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28 J. Contemp. Health L. & Pol'y 23 (2011-2012)
An Empirical Analysis of Aftermarket Transactions by Hospitals

handle is hein.journals/jchlp28 and id is 25 raw text is: AN EMPIRICAL ANALYSIS OF AFTERMARKET TRANSACTIONS BY HOSPITALS* Robert E. Litan Hal J. Singer Anna Birkenbach ABSTRACT: Almost all U.S. hospitals procure their equipment through group purchasing organizations (GPOs). Some hospitals subject the prices secured by GPOs to a second round of competition in an aftermarket, in which vendors both on and off the GPO contract compete for the hospital's business. To measure the extent of the potential benefit to hospitals from another round of competition, we analyzed a database of approximately 8,100 aftermarket transactions for hospital capital equipment. The transactions data suggest that hospitals were able to achieve average savings of approximately 10 to 14 percent across the entire database (2001 through 2010) and a savings of 15 percent on average for 2010 data. These savings may be attributable to many factors, including the compensation structure of GPOs. I. INTRODUCTION Group purchasing organizations (GPOs) were originally established by small hospitals to pool their purchasing power for more favorable contracts with medical suppliers.' By buying as a group, hospitals should achieve lower prices and greater discounts than they would if they bought individually, while also minimizing transaction costs involved in procuring supplies. Since their inception in the early twentieth century, GPOs have greatly expanded in size, number, and importance; in 2009 alone, GPOs negotiated contracts worth $200 to $300 billion,2 and the vast majority of Editor's note: A 2010 unpublished study by the authors addressed the topic of group purchasing organizations (GPOs) and their effect on healthcare costs. The following article presents new methodology and data to support the authors' views. 1. S. PRAKASH SETHI, INT'L CTR. FOR CORP. ACCOUNTABILITY, GROUP PURCHASING ORGANIZATIONS: AN EVALUATION OF THEIR EFFECTIVENESS IN PROVIDING SERVICES TO HOSPITALS AND THEIR PATIENTS 6, 17 (2006). 2. Id. at 18. GPO-financed studies indicate that GPO contract-covered purchases were expected to be worth between $257 to $287 billion by 2009. Sethi independently estimates the market size to be $218 billion in 2005. Id. According to a report by Locus Systems, the estimated GPO purchasing volume for 2007 was between $246.3 billion and 23

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