New research sheds light on the value of group purchasing organizations in the healthcare industry

Group Purchasing Organizations (GPOs) are supply chain intermediaries that use aggregated purchasing demand from their members to negotiate discounts from suppliers and distributors. They are a common fixture for modern healthcare systems in the U.S., Canada, and many other developed countries. Yet their true value, and whether they actually save money for their members such as hospitals and nursing homes, has been a constant topic of debate.

Now, new research co-authored by Alberta School of Business scholar Yanhao Wang provides some of the first empirical evidence on the value of this middleman in the healthcare supply chain: larger GPOs significantly reduce hospital supply expenses without compromising patient care.

The GPO market is typically dominated by a few major players, such as HealthPro Canada, Mohawk Medbuy and Kinetic GPO in Canada.

“The great scale of these GPOs equips them with bargaining power over suppliers, but it also raises concerns among economists and policymakers about whether these organizations have strong incentives to negotiate in the best interests of their customers,” says Wang, co-author of the study published in the Journal of Public Economics.

Together with his co-author Haizhen Lin, professor of business economics and public policy at the Kelley School of Business, Indiana University, Wang uses comprehensive data from the U.S. hospital industry to measure GPO scale and hospitals’ cost savings on supply expenses.

Expenses on medical supplies — from consumable items such as pharmaceuticals, needles and cotton balls to durable medical devices such as MRI machines and cardiac stents — represent the second-largest component of hospital costs.

“Having a reliable estimate of how much GPOs can help save in this dimension has huge implications for addressing ever-increasing medical expenditures,” says Wang.

GPOs deliver significant cost reduction

The research measured GPOs’ scales using their national market shares and found a clear causal link between a GPO’s scale and a hospital’s supply expenses. Specifically, switching from a GPO ranked in the bottom quartile of the market share to one in the top quartile leads to a 4.8 per cent reduction in supply expenses per patient discharge for an average hospital. This translates into annual savings of over $1.2 million per hospital and $85 per patient.

GPOs can also help lower transaction costs and provide non-procurement-related services. However, in delivering these benefits, GPOs also enjoy certain privileges from policymakers. For example, GPOs in the U.S. are allowed to accept fees from sellers without violating the anti-kickback statute. There is an ongoing policy debate about whether such exemptions for GPOs should be continued.

“Policymakers should carefully weigh the potential impacts on hospitals’ acquisition costs and the possible benefits of changing the current regulatory landscape,” says Wang.

Unchanged care quality and lower hospital prices

Another concern in the policy debate is whether the cost savings brought by GPOs come at the expense of patient welfare.

“Sometimes, for life-saving medical supplies, cheaper isn’t necessarily better,” explains Wang. The research found no negative effect of GPO scale on several key care quality metrics, such as 30-day mortality rates, readmission rates and patient satisfaction scores.

“Hospitals and their GPO partners seem to be doing just fine in managing the important tradeoff between medical costs and care quality,” says Wang.

Finally, the study also examined what happens to the savings once they reach the hospital. It found that some of the cost reductions are passed along to patients in the form of lower hospital prices. However, this price reduction for patients only occurred in markets with highly competitive hospital environments.

The findings come at a critical time for healthcare policy. There is a growing concern that organizations like GPOs could hurt manufacturers’ incentives to innovate and encourage over-dependence on certain supply chains.

“We remain agnostic about the costs of relying on GPOs, but understanding the benefits is a good first step toward unmasking these otherwise mysterious organizations,” says Wang.

Read Wang’s full research article at DOI:10.1016/j.jpubeco.2025.105380

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