Recent audit questions GPO's business practices

March 7, 2005

The business practices of three large group purchasing organizations were put under the microscope recently after the Office of Inspector General (OIG) released a report based on an audit of GPOs' revenues. The report concluded that GPOs' revenues from vendor fees substantially exceeded operating costs.

The business practices of three large group purchasing organizations were put under the microscope recently after the Office of Inspector General (OIG) released a report based on an audit of GPOs' revenues. The report concluded that GPOs' revenues from vendor fees substantially exceeded operating costs.

The report sought to determine how much revenue the three GPOs received from vendors and what the disposition of that revenue was; how members treated distributions of net administrative fee revenues received from GPOs on their Medicare cost reports; and whether members properly recorded rebates received from vendors on those reports.

While the report did not identify the companies audited, according to the Health Industry Group Purchasing Association (HIGPA) the top five GPOs are Novation, Premier, MedAssets, Amerinet, and Consorta.

Responding to charges regarding revenues and operating costs, Veronica Lewis, general counsel and compliance officer for VHA, one of the nation's largest GPOs, based in Irving, Texas, said the balance of revenues is returned to members after the operating costs and funds to support other capital activities are taken out. Lewis acknowledged that while revenues may have exceeded operating costs, the organization sees it as a positive. "That excess of revenues over operating costs allows us to provide significant value to our member hospitals." She added that hospitals operating on tight margins could benefit greatly from these funds. She asserted that there was nothing in the report indicating that GPOs were engaged in inappropriate activities.

The report noted that the Inspector General reviewed how 21 member hospitals accounted for the net revenues distributed by the three GPOs. The 21 members received a total of $255 million or roughly 28% of the $898 million distributed. These members did not fully account for the net revenue distributions on their Medicare cost reports. Members of one GPO offset 92% of their distribution, members of another offset only 54%. In total, the 21 members offset on their Medicare cost reports $200 million of the $255 million distributed by the GPOs. Based on its findings, the IG recommended that specific guidance from the Centers for Medicare & Medicaid Services would help hospitals promote full reporting regarding the treatment of GPO net revenue distributions on Medicare cost reports.

Data from the report also indicated that the 21 GPOs' members also received rebates totaling $285 million directly from vendors or passed from vendors through the GPOs. Members generally offset rebates on their Medicare cost reports as required. Nevertheless, seven of the 21 members did not offset rebates totaling about $3 million.

Lewis commented that the report found some isolated instances where some hospitals had difficulty accounting for the distribution or administrative fees they received on their cost reports. "That's due in large part to the complexity of filling out the cost report. There are some people who apparently had difficulty figuring out how to report it or whether they should report it," said Lewis. For its part, VHA, in light of the Inspector General's findings, has sent out an additional reminder to its members that when they get these distributions, they need to make sure that they include them on their Medicare cost report.

The Inspector General recommended that CMS provide specific guidance on the proper Medicare cost report treatment of net revenue distributions received from GPOs and that CMS prepare a "frequently asked questions" or other bulletin to remind institutional providers that all rebates from vendors must be shown as credits on their Medicare cost reports. CMS, however, did not agree with the Inspector General that additional guidance was needed.

This is not the first time that GPOs have been scrutinized. The Federal Trade Commission recently conducted hearings about the business practices of GPOs and issued a report describing such practices.

Despite negative publicity within the past few years, the GPO industry believes that some of the intense scrutiny has resulted in significant improvements to its business practices. "We think we have an organization that is more transparent, more open than it's ever been in the past," said Lewis. And we think that's good for the GPO industry and it's good for our members."