The Impact of Custom Contracting and the Infomediary Role of Healthcare GPOs

Production and Operations Management, Vol 28, Issue 3, 2019

Posted: 9 Aug 2018 Last revised: 10 Jun 2019

See all articles by Rajib L. Saha

Rajib L. Saha

Indian School of Business (ISB), Hyderabad

Abraham Seidmann

University of Rochester - Simon Business School

Vera Tilson

University of Rochester - Simon Business School

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 U.S. Congress. Some hospitals procure using GPO contracts, and some try to improve on prices available via GPO contracts, negotiating custom contracts directly with the GPO vendors. Using a game-theoretic model, we prove that GPOs that operate independently and allow for custom contracting limit the benefit of demand aggregation to smaller hospitals only. The larger hospitals gain primarily from using the GPO as an infomediary to 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 allow custom contracting.

Keywords: Group Purchasing Organizations (GPOs), Healthcare Supply Chain, Information Intermediaries, Custom Contracts

Suggested Citation

Saha, Rajib Lochan and Seidmann, Abraham Avi and Tilson, Vera, The Impact of Custom Contracting and the Infomediary Role of Healthcare GPOs. Production and Operations Management, Vol 28, Issue 3, 2019. Available at SSRN: https://ssrn.com/abstract=3219217

Rajib Lochan Saha (Contact Author)

Indian School of Business (ISB), Hyderabad ( email )

Hyderabad, Gachibowli 500 111
India

Abraham Avi Seidmann

University of Rochester - Simon Business School ( email )

Carol Simon Hall 3-333C
Rochester, NY 14627
United States
585-275-5694 (Phone)
585-275-9331 (Fax)

HOME PAGE: http://www.ssb.rochester.edu/fac/Seidmannav/

Vera Tilson

University of Rochester - Simon Business School ( email )

Rochester, NY 14627
United States

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