Who is this research for? Healthcare supply chain leaders, hospital administrators, and Group Purchasing Organization (GPO) executives seeking data-driven ways to lower procurement costs and strengthen vendor relationships.
Executive Summary
This study, co-authored by David D. Dobrzykowski of the Sam M. Walton College of Business at the University of Arkansas (Department of Supply Chain Management), presents a decision-support framework that helps GPOs optimize vendor tier contracts to reduce hospital purchasing costs while maintaining supplier profitability.
Tier contracts—complex agreements based on market share thresholds rather than total purchase volume—are widely used in the U.S. healthcare industry but often misaligned with hospitals’ operational realities. The research team developed a data-driven optimization model that identifies inefficiencies in existing contracts and suggests feasible adjustments to tier thresholds and pricing.
Using real data from a Midwest-based GPO and four integrated delivery networks (IDNs), the study applied mixed-integer programming to evaluate and optimize tier structures across multiple procurement scenarios. The findings indicate potential cost savings of up to 50% compared to current spending and 14% savings relative to optimized existing thresholds. Importantly, the research suggests that while GPO-wide contracts remain effective, customized GPO-managed contracts tailored to individual IDNs can sometimes yield additional savings—challenging previous assumptions that direct hospital contracts always raise costs.
By aligning vendor incentives with hospital needs, this framework may strengthen GPOs’ dual roles as both transactional and informational intermediaries, helping them compete more effectively amid rising hospital insourcing and regulatory scrutiny.
Action Items for Industry
- Audit contract structures: Review current tier thresholds and pricing models to detect misalignments between vendor incentives and hospital purchasing realities.
- Adopt data-driven modeling: Use optimization tools or decision-support software to evaluate 'what-if' adjustments to tier pricing and thresholds before renegotiating vendor contracts.
- Explore custom GPO-managed contracts: Consider pilot programs for IDN-specific agreements within existing tier frameworks to test for incremental cost savings.
- Balance efficiency and fairness: Maintain equitable pricing across hospitals while using data analytics to identify cases where customized thresholds create system-wide efficiency gains.
- Reinforce informational value: Position GPOs not just as buying intermediaries but as analytics-driven advisors providing insight into pricing, thresholds, and supplier performance.
Quote from the Researcher
“This study is a wonderful example of problem-driven research. It’s so fulfilling to not only publish it in a top journal increasing its visibility with leading researchers, but also provide real, practical value to industry leaders. I’m particularly pleased to bring these important ideas to bear at a time when healthcare costs are under such intense scrutiny.”
-David Dobrzykowsi, PhD
Quote from an Industry Practitioner
“This research is directly applicable to real problems that my peers and I face in our organizations. Healthcare is an extremely complex industry and the application of optimization to help us solve some of the sourcing and contracting complexity will be valuable.“
- Ed Hisscock | Chief Supply Chain Officer, Trinity Health [Retired] and Senior Specialist (Advisor) at the American Hospital Association
Co-Authors & Affiliations
- Willow Liu Yang — Sam Houston State University, College of Business Administration
- Haitao Li — University of Missouri–St. Louis, Ed G. Smith College of Business
- William A. Ellegood — Sam Houston State University, College of Business Administration
Link to the Original Research
Published in Production and Operations Management, available here.
📩 Interested in learning more?
If you’d like additional information about this research or to connect directly with
the researchers, please email us at research@walton.uark.edu.
