The Impact of Custom Contracting and the Intermediary Roles of Healthcare GPOs

Abstract: U.S. hospitals join GPOs for procurement cost savings. It is generally believed that GPOs lower costs through demand aggregation. Until recently hospitals purchasing supplies from a GPO vendor had to pay a GPO-negotiated price. The novel practice of custom contracting allows GPO member hospital to negotiate with GPO vendors to improve on the GPO negotiated prices. Hospital procurement departments have welcomed this practice, lauding the opportunity to further lower hospital costs. In this paper, we use economic modeling to investigate the practice of custom contracting. We develop a game-theoretic model treating as endogenous the pricing and negotiations decisions of the GPO vendor and of member hospitals. We show why – counter to the hospital industry’s expectations – expected purchase prices will not decrease with the introduction of custom contracting. The practice benefits GPO vendors at the expense of the member hospitals.

Bio: Vera Tilson is an Associate Professor of Operations Management at the Simon School of Business, University of Rochester. Her research interests are in health care operations, supply chain management, and stochastic scheduling. Her teaching interests are in quantitative business modeling and in operations management. She has received a superior MBA teaching award, and multiple teaching honor roll recognitions. She has industrial experience as a software engineer and project manager in telecommunications, medical instrumentation, supply chain software and financial industries. Her research has been published in Management Science, Operations Research, MSOM, Production and Operations Management Journal, Decision Support Systems, European Journal of Operations Research, International Journal of Production Economics, and other scientific and industry publications.