Group Purchasing Organizations (GPOs) Can Help Small Pharmacies Level the Playing Field

Independent pharmacies and other small healthcare businesses are often at a disadvantage when competing with large pharmacy chains and businesses.  Larger chains can leverage their size to secure substantial discounts from manufacturers and suppliers not available to smaller businesses.  However, tools such as Group Purchasing Organizations (GPOs) can help small businesses level the playing field.

GPOs allow a group of small business to leverage their purchasing power for better pricing.  Generally, a GPO is an independent entity formed by a group of businesses.  The GPO will purchase large quantities of products at a reduced price that reflects a bulk discount.  The member businesses then purchase the products from the GPO—allowing them to reap the benefits of their combined purchasing power.

Businesses must be careful when creating a GPO.  The concept behind a GPO is an anticompetitive agreement normally prohibited by the Sherman Antitrust Act.  The Sherman Act prohibits “conduct which unfairly tends to destroy competition itself.”   Spectrum Sports, Inc. v. McQuillan, 506 U.S. 447 (1993).  Thus, an agreement between competing businesses to negotiate for a common price would likely run afoul of the Sherman Act.

Nonetheless, it is still possible to set up a GPO without violating the law.  The Department of Justice and Federal Trade Commission have created “safe harbors” in which GPOs can operate.  A safe harbor allows businesses to avoid legal liability when certain conditions are met.  For healthcare GPOs, the safe harbors places limits on the percentage of member business that can make up any affected market.  The safe harbors also limit the percentage of products the GPO can purchase from any one company.

In addition to safe harbors, there are other recommendations to reduce anti-trust risks.  GPOs should be structured to minimize collusion between members.  As such, rules governing confidentiality and anonymity are an important part of any GPO.  The structure of the GPO should also allow members wide latitude in choosing their level of participation.  These are just some of the many factors to be considered when forming a GPO.

A GPO can be a powerful tool for small pharmacies, but its formation is also complicated.  It requires the formation of a separate entity and careful drafting of the bylaws.  If you believe your business can benefit from a GPO, contact Boesen & Snow to find out how we can help you