Why is GPO Contracting Relevant?

Before we talk about contracting with payers, we must first talk about GPO contracting. Healthcare group purchasing organizations (GPOs) negotiate discounts for drugs and products by buying in bulk from manufacturers and medical supply distributors. In certain therapeutic areas—most notably oncology, rheumatology and dermatology—almost all large specialty practices belong to at least one GPO.

Given their size and distribution network, large GPOs commonly negotiate a 3% to 6% discount from manufacturers, who in turn benefit from the potential for a larger sales volume. Group purchasing also saves manufacturers the time and effort of contract negotiation with hundreds of hospitals and specialty practices. While many hospitals and practices can purchase drugs either directly from manufacturers or from multiple GPOs, others are bound by exclusivity contracts, which either award providers for single-source contracts or directly prohibit their membership in competing GPOs.

GPO contracts are highly competitive, especially in therapeutic areas inundated with multiple agents with similar profiles and efficacy data. As physicians want to be able to choose which drug to prescribe, hospitals and specialty practices tend to prefer at least three options for treating any given indication. For agents in a crowded class—such as breast cancer, multiple myeloma, or follicular lymphoma—GPO contracts for largely interchangeable therapies historically resulted in steep discounts, some as high as 50% or more.

In 2005, as part of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, CMS began calculating the average selling price (ASP) for each drug, which indicates the average price of a drug’s sales to all purchasers, including commercial payers. Medicare now uses the market-based ASP plus a 6% add-on fee to set reimbursement rates for providers.

As providers are reimbursed based upon the ASP, hospitals and specialty practices must purchase drugs at a lower price in order to make any profit. While discounts are not nearly as high as they were in the past, GPO contracting remains quite competitive in some classes.

Learn more by reading the full ebook The Essentials of Market Access: How to Build a Strong Commercialization Strategy for Your Medical Benefit Therapy.