GPO (Group Purchasing Organization) Overview and Product Information

What is a GPO?

In the United States, a Group Purchasing Organization (GPO) is an entity that aggregates the purchasing needs of various healthcare institutions and other healthcare providers. By leveraging the collective buying power of its members, a GPO negotiates with suppliers to help them secure lower prices and discounts.

Its procurement scope covers all products used by hospitals, including pharmaceuticals, medical devices, surgical consumables, office supplies, and dietary services. The GPO does not purchase any products directly; instead, it issues requests for proposals (RFPs) based on the purchasing needs of its members, inviting suppliers to bid. Members may then procure from the winning bidder or source supplies from other vendors independently.

Although the organization serves healthcare providers such as hospitals, the primary revenue source for Group Purchasing Organizations (GPOs) is administrative fees paid by suppliers. Moreover, under regulations issued by the U.S. Department of Health and Human Services, these fees must not exceed 3% of the total purchase price. In addition to covering the GPO’s day-to-day operational costs, any surplus funds are often distributed to member hospitals or reinvested in new business ventures, such as e-commerce.

A Brief History of GPO Development

In the early 20th century, Group Purchasing Organizations (GPOs) began to emerge in the United States. These intermediary organizations consolidated hospital orders through market-based competition and conducted centralized competitive procurement. In 1910, the New York Hospital Council established the first healthcare GPO. Over the following half-century, the development of GPOs was remarkably slow; by 1962, there were only ten GPOs in the United States. During the 1970s, soaring medical costs and declining insurance reimbursement rates intensified pressure on hospitals to reduce expenses, thereby accelerating the growth of GPOs. Consequently, GPOs expanded their operations nationwide, merged with other organizations, and continuously broadened the scope of products they procured. It is estimated that by 1992, 88% of healthcare institutions were GPO members. By 1994, only 27 U.S. healthcare institutions had neither joined a GPO nor purchased products through government contracts. Between 1974 and 1999, the number of GPOs in the United States grew from 40 to 633. Currently, there are more than 900 GPOs, with Novation and Premier being the two largest.

Key Services Provided by GPOs

As purchasing intermediaries, Group Purchasing Organizations (GPOs) do not hold ownership of the products purchased by healthcare institutions. Their primary function is to negotiate with manufacturers, distributors, and other suppliers on behalf of member hospitals to secure the lowest possible procurement prices, facilitating the purchase of relevant products through contractual agreements. In recent years, driven by market development and intensifying competition, GPOs have begun to offer a range of competitive services, such as:

• Personalized Contract:Assist clients in negotiating with suppliers for specific products to secure better pricing;




• Clinical Efficacy Evaluation:A clinical committee composed of customer representatives evaluates the product's efficacy;




• New Technology Assessment:Assess whether the innovative technologies incorporated in the product can deliver benefits to patients;




• Supply Chain Management:Optimization of hospital supply chain processes and management of inpatient pharmacies (timely substitution of brand-name drugs with low-cost generics);




• E-commerce:Provide e-commerce solutions to hospitals to help them strengthen procurement management;




• Data Analysis:Analyze pharmaceutical data to identify cost-saving opportunities;




• Clinical Medication Guidance:Develop clinical medication guidelines to guide safe drug use and maximize the clinical benefits of products;

Key Features of GPO

1. Batch Procurement
The most prominent feature of Group Purchasing Organizations (GPOs) is the ability to purchase large volumes of products and services through a single contract, thereby securing substantial discounts and reducing product transaction costs. This is particularly relevant in the pharmaceutical market, where competition is often differentiated and R&D and production costs are relatively fixed; once committed to bulk purchasing, suppliers are inevitably compelled to offer greater price discounts. Furthermore, consolidated bulk purchasing significantly reduces the number of procurement personnel required for pharmaceuticals, thereby lowering hospitals’ administrative costs associated with managing procurement staff.

2. Customer-Oriented Service Philosophy
In product procurement, Group Purchasing Organizations (GPOs) do not mandate healthcare institutions to use specific products. Instead, prior to procurement, healthcare institutions provide primary recommendations based on quality and price. The GPO’s main role is to strive for lower procurement costs once the healthcare institution has selected the product. If a product’s price is significantly higher than that of comparable competitors, it is generally unacceptable unless the healthcare institution deems the premium justified by the product’s specific attributes.

3. Openness and Transparency
The operation of centralized procurement is open and transparent. Eligible purchasers may participate in purchasing according to their needs, and willing qualified suppliers may also participate in sales, with transactions completed upon mutual agreement between buyers and sellers.

Prospects for the Development of GPOs in China

Since the promulgation of the "Specifications for Centralized Bidding and Procurement of Drugs by Medical Institutions (Trial)" in 2001, China’s drug procurement system in medical institutions has, after more than a decade of development, basically evolved into a government-led, province-based online centralized bidding and procurement model. While government-led centralized bidding and procurement have effectively assumed the role of Group Purchasing Organizations (GPOs), they lack adequate oversight and evaluation mechanisms. Currently, relevant national authorities are studying reforms to the healthcare system. From a long-term perspective, severing the financial ties between medical services and pharmaceutical sales is an inevitable choice. GPOs have achieved notable success in controlling drug prices and separating prescribing from dispensing in the United States, offering valuable references for China’s current drug procurement policies and potentially serving as a viable option for China’s future pharmaceutical procurement model.

By Liu Nan | Edited by Mo Renying

General Advisor for VCBeat’s Glossary of Hot Terms in Internet Healthcare: Zhao Xinyuan, current CEO of Beijing Intecolon Technology Co., Ltd., and member of the HL7 China Technical Steering Committee.

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