Take note, commitment-shy hospital administrators: Your purchasing group wants a closer relationship.
Groups are trying harder than ever to entice hospitals into buying a greater percentage of products through group contracts, according to MODERN HEALTHCARE's 1994 purchasing survey.
For the first time, some groups said they'll tackle an old obstacle, contract compliance, by offering lower prices to hospitals that guarantee full use of group contracts.
Groups define and track compliance differently. Today, however, several groups said they are striving for compliance levels of more than 90%. Under one common definition, that means if a group negotiated a contract for a particular product, its members bought the product from a contracted vendor 90% of the time.
Groups are wooing hospitals in other ways, too. For example, Charlotte, N.C.-based SunHealth Alliance will become a cooperative Oct. 1, in part so it can reward its 155 shareholders and 83 affiliates with cash for greater use of SunHealth programs.
SunHealth and other groups also are trying to determine how particular products affect patient care and a healthcare system's total costs. Many groups said that in the years ahead they'll strive not only to negotiate the best prices for products but also to help members make the best use of them.
Networks the new customers.Their efforts are fueled by a revolution in healthcare that threatens the future of many groups. Hospital mergers and the formation of integrated delivery networks mean groups' memberships probably will shrink. Many networks may find that they ultimately can negotiate contracts just as well without group involvement. Groups that don't prove their worth to integrated networks won't survive, observers said.
"The traditional role that group purchasing organizations have played-serving as a broker and leveraging volume-will become less important," said Bill Elliott, senior vice president of supply-chain management at Irving, Texas-based VHA. "We're moving to an enabler role-giving networks the tools to do what they want. In addition to providing supplies and drugs, we will become a convener of physicians, a forum for information and technology, and a network for learning and communications."
The changing healthcare marketplace is, in fact, rocking the purchasing industry.
The 50 organizations responding to MODERN HEALTHCARE's survey said they had group contracts in 1993 with a total of 10,941 independent and system hospitals with 1.6 million acute-care beds, 6,686 nursing homes and 28,521 alternate sites, such as physicians' offices, clinics and surgery centers. The aggregate membership reported is so high because many hospitals belong to more than one purchasing group.
Total hospital membership reported in the survey grew 3% in 1993 as some groups absorbed competitors and others, anticipating hard times ahead, aggressively recruited new members. Hospital membership grew 1.2% in 1992, according to the 61 groups that responded last year.
Consolidation of purchasing groups has only begun, observers said. In the most recent transaction, OSF Healthcare System, a Peoria, Ill.-based system with nine hospitals, and St. Louis-based AmeriNet said they will combine purchasing programs next month. Some 332 hospitals bought $685 million in goods and services through OSF's purchasing program in 1993. AmeriNet, which negotiated $2 billion in contracts for 1,017 hospitals in 1993, will gain 255 new members and more than $500 million in additional purchases with the OSF affiliation.
"A couple of years ago, we probably felt we were plenty big enough," said Bud Bowen, AmeriNet's executive vice president. "Today, we have an appetite to grow."
AmeriNet's appetite is triggered by the knowledge that its current members will merge and downsize inpatient operations in the years ahead, Mr. Bowen said. New members will be a buffer from change.
Some groups already are seeing the results of market turmoil.
For example, the number of hospitals using contracts of San Diego-based American Healthcare Systems dropped 5% to 863 in 1993 from 908 in 1992 largely due to the defection of a single system, said Jack Bernard, its vice president of planning and marketing.
HealthSpan Health Systems Corp., formed by the 1992 merger of Minneapolis rivals Health One and LifeSpan, decided to drop its membership in AmHS so it could work chiefly with VHA (April 4, p. 12). AmHS lost 71 of the 145 hospitals that used the group's contracts through a Health One affiliation. HealthSpan became Allina Health System when it completed another merger (Aug. 1, p. 14).
AmHS, however, recently added its first new shareholders in four years. SSM Health Care System of St. Louis brought 17 acute-care hospitals to AmHS, and Seagate Alliance of Rochester, N.Y., added 15 others.
Other integrated networks are expected to limit their memberships to one main group, as Allina did. Then, they'll have more influence over group decisions and will see financial returns from higher compliance, said John Henderson, president of SMG Marketing, a Chicago-based firm that tracks group purchasing organizations.
"There's no way that the truly integrated network can continue the multiple arrangements they have," Mr. Henderson said.
Hospital membership also declined at Los Angeles-based Purchase Connection, which said hospital members dropped 11% to 703 in 1993 from 795 in 1992.
"Some of it is consolidation," said Lisa Sokol, senior vice president of the group. "Some have left us to join other organizations. Some have gone independent. We're cleaning house a little, too. We're saying, `It's not to your advantage to support two national groups and three regional groups."'
In contrast, Purchase Connection's alternate-site membership, already large, rose 3% to 851 members in 1993 from 827 in 1992.
Total alternate-site membership reported to MODERN HEALTHCARE soared 36.4% in 1993 as dozens of groups devised new programs for physician offices and clinics. Alternate-site membership rose 27.5% in 1992, according to last year's survey.
Many groups, including AmHS, Premier Health Alliance and VHA, took the word "hospital" out of their names or changed their bylaws to reflect the growing diversity of their memberships and the transformation of hospitals into healthcare networks.
Growing closer.The competitive threat from investor-owned hospitals in general, and Columbia/HCA Healthcare Corp. in particular, is driving not-for-profit hospitals to higher compliance with group contracts.
Because Columbia/HCA owns its 195 hospitals and healthcare facilities, it can make them buy on contract almost all the time and can switch purchases to new vendors quickly. The Louisville, Ky.-based chain expects its size and compliance will win lower prices from vendors and eventually trim $80 million from the $1.7 billion its hospitals spend annually on supplies (March 14, p. 22).
Competing hospital chains are just as interested in controlling supply costs.
For example, materials managers at Premier hospitals designed a new program to reward highly compliant members. The Westchester, Ill.-based alliance is one of the nation's largest, with 228 member hospitals and $1.1 billion in contract purchases in 1993. Executives are trying to persuade the bulk of Premier's 53 owner hospitals and systems to join the new program, which starts Jan. 1.
Chief executive officers of participating hospitals will sign letters vowing to make full use of each contract in the program, provided the products are clinically acceptable, the service is adequate and the terms save them money. Their actual compliance levels will be defined by the contracts.
Initially, Premier will negotiate separate contracts for five categories of goods or services, still being selected. Each hospital involved also will pick five other Premier contracts to which they'll commit.
Big bite.The program sanctions have teeth. Hospitals that don't meet the criteria will buy goods at Premier's previous contract prices, a difference of perhaps hundreds of thousands of dollars, said John Strong, Premier's senior vice president of materials management.
"If a member agrees to the first 12 contracts and on the 13th says it can't, it can back out and lose eligibility for the benchmark pricing," Mr. Strong said.
GNYHA Ventures, MASCO Services and NJHA Group Purchasing-which have strong ties to their members-also require hospital executives to sign letters of commitment for certain contracts. GNYHA Ventures is a subsidiary of the Greater New York Hospital Association. MASCO, which stands for the Medical Academic Scientific Community Organization, is owned by six Harvard University teaching hospitals. NJHA Group Purchasing is owned by the New Jersey Hospital Association.
Vendors often lower their prices by 20% when they know upfront that hospitals will commit all eligible purchases to the contracts, said Peter Wall, president of MASCO, which had 50 members in 1993. About half of MASCO's $140 million in contracts now require full compliance.
National groups, with significantly larger and more geographically diverse memberships, also are developing new incentives for compliance.
Of the national groups, only AmHS has sanctioned members for failing to comply sufficiently with contracts. Since adopting a detailed compliance policy last July, it's dropped several affiliates for noncompliance, Mr. Bernard said. Other groups rely exclusively on incentives.
SunHealth will ask members to propose a "committed-volume" program, similar to Premier's, for consideration at its January 1995 board meeting. In 1993, 310 hospitals bought $1.8 billion in goods and services through SunHealth contracts.
VHA, which had 993 hospital members and $4.9 billion in contract purchases in 1993, expects to implement a committed-volume program by year-end. It now is trying to determine the degree to which high compliance cuts vendors' marketing expenses and thus merits lower prices. The details of both programs still are under discussion.
VHA and Premier, both cooperatives, long have used dividends to reward members for their use of programs. As a cooperative, SunHealth will dole out its dividends so that highly compliant hospitals will take home a larger share, said Ken Mitchell, its associate vice president of materials services (Sept. 19, p. 4). By law, cooperatives must distribute at least 20% of their profits as before-tax patronage dividends.
Others reorganize.SunHealth isn't alone in its desire to use a new organizational structure to lure its members to greater commitment. Health Services Corporation of America, for example, might change its structure to give members an equity interest in the group.
Cape Girardeau, Mo.-based Health Services, with 1,087 hospital members in 1993 and $1.8 billion in contract purchases, is one of the nation's largest purchasing organizations. Its members have no equity stake in the organization.
"Compliance has to be very strong because of the emergence of Columbia as a potent force," said Earl Norman, the group's CEO. "For not-for-profit hospitals to compete, they have to drive compliance. Obviously, ownership has an effect on the support of contracts."
While they struggle for better prices, many groups also are starting to attack other components of supply cost.
Some see such steps as their best guarantee against eventual extinction. Hospital executives today are absorbed by the development of integrated systems. When they're ready to take on operational issues, such as systemwide supply use, purchasing organizations want to be there helping them.
Groups are developing models to guide members in product standardization. Some are naming committees of physicians to analyze the most cost-effective use of controversial drugs and devices (Feb. 28, p. 36).
Limiting waste.The potential
savings are considerable. Experts estimate that in some cases hospitals use twice as many products as they need. Meanwhile, manufacturers and distributors also waste resources.
VHA and Arthur D. Little recently studied the total cost of supplies used by VHA hospitals in 1993 through development, manufacture, sale, distribution and disposal. Some $1.5 billion of the $12.5 billion spent was wasted, for example, by redundant sales efforts or inefficient tracking systems, Mr. Elliott said. Even more money could be saved if hospitals used products more effectively.
VHA now is laying plans to rid waste from the supply chain, with companies' help. It expects to have a detailed strategy by year-end.
Interestingly, groups' efforts to evaluate product use create the potential for conflict with vendors. Groups and companies said they can work together to mutual benefit. At least one group, however, is trying to sidestep potential trouble by separating its product consulting services from its purchasing arm.
In July, Louisville, Ky.-based MedEcon Services spun off part of its clinical pharmacy program into a new company, Clinical Catalysts, which will continue to work with MedEcon's 1,003 members to improve product use.