Washington, D.C. (November 25, 2014) - At the request of Senator Edward J. Markey (D-Mass.) and Representatives Henry A. Waxman (D-Calif.), John Dingell (D-Mich.), Frank Pallone (D-N.J.), Diana DeGette (D-Colo.), and Anna G. Eshoo (D-Calif.), the nonpartisan Government Accountability Office (GAO) released a report describing the contracting practices and funding structure of Group Purchasing Organizations (GPO).

GPOs are designed as a purchasing intermediary that negotiates contracts for medical products and services provided to their client hospitals. GPO’s leverage the purchasing power of their clients to obtain lower prices for drugs, devices, commodities and services through contracts. Current law allows GPOs to charge manufacturers of these products a fee that is based on a percentage of the total value of the purchase. These fees serve as a source of operating revenue for the GPO’s and frequently are also distributed back to their health care provider customers to finance other ventures by the clients. These fees are also sometimes used by GPO’s to pay for additional services outside of group purchasing for their hospital customers.

The fees collected by GPO’s are not subject to the “anti-kickback” provision of the Social Security Act, because they fall into what is known as the “safe harbor” provision, passed by Congress. The GAO investigated GPO contracting practices and how these organizations are funded, as well as the reported effects of these contacts and funding structure.

The report, Group Purchasing Organizations: Funding Structure has Potential Implications for Medicare Costs, found that Medicare payments could be affected if hospitals are not accounting for the revenue they receive from GPOs as a reduction in costs in reports that are reviewed by the Centers for Medicare and Medicaid Services (CMS).  CMS has not identified this information to be routinely audited and The Department of Health and Human Services (HHS) has not reviewed the extent to which hospitals are reporting the revenue since 2005. To help ensure the accuracy of Medicare’s payments to hospitals, GAO recommended that HHS determine whether hospitals are appropriately reporting administrative fee revenues and take steps to address any underreporting that may be found.

HHS agreed with GAO’s recommendation, and stated that it will add steps to its process for auditing hospitals’ cost reports so that contractors may review administrative fee revenues that hospitals receive from GPOs.

“The Department of Health and Human Services should undertake a review to determine if GPO revenues that are shared with hospitals are being properly reported. It is important that appropriate actions are taken to ensure that Medicare is paying based on correct cost reports,” said the lawmakers upon release of the GAO report.

A copy of the GAO report can be found HERE.