Physicians Should Take a Closer Look at Group Purchasing Organizations

If you have been approached by someone seeking your investment or participation in a group purchasing organization (GPO), be careful. Just because there is a "GPO Safe Harbor," doesn’t mean all GPOs are safe.

Before you make any decisions, consider the HHS' Office of Inspector General (OIG) Advisory Opinion 13-09  (July 23, 2013). There are as many ways to structure a GPO as there are restaurant napkins upon which to write business models.

Without delving too deeply into the mechanics, a group purchasing organization (GPO) is like a farmers' cooperative. The idea is that a group of purchasers (members/hospitals) pool resources to buy in bulk from suppliers at a discount.  The GPO is funded by administrative fees that are often paid by the vendors not the buyers and usually limited to 3 percent of the purchase price, which cover’s administrative overhead. If there is any left over from this fee, it is distributed to the members. As explained in CMS guidance, when a GPO passes through a portion of its administrative fees to its members, those members are required to treat such distributions as "discounts" or "rebates."  Two Anti-Kickback Statute (AKS) safe harbors are normally used to protect GPO activities: the GPO safe harbor, 42 C.F.R. § 1001.952(j), and the discount safe harbor, 42 C.F.R. § 1001.952(h). As a general rule, GPOs whose members are paid a flat rate, such as under a DRG system, usually have a low incidence of abuse.

As revealed in the recently released Advisory Opinion, the scheme at issue was slightly more creative: The GPO proposed to offer members an equity interest in the GPO’s parent organization in exchange for the member 1.) extending its contract with the GPO for five years to seven years; 2.) committing not to decrease purchasing volume; and 3.) relinquishing its right to a portion of the administrative fees that would otherwise have been passed through to the members. Also, the split of the "administrative fees" between members depended upon maintaining purchasing levels. Essentially, there are two potential problems here: one, the distribution of administrative fees; and two, the transfer of equity in the parent company to the members who promised to "keep up the good work" of buying from the GPO.

The OIG determined this could potentially violate the AKS, depending upon intent. The GPO safe harbor excludes from the definition of "remuneration" certain fees paid by vendors to GPOs. The proposed arrangement at issue, however, involves not only fees paid by vendors to the GPO, but also remuneration transferred between the requestor and the GPO members, which would not be included in the protection of the GPO safe harbor. When a GPO gives anything of value to its members to induce the members to order federally reimbursable products under the GPO’s contracts, the AKS statute is implicated. The equity interest is a form of remuneration that would not meet any safe harbor to the AKS. It is not a discount, because it is not a reduction in price on items or services. While administrative fees passed through to GPO members could be treated as discounts on the price of goods sold by the vendors, and the GPO and GPO members could meet the reporting and other requirements of the discount safe harbor, the same is not true of an equity interest in the parent company of the GPO.

According to the OIG, three other key elements, in combination, increase the risk of fraud and abuse posed by this particular proposed arrangement:
• First, the requestor would require members accepting an equity interest to extend their contracts by five years to seven years.
• Second, the equity interest offered would be tied to past purchases.
• Third, under this extended contract, members would not be permitted to decrease their volume of purchases under the GPO contracts.

Thus, members would be locked in to a contract for five years to seven years, regardless of whether the GPO is getting them the best prices.

In sum, not all GPOs are created equally, and not all schemes involving a GPO are protected by the GPO Safe Harbor. As with any AKS issue, each proposed arrangement must be scrutinized by an experienced health lawyer who can provide an opinion as to the legality of the arrangement.