Group purchasing organizations are outdoing even linebackers on steroids when it comes to building brawn.
The 10 largest, in particular, are real bruisers. They accounted for roughly 60 cents of every $1 spent on supplies by nonfederal U.S. hospitals in 1995. The previous year, they represented 49 cents of every $1, according to MODERN HEALTHCARE's latest purchasing survey. In comparison, all remaining groups controlled 8 cents of every nonfederal $1 in 1995, MODERN HEALTHCARE estimates. (For an explanation of the data, see box below.)
The top 10 groups still are packing on muscle. Arms of the Greater New York, New Jersey and Metropolitan Chicago hospital associations-which respectively ranked No. 11, 13 and 17 in 1995 buying volume-plan to market Big 10 groups' contracts to their members and cease most independent contracting. If trends continue, 65 cents to 70 cents of every nonfederal $1 spent on hospital products could be controlled by Big 10 groups in 1997.
Some experts predict the dominance of as few as five "national supergroups" by the year 2001, although bets haven't been laid on which ones.
The only apparent threat to groups' power lies in new integrated delivery networks. These systems of hospitals and doctors work together to win managed-care contracts. If they trouble to negotiate independently with vendors, the best-managed networks could secure even better deals than groups, theorists argue.
"If you can't work with the networks, you better look for a new job," warned Gary Link, executive director of Shared Health Services Corp., a La Crosse, Wis.-based group.
Groups are taking considerable risks to meet competing needs.
For example, Premier hopes to yield big savings for its hospitals by requiring them to buy 80% to 90% of certain products under national contracts. Its strategy will backfire if hospitals can't persuade physicians to use those particular products and instead must depart the new alliance.
Using an opposing strategy, Louisville, Ky.-based MedEcon Services is risking a significant dilution of its purchasing power by trying to please networks with customized contracts.
Scores of groups were formed in the 1970s and 1980s to negotiate on hospitals' behalf for drugs, equipment, medical supplies, and other goods and services. Today, alliances among groups are widespread, and hospitals belong to an average of 2.6 groups each, according to SMG Marketing Group, Chicago, which tracks the industry.
The result is a weird ecosystem, somewhat like a coral reef building upon predecessors' remains. Roughly 30 of 600 existing groups negotiate sizable contracts. The remainder typically provide their members access to larger groups' contracts but negotiate agreements with regional vendors for waste management and similar services.
The 38 respondents to the 1996 MODERN HEALTHCARE purchasing survey include most groups exceeding $100 million in annual buying. Three large groups didn't participate. At MODERN HEALTHCARE's request, they provided estimates of annual volume, which are included in aggregate statistics.
The survey documents an industry overhaul.
In January, three leading alliances merged into Premier, the industry's version of former Chicago Bear Dick Butkus. Although the three groups-American Healthcare Systems, Premier Health Alliance and SunHealth Alliance-were independent in 1995, their purchasing was consolidated in this survey.
Rival VHA, based in Irving, Texas, then turned its Healthcare Purchasing Partners subsidiary into a vehicle to serve regional groups. Although many contracts mirror VHA agreements, groups have more input into the resulting portfolio than they would in the larger VHA buying group, said Eldon Peterson, general manager of Healthcare Purchasing Partners. Four groups with $550 million in yearly purchases have been recruited so far, and talks are under way with two or three additional groups, he said. Healthcare Purchasing Partners isn't included in this year's survey because of its recent formation.
Big 10 members AmeriNet, St. Louis; BuyPower, Dallas; Health Services Corporation of America, Cape Girardeau, Mo.; and MedEcon also are wooing smaller groups aggressively.
MedEcon and another Big 10 member, Purchase Connection, are rumored to have discussed a merger. A MedEcon spokeswoman said the groups aren't negotiating currently, but she declined to comment on the possibility of previous talks. A spokeswoman for Purchase Connection, the buying group of Los Angeles-based COHR, also declined to comment.
Link of Shared Health Services said he counted 30-plus deals among national and regional purchasing groups in the past 18 months. Those numbers convinced his board to affiliate with AmeriNet as of Oct. 1. Shared Health will end its relationship with MAGNET, Harrisburg, Pa., and National Purchasing Alliance, Irvine, Calif., which accounted for about 60% of its 1995 spending of $53 million. With so much consolidation, the group needed AmeriNet's broader portfolio of contracts to compete in its market, Link said.
More change for regional groups is ahead:
AllHealth, Harrisburg, Pa., which ranked 12th in 1995 purchases at $500 million, will decide early next year whether to partner with another group, said Patrick Mazzolla, its chief executive officer. Both regional and national buying groups are under consideration. AllHealth negotiates most of its own contracts, although about 5% of its total business is through MAGNET.
The largest independent regional group-Shared Services Healthcare, Atlanta, with $287 million in 1995 contracts-will ask its board to approve an affiliation to share contracts and programs with a noncompeting alliance. Sandra Green, its CEO, declined to identify the proposed partner but said the affiliation could be finalized by mid-November.
Including Shared Services, just three of the 29 second-tier groups in the survey still use their own contracts exclusively. Shared Hospital Services, Portsmouth, Va., would like to pool its buying with five other laundry cooperatives in Virginia. Nassau-Suffolk Hospital Shared Services, Hauppauge, N.Y., could end up the only holdout. The group, which had a 1995 contract volume of $140 million, considered an affiliation last year but found its contracts with vendors "totally competitive," said Peter Sullivan, its CEO. "Six months from now, I might sing a different tune."
One regional group-MASCO Services, Boston, with $165 million in 1995 purchasing-is departing from the masses to become independent. It plans to cut its ties to Premier in winter 1997 because some of its hospitals compete and don't want to share their membership in Premier, MASCO President Peter Wall said. MASCO will continue to negotiate $80 million to $90 million in regional contracts for service-dependent items such as computers and communications.
Regional groups are seeking partners because of new strategies from the Big 10. In the past two years, Big 10 groups cracked down on members for using multiple groups' contracts and cutting their own deals with vendors. Premier, perhaps the most militant, has threatened to kick out hospitals that don't meet its tough compliance policy. Every group rewards hospitals for greater contract compliance.
The prices of some regional buyers fell behind the flashy national groups.
For example, members of the Metropolitan Chicago Healthcare Council saw competing hospitals gain a price advantage of up to 10% in the past 18 months. When the council signed on with AmeriNet earlier this year, it recorded a price advantage in the market of up to 20% for some products, said George King, the council's purchasing director.
Like other recent converts to affiliation, the Metropolitan Chicago council will shift its focus from contracting to ensuring its members comply with AmeriNet contracts. "We are now one very large customer of AmeriNet, and we will be giving input as to what is the best philosophy to work in Chicago," King said. The group reported $164 million in 1995 contract purchasers.
After years of defending regional groups, the Greater New York Hospital Association turned its purchasing program, GNYHA Ventures, into a marketing arm for Premier this year. At the time, GNYHA Executive Vice President Lee Perlman said he was tired of arguing with members about prices. Reportedly, key Premier shareholders in New York also pushed the affiliation.
There are exceptions. In general, the prices of members of Nassau-Suffolk are equivalent to competitors, give or take 1%, Sullivan said. The group dominates Long Island. Its regional concentration cuts manufacturers' distribution costs, among other advantages. Meanwhile, Sullivan said his ties to local hospital executives helps market contracts. "If one of those major factors change, we'll reopen the issue," he said.
Large, well-managed integrated delivery networks boast the same charms-and then some. For example, networks ought to do better persuading physicians to use standard products than larger groups.
The question is: Will networks go it alone? At a June conference in Chicago, several leading networks said they would rather work with groups than develop their own in-house expertise.
Groups are trying hard to please them.
HSCA negotiates extra discounts and services for networks that commit all purchases of particular products to one of its existing vendors. Their prices typically beat single hospitals by 10% to 13%, HSCA Vice President Kevin Campbell said.
AmeriNet also will negotiate additional concessions from its current vendors if networks can commit at least 90% of eligible purchases.
Smaller agreements are less risky for manufacturers, said Bill Wooldridge, chairman of MedEcon. They can cut prices to individual networks where it makes strategic sense without having to cater to every hospital in a group.
Unlike other groups, MedEcon will negotiate separate contracts for networks with both MedEcon-contracted vendors and their competitors. Other groups argue that so much regionalization reduces MedEcon's national clout. Nevertheless, in the past 21/2 years, MedEcon has set up 10 regional cooperatives for the contracts. Five new agreements are expected this year.
"On a regional basis, we can get the commitment," said John Horns, CEO of Lake Erie Health Alliance, a MedEcon cooperative that includes 20 independent hospitals and systems in Michigan and Ohio. "I'm really in a quandary as to how national players can work that."
Premier and VHA are pushing compliance furthest for greater total contract volume. Premier is asking all its 1,700 hospitals to agree to purchase 80% to 90% of products under designated contracts. VHA has asked members to enroll in commitment program offering lower prices and better service. Its initial phases potentially involve about $1.6 billion in purchases.
Competitors contend that many hospitals won't be able or willing to meet such demands.
Limited compliance programs aren't enough, said John Strong, head of Premier Purchasing Partners, Westchester, Ill., the Premier buying arm. "Will manufacturers reward systems with lower prices if a much larger group of 300 or 1,700 hospitals does the same?" Strong asked. "I think it will be several years before we know the total success of our program, but the early returns are certainly promising."