Premier will take greater care to hide the value of its buying contracts after one recent award led to lower prices throughout the market.
The alliance, now about 7 months old, negotiates contracts for drugs, surgical supplies and other products on behalf of 1,850 hospitals.
Earlier this year, Premier announced a contract for contrast media, which is used in imaging procedures, and pointed to average savings of 12% to 31% as proof of its superiority. The contract, awarded to Mallinckrodt Group and Berlex Laboratories, was one of the alliance's first (May 20, p. 26).
Noncontracted manufacturers subsequently lowered their prices to other buying groups (July 8, p. 16). In some cases, they promised to match or better the Mallinckrodt bid in an effort to keep the business of Premier hospitals.
From Premier's perspective, such events bode ill. A price war jeopardizes its ability to drive high contract compliance, which is essential to negotiating superior contracts. The downward spiral of prices also eventually could make Premier contracts unprofitable for vendors.
Finally, Premier's status with member hospitals is threatened if it doesn't stand out from other groups.
In a speech last week before business partners in suburban Chicago, Premier President Alan Weinstein pledged not to place contracted vendors in such a position again. Premier will use rebates, stock options and warrants to disguise the prices members actually pay. Columbia/HCA Healthcare Corp., which also boasts of the great deals it gets, already uses such tactics.
In addition, Weinstein threatened to kick hospitals out of Premier if their representatives on Premier task forces broke confidentiality of negotiations. He also said Premier might disqualify companies from bids if it learned they tried to solicit information from task-force members.
In a later interview with MODERN HEALTHCARE, Premier executives declined to discuss events that may have led to the proclamation.
Asked to comment on Weinstein's words, one materials management consultant said they could be read as another boast of Premier's power or a sign of naivete.
"They're afraid they're going to hurt their suppliers by reducing prices? They accomplished exactly what they wanted," said consultant Patrick Carroll of Cypress, Calif.
Despite the market fallout, Mallinckrodt executive Steve Spinosi called the terms it negotiated with Premier "a good financial decision." But Spinosi declined to discuss the profitability of the Premier deal. He said the company hoped to be contracted for a broad set of products and would be "shortsighted" if it didn't regard the deal as a good one.
About 460 vendor representatives attended the meeting at a suburban Chicago hotel near Premier's Westchester, Ill., office.
Weinstein said the total annual value of Premier buying contracts would be $8.5 billion to $9 billion if vendors' future bids are as low as those in its initial contracts. The contract value also depends on its ability to achieve target compliance levels of 80% to 90%. Compliance refers to the percent of purchases made under contract.
Premier has been criticized by some competitors for reporting its annual contract value as $10 billion in press releases and other company literature. That figure, arrived at before initial contracts were awarded, represents the potential purchases of its three founding groups, assuming an expansion of contracts. "I don't think it was a number that was a bogus number," Weinstein said.
Currently, Premier has awarded $3.2 billion in contracts and expects to have negotiated another $3 billion in annualized value by Oct. 1.