Welcome to a nightmare come true for group purchasing and distribution middlemen: Four Florida hospitals are booting the skimmers right out of the buying loop.
Enticed by the prospect of eliminating the middlemen's margins and fees, plenty of hospital managers think about going direct to manufacturers. But remarkably few seem to have the vision, guts and patience to pull it off.
For Lee Memorial Health System, a three-hospital system anchored by 407-bed Lee Memorial Hospital in Fort Myers, and 543-bed Sarasota Memorial Hospital, taking the direct-purchasing plunge has paid off big time.
A cooperative purchasing venture the hospitals launched in spring 1997 is blazing such a thrifty path that it may compel other hospitals to rethink the solo route. In phase one, the hospitals saved 17% over previous supply costs on a contract portfolio worth $20 million. The hospitals expect similar savings on an additional $15 million in contracts to be completed this summer and another $35 million over the next 18 months.
To be sure, buying without the net of a group purchasing organization is more work. But the savings, these hospitals say, far exceed the cost of the extra effort.
To make self-purchasing a reality, the hospitals established a cooperative service company last year to negotiate and administer contracts. Soon, the company will act as an authorized distributor of products between manufacturers and the four hospitals.
To help with contracting chores and to get the co-op rolling, the hospitals enlisted a Dallas-based purchasing consulting firm called Coalesco for a set but undisclosed fee.
When Lee Memorial and Sarasota Memorial became affiliated in 1995, they made supply savings a top strategic priority. They briefly considered working through an existing purchasing group. But shortly after the affiliation, Sarasota Memorial decided to sever its ties to Premier because the San Diego-based hospital alliance's lock-step supply contracts didn't brook the kind of flexible buying programs the hospitals were considering. For its part, Lee Memorial, while still aligned with Irving, Texas-based VHA, is phasing out buying through VHA's group purchasing operation, Novation.
Both decisions stemmed from an analysis that a self-service approach to materials management, rather than one mediated by purchasing groups and distributors, would deliver the most value to the hospitals.
"What we've attempted to do is put ourselves, as the systems' representative, directly in the roles provided by the GPOs and the commercial distributors," explains John Skalko, executive director of the co-op and regional director for materials and integrated services at Lee Memorial. "By doing that, you end up structuring agreements that are truly win-win and are not compromised by the need of meeting national acceptance."
Like politics, the best purchasing is done locally.
Vendors simply can't afford to offer their absolute rock-bottom prices to national buying groups, contends Bob Bissel, founder of Coalesco and a former executive with the MedEcon purchasing group and medical-surgical distributor General Medical, a division of McKesson Corp.
By contrast, a regional buying approach lets vendors consider exactly how low they're willing to go to win incremental market share in a given market.
Happily, many top-drawer companies proved to be even more flexible on pricing and terms than Skalko had thought possible. Perhaps that's because the co-op offers high-compliance, sole-source contracts, which can quickly move market share.
And the hospitals haven't been afraid to switch suppliers to get better deals. The bugaboo of converting to new products hasn't been too bad, say Skalko and Bissel, thanks in part to a cooperative working relationship with vendors. The longest time to convert a contract has been 120 days and the shortest 30 days.
To date, the contracts guarantee compliance rates from 80% to 95% over terms as short as 27 months and as long as nine years.
In return for their allegiance to chosen vendors, the hospitals reaped price breaks last year that lopped 17% from their combined medical-surgical supply. One-time signing bonuses helped boost first-year results, he concedes, but long-term savings should top 12% annually. Skalko zealously guards the identity of participating companies. But the co-op approach has won over even some of the bluest-chip names in medical supplies, not just the marginal players desperate for a bigger piece of the action, he says.
Other hospitals can recreate the Lee-Sarasota formula for success, says Jan Kaputkin, a consultant with Health Resource Network in Florham Park, N.J. "If you have the commitment and the patience to allow the evolution and development of these contracts, they make sense," he explains, adding that some his clients using a similar approach to Skalko's have reported comparable results.
But making the co-op idea fly, says Kaputkin, is challenging. It takes a still uncommon combination of patient support from top-level hospital executives, sincere cooperation from clinicians on the floors and materials managers with a knack for creatively working with vendors.
In September, the co-op expands into distribution with a 52,000-square-foot facility in Fort Myers. Even tougher than contracting, self-distribution, except for a few incidentals, is also worth the effort, Skalko says. Between direct savings and manufacturers' incentives, Skalko expects to net another 6% to 10% reduction in supply spending.
Already other Florida hospitals are sniffing around the Lee-Sarasota co-op to see if they can join.
Skalko has talked with a few in the area that aren't direct competitors. But even if they are allowed in, he plans to keep the co-op a select group that can be counted on to deliver market share to vendors.
"Our intent is to keep it at a level where we can ensure commitment levels we've promised," he says.