The OIG recently issued a favorable advisory opinion permitting a health system (the “Health System”) to become the sole owner of a Group Purchasing Organization (“GPO”), some of whose members were also owned by the Health System (the “Proposed Arrangement”).

Despite determining that the Proposed Arrangement does not qualify for protection under the GPO safe harbor, the OIG considered whether allowing the GPO to be wholly owned by the same entity that also owns almost 1% of the member pool increases the risk of fraud and abuse to Federal health care programs.

The GPO Structure

The GPO has over 84,000 members nationwide, many of which are hospitals, nursing facilities, clinics, physician practices, laboratories, home care, and equipment organizations. It operates by negotiating products and pricing with vendors on behalf of its members and receives administrative fees from the vendors based on a percentage of the value of sales to the members.  The GPO provides annual written disclosures to the members regarding purchases made on behalf of each member and maintains records regarding discounts and vendor administrative fee distributions to members.

The Proposed Arrangement

To increase efficiencies, the GPO underwent a series of mergers and stock sales (not at issue here), after which the Health System owned 95% of the GPO, with an unrelated entity owning the remaining 5%. About 800 of the 84,000 members (just under 1%) are owned by the Health System.  Under the Proposed Arrangement, the Health System would purchase the remaining 5% of the GPO to become the sole owner.

OIG Analysis of Proposed Arrangement

The OIG addressed compliance of the Proposed Arrangement with the discount and GPO safe harbors. The discounts that the GPO negotiates with vendors on behalf of its members and the GPO’s distribution of administrative fees to members would be protected by the discount safe harbor as long as the GPO continues to provide its members with the necessary records to enable them to make the required discount safe harbor disclosures.  Even so, the administrative fees obtained by the GPO from its vendors had to be analyzed under the GPO safe harbor.

The definition of “GPO” provided by the GPO safe harbor includes an entity “authorized to act as a purchasing agent for a group of entities…who are neither wholly owned by the GPO nor subsidiaries of a parent corporation that wholly owns the GPO (either directly or through another wholly owned entity).” Thus, the Proposed Arrangement kicks the GPO out of the GPO safe harbor.  The OIG states, however, that the absence of safe harbor protection is not fatal and potential risk is considered on a case-by-case basis.

The OIG concluded that the Proposed Arrangement carries an acceptably low risk of fraud and abuse. The OIG focused on two key factors:

• The members that would be under shared ownership with the GPO constitute only 1% of the GPO’s total membership.

• These affiliated members would be subject to the same terms and conditions as the unaffiliated members and would therefore not receive more or less favorable discounts than the others.

Because of these factors, the Proposed Arrangement is differentiated from a situation in which an entity attempts to insulate itself by having an affiliate indirectly solicit fees for potential referrals.