Controversial Role of GPOs in Healthcare-Product Supply Chains
Article first published online: 25 JAN 2010
© 2010 Production and Operations Management Society
Production and Operations Management
Volume 20, Issue 1, pages 1–15, January/February 2011
How to Cite
Hu, Q. and Schwarz, L. B. (2011), Controversial Role of GPOs in Healthcare-Product Supply Chains. Production and Operations Management, 20: 1–15. doi: 10.1111/j.1937-5956.2010.01121.x
- Issue published online: 25 JAN 2010
- Article first published online: 25 JAN 2010
- History: Received: April 2009; Accepted: October 2009 by Michael Pinedo, after 2 revisions.
- healthcare product supply chain;
This paper examines the controversial role that Group Purchasing Organizations (GPOs) play in the supply chains for healthcare products. Among the controversies, perhaps the most fundamental one is whether or not GPOs reduce purchasing costs for their members. However, the fiercest controversy is around the “contract administration fees (CAFs)” that GPOs charge to manufacturers. We examine these and other controversies using a Hotelling duopoly model. Among our conclusions: GPOs increase competition between manufacturers and lower prices for healthcare providers. However, GPOs reduce manufacturers' incentives to introduce innovations to existing products. We also demonstrate that the existence of lower off-contract prices is not, per se, evidence of anticompetitive behavior on the part of GPOs. Indeed, we demonstrate that, under certain circumstances, the presence of a GPO lowers off-contract prices. We also examine the consequences of eliminating the “safe harbor” provisions that permit healthcare GPOs to charge CAFs to manufacturers, and conclude that it would not affect any party's profits or costs.