The value of group purchasing: Evidence from the US hospital industry

Group purchasing organizations, or GPOs, are pervasive in many settings, but the actual value of GPOs remains a constant topic of debate. We offer one of the first studies examining the effect of GPOs on supply expenses in the U.S. hospital setting. Our two-way fixed effects model reveals that a one-standard-deviation increase in GPO scale (a GPO's market share weighted by its member hospitals' bed capacity) reduces an average hospital's supply expenses by 2.7%, translating into a per-discharge savings of $48 and an annual savings of about $0.72 million. Our event study, which exploits a merger event between two of the largest GPOs, has produced qualitatively similar results. Meanwhile, we find no evidence that GPOs reduce supply expenses at the cost of the quality of care, nor by means of selective patient admission. Instead, we find that some of the cost savings are passed along to consumers in terms of lowered hospital prices, although only in highly competitive hospital markets. Our results contribute directly to policy debates over the value of GPOs and, more broadly, to the literature on countervailing buyer power and purchasing intermediaries.