It takes a virtual village to cut hospital supply spending.
Materials managers, clinicians and top management must work together to set savings targets, craft plans to meet them and make sure the job gets done.
Involving the growing number of facilities being merged almost daily into bulging health networks only compounds the painstaking work.
Group purchasing organizations are standing by to help. They promise to ease hospitals' administrative burden by centralizing contracting and to drive down costs using the powerful lever of pooled purchases.
But as integrated delivery networks mature, many are questioning whether purchasing groups are as relevant as they used to be.
Sure, the groups promise purchasing muscle, but many systems already have enough buying heft to extract serious concessions from suppliers. The groups promise purchasing expertise, but many systems can afford to grow their own or purchase what they need from consultants. What's more, systems that go solo retain complete say-so on purchasing decisions and reap full manufacturer rebates, without a group skimming a percentage to cover its administrative overhead.
As a result, purchasing through groups is not the automatic decision it once was. Today, more than ever, the groups have to prove they can earn their keep. Against this backdrop, MODERN HEALTHCARE conducted its annual purchasing survey. This year, 102 groups were queried and 31 responded.
To capture information about which tacks the groups are taking to meet members' changing needs, MODERN HEALTHCARE asked a series of new questions about buying strategies and purchases made through committed programs that trade guaranteed spending for deeper discounts. In addition, we asked the groups to tell us how they measured and reported purchasing savings to their members.
Close ties. The responses show groups are brokering close ties to a select group of suppliers to get the purchasing job done. For instance, 25 of the 31 responding groups use committed buying programs, requiring members to purchase 70% to 100% of a product category under contract, to increase purchasing leverage. In addition, the groups showed a strong bias toward sole-source and strategic partnerships over dual-source contracting (See chart, p. 54).
In a nod to customer concerns, 20 responding groups said they provide an annual report card detailing the value of belonging to the group. Of the 20 groups that issue report cards, four respondents, including Catholic Materials Management Alliance, measure savings against list prices; three, including AmeriNet, calculate savings against street prices; and 11, including VHA and Premier, use an alternate method.
Total purchasing volume of the top 10 respondents stood at $26.3 billion in 1996, compared with $28.2 billion in 1995 for the same organizations. Among the top 10, most showed double-digit percentage gains over the previous year. San Diego-based Premier was a notable exception. Its purchasing volume fell 38% to $6.2 billion in 1996 from the $10 billion spent collectively by Sun Health, American Healthcare Systems and the previous Premier alliance in 1995.
Lynn Detlor, president of Premier Purchasing Partners, says almost half the apparent volume drop, or about equal to 15% of previous volume, was a result of better pricing available to the mega-alliance born on Jan. 1, 1996.
Detlor says continuing contract renegotiations and phase-in meant only $6.2 billion of a possible $8.5 billion in spending materialized. For 1997, Premier estimates total purchases will hit $8.5 billion.
Overhauling the new Premier's purchasing portfolio has been a daunting task.
"No GPO has ever gone out and redone every contract within a year," Detlor says. Likewise, no purchasing cooperative of not-for-profits has ever mandated such strict compliance to purchasing contracts on a national scale. This summer Premier underscored its resolve by saying it would boot shareholder Methodist Hospital System, Houston, as well as 27 affiliate hospitals, for failing to sign letters of purchasing commitment.
Detlor says only time will show the full effect mandatory committed contracting has on purchasing volume.
"What you could see in a year or two is that the (purchasing) number could be a lot larger due to compliance," Detlor says. Or better pricing and more attention to utilization could serve to restrain dollar growth.
Lock-step purchasing on this scale just hasn't been tried before.
While Premier was busy rebuilding its contracts, rival VHA, based in Irving, Texas, seized the top volume spot with $7.1 billion on purchasing growth of 13% over 1995. Although VHA doesn't mandate compliance, it places great stock in concentrated purchasing arrangements and a growing voluntary committed buying program.
"There's still a lot of market share (and price) that can be moved under a predominantly sole-source philosophy," says Mark McKenna, VHA vice president for supply chain management.
Last month's announcement that VHA and University HealthSystem Consortium would merge their purchasing operations into an $11.2 billion buying machine only adds momentum to VHA's already ambitious plans to pump up purchasing volume in its existing committed program.
In 1996 VHA organizations bought $1.7 billion through voluntary commitment contracts. This year VHA predicts committed purchases will climb to $2.5 billion.
More than price. For all the chatter about which groups have the best prices, many executives say other services, such as benchmarking and networking, are an increasingly important factor in deciding which purchasing group to use.
Good prices have become a given. It's the extras that seem to make the difference.
"We're firm believers in GPOs," says Leo P. Brideau, president and chief executive officer of Strong Partners Health System, Rochester, N.Y. The major groups deliver excellent pricing and lower administrative overhead by taking on contracting chores. They free up hospital staff to work on the next tier of supply savings, such as standardization, he says.
Formed through a mergerlike partnership completed this spring of Highland Health System, a VHA shareholder, and Strong Memorial Hospital, a member of Premier, Strong recently had to decide which group to use. Purchasing is like a utility, Brideau says. "We want to make sure that it works and have to make sure we're paying a competitive price," he explains.
But pricing among top-tier groups, he says, isn't all that different.
"Essentially, when we shook it all out, the economic value was so close that the decision wasn't going to be made on economic value-but strategic value."
In July Strong chose VHA, Brideau says, primarily because of a regional managed-care contracting network the alliance had in place.
Brideau discounts the widely circulating notion that Premier's exclusive film contracts with Sterling Diagnostic Imaging, Newark, Del., a rival to Kodak, Rochester's favorite son and a research partner, were the deciding factor.
Despite Premier's tough stance on contracts, Brideau says, "I think there would have been a way to have dealt with that."
New solutions. Many systems that remain committed to group purchasing nevertheless are looking for new solutions to their evolving problems.
Many systems openly question whether national purchasing, for instance, offers the best solutions for healthcare delivery systems that are a decidedly regional business. Committed programs only compound their uncertainty.
"Flexibility is still at the very top of the list for us," says Dick Seim, vice president of materials services for Health Alliance of Greater Cincinnati, a four-hospital health system with more than $180 million in annual purchasing volume. "Our agility, or nimbleness, in negotiating on a regional basis is the most important thing," he says.
Although the system considered going independent, Health Alliance decided to use a GPO to manage contracts for commodity goods. By doing so, the system's managers were free to concentrate on selected high-value and high-clinical-preference contracts as well as standardization and utilization.
After reviewing proposals from eight groups-including VHA, Premier and UHC, which had existing relationships with the hospitals that formed Health Alliance-Health Alliance decided last year to cast its lot with AmeriNet, based in St. Louis.
Health Alliance has used AmeriNet's national supply contracts, Seim says. But keeping its options open has paid off, too. The health system's regional clout with some vendors combined with AmeriNet's contracting expertise has allowed it to successfully negotiate customized arrangements for items such as intravenous solutions and orthopedic supplies in keeping with existing preferences.
Catering to regional groups such as Health Alliance is one way AmeriNet, with $3.2 billion in purchasing volume, is making its mark.
"When you make a one-size-fits-all decision, I would suggest someone is not getting taken care of properly," says Robert Bowen, executive vice president at AmeriNet. "We offer choice where it makes economic sense for us to do it."
Regional specialty. MedEcon, based in Louisville, Ky., is another purchasing group that's making regional pacts a specialty.
"The notion that bigger is better defies the current economic model in healthcare," declares Bill Wooldridge, president and CEO of MedEcon. Regional delivery systems need regional solutions, he says.
MedEcon has developed seven regional purchasing cooperatives and has five more in the pipeline, he adds.
According to Wooldridge, MedEcon has crafted custom agreements for the regional cooperatives that lock up regional purchasing volume in exchange for supplier agreements that match or beat pricing of the national purchasing groups. Perhaps the larger concession, Wooldridge says, is that manufacturers pay patronage dividends that are passed back 100% to co-op members.
MedEcon declined to divulge its purchasing volume, citing confidentiality agreements with its co-ops. But the smallest, he says, has $40 million in annual purchases.
As for its traditional national purchasing business, Wooldridge says, volume is expected to grow 8% this year over last. That's important because administrative fees from those contracts cover the costs of running the specialized co-ops, he says.
Similar prices. Purchasing groups guard contract pricing like state secrets. And hospitals are rarely eager to share the details of their savings with competitors.
But generally speaking, the major group purchasing players have similar prices when a broad marketbasket of products is considered, according to purchasing consultants privy to the groups' proposals.
"You'll have some line-item winners, but when you roll them up the differences are not as great as has been expected or perceived," says Jamie Kowalski, president of Kowalski-Dickow Associates in Milwaukee.
"The price variance between the groups is not that great," agrees Thomas Hughes, president of Concepts in Healthcare, Ashland, Mass. Among the larger groups, aggregate pricing varies in the neighborhood of 3%, he says, depending on a hospital's purchasing mix and a group's contract portfolio at a given time.
Nearly everyone agrees that group buying works best when customers can guarantee suppliers minimum purchasing volumes. So in one form or another, most groups now offer committed buying for some goods and services.
Without question, Premier's aggressive stance has prompted a careful look at the role committed purchasing plays in hospitals' materials management strategies. Beyond pricing, many executives say, commitment paves the way for product standardization and appropriate utilization.
As for Premier's roll-out of its full-compliance approach, one major shareholder says things are going just fine.
"It's not just here are your new contracts and prices and have a nice day," says David Pecoraro, vice president and chief information officer of Jewish Hospital HealthCare Service, Louisville.
As a result of the new contracts, the eight-hospital system already has seen significant savings over its old Premier prices.
"It's been very successful for us," Pecoraro says, "We've seen 6% to 25% improvement in prices over what we had in the past."
Not everyone agrees, however, that Premier's brand of commitment is the way to go.
In January Emory Health System in Atlanta cut its ties to Premier. Now the two-hospital system, which had belonged to both Premier and UHC, contracts only through UHC.
"We found that Premier's contracts had no major advantage over UHC contracts," says Debra Bloom, director for institutional development at Emory Hospitals in Atlanta. Besides, she explains, the big cost savings prize will come through how the products are used, not necessarily what each one costs. To best achieve those and other savings goals, "We stuck with UHC, not just for purchasing but for the other programs they have, like benchmarking," she explains.
Clarian Health Partners in Indianapolis is another recently forged system that faced a choice regarding how to manage its $200 million in annual purchases.
The Jan. 1 merger of 941-bed Methodist Hospital of Indiana, which had bought products independently for the past seven years, and 600-bed Indiana University Medical Center, which had purchased through UHC, sparked a review of group purchasing options.
"Do I want to spend my resources chasing the best unit price? Probably not," says Samuel Odle, Clarian's senior vice president and chief operating officer. "We count on the buying groups to get the best unit price. . . . We'll invest our resources in improving our internal distribution systems."
After looking around, Odle says, we concluded "the larger groups are all pretty close." In July Clarian became a shareholder in VHA. "The decisionmaking comes down to where are your strategic partners in your particular marketplace."