In its first nine months as Morton Plant Mease Health Care, the three-hospital not-for-profit system based in Clearwater, Fla., has saved $8 million of the $75 million it promised to cut over five years if allowed to merge.
The savings aren't as much as Morton Plant Mease executives wanted, but the Justice Department only approved a limited merger that prohibited the two groups-Morton Plant Health System and Mease Health Care-from sharing prices and combining certain clinical services (June 20, 1994, p. 3).
Executives said the $8 million saved came from cutting 35 of 100 management positions-saving $2.3 million-and eliminating duplicative equipment purchases, combining clinical laboratories, and consolidating purchasing and administrative services.
But the pressure to reap even greater savings led Morton Plant Mease earlier this month to announce a similar affiliation with four-hospital St. Joseph's-St. Anthony's Health System, based in Tampa, Fla. The proposed agreement, which also is not a merger, includes combining purchasing, laboratory and research services (July 10, p. 4).
"We (the industry) are looking at a trillion-dollar cut in Medicare and Medicaid," said Frank Murphy, Morton Plant Mease's president and chief executive officer. "We've got to do what's best for our hospitals and our community."
One of the key elements of the proposed agreement with St. Joseph's is to jointly seek out best prices for supplies and equipment and to improve the way supplies are distributed, Murphy said.
A report by InterLakes, a Meredith, N.H.-based consulting firm, indicated the two systems could save 10%, or nearly $10 million a year, by combining purchasing programs, seeking best prices and improving distribution by adopting a stockless inventory or a "continuous replenishment" system.
St. Joseph's and Morton Plant now make purchases through Charlotte, N.C.-based SunHealth Alliance. Mease, which merged certain services with Morton Plant last year, buys supplies through its membership with VHA, although the amount has diminished since the merger, executives said.
For example, Mease now purchases its drugs through SunHealth's pharmacy program, saving $3.5 million to $4 million annually, said Gary Wright, SunHealth's executive vice president.
Executives of St. Joseph's and Morton Plant Mease wouldn't speculate as to whether the hospitals would purchase less from SunHealth and VHA, but they suggested the relationships would change once the agreement goes into effect. Annual supply purchases at Morton Plant Mease total about $45 million. Figures for St. Joseph's weren't available.
"It's too early to tell. It all depends on the prices," Murphy said.
To increase volume of supplies purchased through its corporate contracts, SunHealth recently began a committed-volume purchasing program. The arrangement, in essence, provides bonuses to hospitals that purchase larger amounts of supplies on contract.
But Murphy said SunHealth's program is in its "infancy" and that Morton Plant Mease can't wait for the program to reap expected benefits.
Isaac Mallah, St. Joseph's executive vice president, said hospitals owned by systems can achieve higher commitment levels than voluntary alliances.
"(SunHealth) can't give us best prices because they don't have a committed group (that's operational)," Mallah said. "We feel we can save more money (in certain supply areas)."
Wright said SunHealth provides assistance to member hospitals seeking to reduce costs and improve regional distribution systems. "We are convinced there is a need for national contracts," he said.
However, alliances such as VHA and SunHealth are facing increasing questions from multihospital system members about best pricing and distribution, said Philip Oaten, an InterLakes vice president.
"Unless (alliances) change, healthcare systems will question whether they can reduce their materials management costs through the alliances," Oaten said.
Morton Plant Mease operates three hospitals with 1,095 beds in northern Pinellas County. St. Joseph's is a three-campus system with four hospitals and 1,310 licensed beds in Hillsborough County. It's part of Allegany Health System, based in Tampa.