Mirroring the consolidation wave rippling through their memberships, VHA and University HealthSystem Consortium said last week they have agreed in principle to combine their group purchasing operations into a limited liability company.
Boasting pro forma purchasing volume of $11.2 billion this year, the yet-unnamed company would stand alone atop the hospital group purchasing heap.
Second-place Premier, based in San Diego, reported purchasing volume of $6.2 billion in 1996 and estimates $8.5 billion for this year.
In 1996 VHA's 1,500 members and affiliates bought $7.1 billion of goods and services through the alliance, while UHC's 78 academic medical centers and 38 associates bought $1.7 billion. VHA projects purchasing volume of $8.3 billion in 1997; UHC's estimate is $2.9 billion.
VHA and UHC executives stressed that their planned purchasing collaboration does not herald a full-blown marriage. Rather, the consolidation of group purchasing would deliver beefed-up buying volume, lower overhead and a better portfolio of contracts than either alliance could offer alone.
Neither group "envisions value coming from a merger of the two organizations," said Robert J. Baker, UHS president and chief executive officer. Each alliance would continue to exist and offer nonpurchasing services separately to its members.
Irving, Texas-based VHA and Oak Brook, Ill.-based UHC estimate members and affiliates would reap $300 million to $400 million in annual savings as a result of merging their purchasing operations. Culling the best contracts from their combined portfolios would account for the bulk of savings, the organizations said.
But cutting overhead would save money as well. VHA and UHC employ 199 and 61 people, respectively, in their purchasing programs. The alliances expect the merger to reduce purchasing staff by 15%.
The new purchasing company would be based in Dallas and operational by January, subject to a definitive agreement expected later this month and then member and shareholder approval.
VHA would hold the cards on the new company's board. Of the 14 board members, VHA would have eight seats and UHC five. The final seat would be held by the president and CEO of the new company. A national search is under way for an executive to fill the top spot.
Executives of the two organizations wouldn't say who approached whom about the deal. As for its timing, they said both groups are strong now, but a combination would prepare them better for the future.
"The only reason to ever do this is because it brings added value to your membership," said C. Thomas Smith, VHA's president and CEO. "You act because you believe you'll benefit those you seek to serve."
Underpinning the deal is the increasingly important axiom that purchasing volume equals clout with vendors, a message that played well with hospitals.
"This will be a big group that will command a lot of attention," said Terry Turner, purchasing director at University of Utah Hospital and Clinics, Salt Lake City, a UHC member. Turner said UHC staff had assured him that purchasing through the new organization would allow his public hospital to remain in compliance with Utah's public procurement requirements, as contracting through UHC has, allaying his main concern about the deal.
Whether the new purchasing company would sacrifice flexibility for size is another question. But Turner, for one, seems open-minded.
"It looks like it will be an advantageous thing," Turner said. "We're optimistic."