Administrative fees-the lifeblood of some purchasing groups-are flowing less freely these days.
Vendors, never happy about the fees purchasing groups ask them to pay, reportedly are demanding more proof that groups will earn the money.
Some purchasing organizations are trying to document their value to vendors. At least one group is testing additional sources of funding.
There's talk, too, that the federal government or states someday might decide that fees raise product costs instead of shifting expenses from vendors to purchasing groups.
The subject of administrative fees is so tender, in fact, many vendors declined to comment on it.
Administrative fees make up a big chunk of purchasing groups' revenues. Organizations that provide diverse services also might draw money from dues and other charges to members. Administrative fees typically come as a percentage, perhaps 1% to 3%, of the dollar volume of contract purchases.
Purchasing groups don't report to any national organization, but for a sense of how much money that can be, consider MODERN HEALTHCARE's most recent survey of purchasing organizations (Sept. 27, 1993, p. 49). Members of 42 groups bought $18.5 billion in goods and services through group contracts in 1992. If the groups earned fees of 1% on total spending, they'd garner $185 million.
Groups say the money is well spent because they market the contracts to their members. "The reality is manufacturers get fees back in reduced selling costs and reduced administrative costs," said John Strong, senior vice president at Premier Health Alliance in Westchester, Ill.
Vendors, squeezed by cost controls throughout healthcare, want to be certain of that. "If there's value delivered in return for fees, it's worthwhile," said Bob Gould, national accounts marketing manager at St. Paul, Minn.-based 3M Health Care.
More than ever, 3M is linking administrative fees to measures of the group's performance, Mr. Gould said.
For example, it might pay a higher fee for new business under a contract but no fee if purchasing volume doesn't rise, he said. Such contracts are becoming more common, groups said. Vendors also are bargaining for smaller administrative fees.
At Premier, some new contracts spell out elements of the alliance's marketing plans, such as the number of hospitals it will work with each quarter to determine how the contract helps their facilities, Mr. Strong said.
Premier also is striving to create a "value index" for vendors. The index would resemble Premier's reports to hospitals, which place a dollar value on Premier's services to them. The task is difficult because the return on marketing isn't always clear, and the reports might cost $100,000 a year.
The development of regional delivery networks is one force behind such efforts. Large networks are potential competitors to groups. They might buy as much as some groups and offer vendors other advantages. For example, they won't charge administrative fees.
"There is some concern on our part," said Richard Altman, vice president of shared services at Connecticut Health Institutional Services in Wallingford, which draws all its revenues from administrative fees. "But the reason I'm very positive is that we're so diversified."
Hospitals make up only one-fourth of the group's business. Its revenues have grown because it's expanded services to physicians, dentists and other healthcare practitioners. Still, the pressure vendors are putting on administrative fees has Mr. Altman seeking other funding sources.
In May, CHIS started charging new physician members $50 per year. It promised to refund the $50 if the physicians failed to save at least three times that through group contracts. It probably will extend the policy to other members later this year, Mr. Altman said. Hospitals, which pay dues to the state association, will be exempt.
Fees don't raise the prices paid for products, purchasing groups argue. Instead, they reduce company profit. If the group is good, it will save vendors overhead costs, so fees are more than a payoff for access to group members.
Such arguments don't convince everyone. The states of Oregon and Washington are starting to question whether fees raise the cost of products for which they reimburse hospitals, said Larry Dixon, director of materials management at Sisters of Providence Health System in Seattle.
"Maybe now's the time to ask, `What are administrative fees really, and why are they still part of group purchasing?'*" Mr. Dixon said. "I want to know how administrative fees actually are translating to reduced healthcare costs."