Reducing Hospital Procurement Costs Through Vendor Contract Optimization: A Decision-Support Framework for GPOs

Abstract

Group Purchasing Organizations (GPOs) play a crucial intermediary role in the U.S. healthcare supply chain by consolidating purchasing power across multiple healthcare providers. However, increasing competition from peer organizations and hospitals’ insourcing efforts has placed significant pressure on GPOs to enhance their value propositions. This study presents a data-driven framework designed to help GPOs reduce medical supply costs for hospitals by addressing inefficiencies in vendor tier contracts, a complex form of quantity discount based on market share rather than absolute quantity. The framework consists of reference matrices that define feasible adjustment spaces for tier prices and thresholds, followed by mixed-integer programming models designed to optimize contract parameters. It enables GPOs to (1) identify misalignments between vendor contracts and hospital operational realities, (2) guide vendors in improving their tier contracts to lower procurement costs for hospitals while supporting their own financial interests, and (3) evaluate the potential for tailoring contracts to individual health systems within existing tier structures to achieve additional savings. Applied to four health systems within a Midwest-based GPO, the model demonstrates up to 50% potential savings compared to current integrated delivery network spend and 14% savings relative to the optimal spend under existing tier thresholds. In addition, while prior studies suggest hospital-direct contracts fail to deliver net savings due to high transaction costs, our research shows that some hospitals could potentially benefit from GPO-managed custom contracts.