efficiency of medical institutions. Although there are still some controversies and the policies are constantly being adjusted, the experience of GPOs is worth learning from.

6.1 GPOs should play the core and additional functions

Procurement of medicines should enable drug prices to truly reflect their value and control health cost while ensuring the quality of medical care. At present, bidding procurement mode and GPOs mode in China focus on prices. Although the core function of GPOs in the U.S. is to use their large purchasing power to help medical institutions negotiate prices,its value is also reflected in additional functions.Therefore, GPOs in China should not only focus on price factors, but also on technology development to improve their own value constantly. They should provide professional support for hospitals to select drugs with clinical value, and improve the efficiency of medical institutions through value-added services.The core functions of American GPOs depend on their rich procurement database, docking with other databases and data utilization. China should also pay attention to the establishment and maintenance of related databases in the development process.

6.2 Improving the quantity-based pricing mechanism

The outstanding feature of GPOs procurement in the U.S. is the price conversion. Specifically, it sets various discount rules related to the purchase quantity, such as purchase quantity discount, purchase ratio discount, product combination discount and so on. Attention should be paid to the establishment of a dynamic reference mechanism based on past purchase prices and evaluate suppliers’ price and nonprice indicators comprehensively, rather than the lowest price bidding principle in China. At the same time, scientific data analysis should also be carried out, which means doctors should be introduced into decision-making in the supply chain to help medical institutions predict purchase volume. They can determine the purchase price for each medical institution according to the different purchase volume and procurement ratio, and finally make reasonable usage predictions.

6.3 Using procurement data effectively to provide value-added services

The function of GPOs in the U.S. is not simply pricing negotiation, but to meet the needs of customers. GPOs in the U.S. accumulate huge purchasing data. If these data cannot be fully utilized,it is impossible to talk about users’ volume purchase forecasting, demand tracking, product value analysis and other functions. Therefore, we must continue to accumulate and exploit the value of purchasing big data in the process of developing GPOs so as to provide full-service for medical institutions and realize the value of GPOs.

6.4 Establishing reasonable rules to avoid related problems

At present, the monopoly caused by GPOs mode in China has a direct relationship with the self-built platform and the exclusive agent. This problem can be solved by establishing rules in the process because GPOs have some positive roles. The shortage of drugs,monopoly, suppression of innovation and transparency in the development of GPOs mode in the U.S. should be avoided in China. Therefore, in order to avoid shortage of drugs in the development of GPOs,contracts with multiple suppliers should be signed as much as possible. Besides, GPOs should generate drugs through a dynamic price adjustment, product substitution, manufacturer evaluation and enhanced communication between producers when there is a shortage. At the same time, GPOs in China should not build their own platforms to avoid monopoly, and they must ensure the fairness of GPOs’ profitability,operational mechanism and market competition by formulating specific policies. GPOs in China should also develop policies to encourage small suppliers to use high-quality innovative products to sign contracts so as to promote innovative drugs.

6.5 The development of GPOs requires industry association restrictions

GPOs in the U.S. have developed more than a hundred years, and the industry association HGPII plays an important role in the GPOs industry standardization. The constraints of the industry associations have enabled GPOs to form a transparent procurement process and good business principles. If GPOs in China want to develop rapidly, they also need industry associations to carry out industry norms and promote the healthy development of GPOs.