Do GPOs Promote or Stifle Competition in Healthcare-Product Supply Chains?

This paper uses economic modeling to examine the controversial role that Group Purchas-ing Organizations (GPOs) play in the supply chains for healthcare products. Among the controversies, perhaps the most fundamental one is whether or not GPO-contracted prices are the lowest available. However, the fiercest controversy is around the “Contract Admin-istration Fees (CAFs) ” that GPOs charge to manufacturers. We examine these and other controversies using a Hotelling duopoly model. Among our conclusions: GPOs increase com-petition between manufacturers and lower prices for healthcare providers. However, GPOs reduce manufacturers ’ incentives to innovate. 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, and conclude that it would not affect any party’s profits or costs. 1