As hospitals go, so go the purchasing groups that serve them.
Over the past year, the consolidation fever that continues to keep hospital and health system executives sweating also has put the heat on the honchos heading purchasing groups.
Just when there seemed to be no room for further marriages among the major purchasing groups, a few of the biggies found the will and the way to tie the knot.
Meanwhile, the undaunted growth of integrated health systems has raised the ante for all the groups to do more for their healthcare provider customers or risk being erased from the buying equation.
To draw a bead on the current state of the buying groups, MODERN HEALTHCARE conducted its 10th annual group purchasing survey this summer. This year, 28 organizations responded from queries sent to 102 groups and integrated health systems large enough to be considered group purchasing organizations in their own right. Thirty-one responded to last year's survey.
For the second straight year, MODERN HEALTHCARE asked questions about the groups' buying strategies and purchases made through committed purchasing programs that trade guaranteed spending for deeper discounts. Of the 28 respondents, 18 said they have committed-buying plans for pharmaceuticals, and 17 have them for medical-surgical products. Required purchasing minimums to snare improved pricing ranged from 75% to 100%.
Once again, we also asked the groups to tell us how they measured and reported purchasing savings to their members. Just over half of the respondents, or 16 of 28, provide a report card documenting the savings to members. Of those groups that issue report cards, five calculate savings against street prices, and three measure value against list prices. The rest offer alternative methods or didn't specify how they document savings to members.
Total purchasing volume as reported by the top 10 respondents hit $28 billion in 1997, compared with $22.8 billion in the previous year for the same organizations, although two organizations did not provide numbers for 1996. MODERN HEALTHCARE does not audit the reported financial results.
Merger influence. Mergers continued to sculpt the group purchasing landscape.
In the year's biggest blockbuster, VHA and University HealthSystem Consortium combined their supply operations and formed Novation on Jan. 1, creating the largest purchasing group.
For 1997, Novation had pro forma supply spending of $8.6 billion. It projects $11.2 billion in purchases this year.
Now Novation is trying to prove that the purchasing sum is greater than its parts. "Our target is to establish a port-folio that is the most competitive in the industry with the best pricing, programs and services to reduce costs," says Mark McKenna, senior vice president for operations at Irving, Texas-based Novation. "Consolidation is going along ahead of schedule."
More than 85% of Novation's employees are now in place, and purchasing contracts worth more than $7 billion have been put out to bid and will soon be awarded or are covered under compatible contracts, he says. But plenty of work remains. Completing the consolidation of the entire Novation portfolio will take two to three years, he says.
In July, Sisters of the Sorrowful Mother-Diversified Health Services and Catholic Materials Management Alliance completed their merger, forming Consorta, Rolling Meadows, Ill., the sixth-largest group, with projected spending of $1.5 billion this year.
But forecasts of dollar volume tell only part of the purchasing tale.
Marriage pains. Leaders at merging groups have the same kinds of headaches as hospital executives struggling to forge cohesive systems after the hoopla of their announced deals fades. Novation and Consorta can't underestimate the challenge of making a marriage work.
One look, for instance, at San Diego-based Premier illustrates the difficulty of mega-mergers. Its purchasing volume during 1996, its first year of operation, fell to $6 billion from pro forma spending by its three founding alliances of $10 billion in 1995.
Premier predicts purchasing will once again ring the $10 billion bell this year, equaling the combined volume of SunHealth Alliance, American Healthcare Systems and the previous Premier, which combined to create the current organization on Jan. 1, 1996.
To be sure, additional cost savings in newly negotiated contracts helped drive volume down. But the time-consuming integration of portfolios and operations of the three large precursor alliances played a significant role in restraining purchases through the new Premier contracts.
Changing demands. Regardless of whether they have merged or stayed independent, today's purchasing groups face the same challenge: adapting to the changing needs of their rapidly evolving health system customers.
First and foremost, of course, hospitals still look to the groups to extract the best bargains from manufacturers. Larger groups command more purchasing dollars, which, in principle, should allow them to pry bigger pricing concessions from suppliers.
But size alone is not enough to drive top value in hospital supplies.
"Clearly scale does play a role, but it is probably secondary to compliance," says Ajay Gupta, a healthcare consultant with McKinsey & Co. in Chicago.
As a result, groups continue to tout committed purchasing programs that require high minimum contract compliance with a portfolio of supply contracts in return for better prices.
Even after enhancement with committed purchasing options, though, buying scale goes only so far, according to some hospital customers. A bigger group can also mean less nimbleness and flexibility, they say. Beefy hospital systems demand tailor-made solutions and more direct control of the purchasing process.
BuyPower, a subsidiary of Santa Barbara, Calif.-based Tenet Healthcare Corp., is taking a middle road, driving the best bargains by balancing purchasing volume and commitment to several suppliers' products.
According to Steven Pfeil, senior director at BuyPower, his strategy is to first tie up the 50 or so contracts that account for the bulk of purchasing volume with long-term, sole-source contracts. Once these items, most of which aren't that controversial, are nailed down, purchasing pros at BuyPower and its customer hospitals are free to focus on pesky clinical areas where contracts, standardization and appropriate product use are harder to come by.
As a rule, BuyPower works with hospital decisionmakers to approve product offerings from several vendors before the final contract starts. With several acceptable options in hand, Pfeil says, BuyPower has real leverage with vendors while assuring a smooth conversion no matter which products are ultimately selected.
Meanwhile, some observers say the need to accommodate the big hospital networks is causing special services to proliferate and some groups to subtly shift from sole-source to dual-source contracts.
Until recently, Premier, for one, trumpeted mandatory compliance with sole-source contracts as the strategy of first resort. But even Premier has switched from dogmatic to pragmatic.
The group has decided "to move a little more to a dual-source strategy to create flexibility for our owners," says Lisa Sokol, vice president for marketing. A contributing factor, she says, is that sole-source contracts for the more than 1,700 hospitals that buy through Premier can strain the manufacturing capacity of even large vendors.
Despite the retrenchment, Sokol says, Premier remains willing to go sole-source, if that's clearly the best way to move a market and capture value. "We want to pick and choose the battles wisely," she says. "We don't do it just to do it."
Several factors help explain the shift in contracting sentiment.
"The mandates have not met the overall expectations when you look at the largest groups," says Jan Kaputkin, a consultant with Health Resource Network, Florham Park, N.J. "Local requirements, pricing and clinical issues or just conversion itself are thwarting sole-source."
The financial interest of the groups may be another factor sabotaging sole-source agreements. Some groups, Kaputkin says, are willing to sacrifice rock-bottom, sole-source pricing in favor of dual-source awards that ultimately result in more market share being funneled through a group. Higher volume translates into higher administrative fees to the groups' coffers, Kaputkin says.
Spending power. Purchasing volume matters. But raw spending scale doesn't guarantee the best prices from vendors, says John Strong, Consorta's president and chief executive officer.
"Folks are looking not so much at our size as our ability to commit" to buy from them, he says.
The Roman Catholic systems that constitute Consorta own about two-thirds of their facilities, Strong says, which smooths the way for quicker and more complete compliance with contracts.
All the chatter about which group has the best price for a given product may be a waste of time.
"From a pricing standpoint, most of the major groups are all right there" in the same ballpark, contends Robert "Bud" Bowen, president and CEO at St. Louis-based AmeriNet. "You can just about throw a blanket over it; it's all pretty tight."
Instead, Bowen suggests health system decisionmakers consider the match of culture and specific services that make sense for them.
"We bring a huge portfolio of contracts to the integrated delivery network, and typically we're dual- or multisourced," Bowen says. "For the budget-busters, we'll work . . . to develop customized contracts and really ratchet down the agreement for that specific (system)."
To enhance its appeal, AmeriNet will soon roll out a committed private-label program that will offer deep discounts on commodity goods that sell under an AmeriNet brand rather than a vendor's brand.
"We'll ease into it pretty cautiously," Bowen says, explaining that the program will start with commodity medical-surgical products and perhaps some pharmaceuticals. The biggest problem, he says, is fending off all the interested companies.
Independent streak. Some systems are large enough to consider contracting on their own. And many more seem to be considering the route these days (See related story, p. 72).
But one prominent group purchasing executive believes the window of opportunity for such independent buying is closing fast.
"The major vendors are recognizing that if you go to the prom with GPOs, you can't go home with integrated delivery networks," says Lee Perlman, executive vice president of Greater New York Hospital Association Services, which markets the Premier purchasing contract in metropolitan New York. Mincing no words, Perlman says: "I believe that the IDN strategy will fail."
Top-flight vendors have already signed with GPOs, Perlman says, leaving only lesser suppliers to partner with systems considering the independent route. "There has been too much investment made in GPOs by vendors for GPOs not to succeed," he adds.
Key question. At the end of the day, the decision on which group to use or even whether to go it alone comes down to a question of time and money.
Is it worth the effort to forge a solo set of contracting arrangements? If not, which group has the best match of portfolio, pricing and service?
"I believe that the GPOs will continue to do a stand-up job on commodity products, but I think the jury is out on what they can do with strategic supplies like pacemakers and stents," says Kevin Connor, assistant vice president of materials management at CGF Health System in Buffalo, N.Y. As part of a March merger, the four-hospital system elected to buy through Novation, after considering independent buying and other groups.
Besides supply pricing, the decision to align with the contract portfolio of a group-any group-can help pave the way for smarter product use and even bigger savings, Connor says.
"I still believe they're of value because they're sort of a lever that helps us drive standardization. It's easier for an (integrated delivery system) if a CEO embraces a GPO-our sales job is a lot easier."
But savvy hospital executives can't expect the groups to solve all their purchasing problems. Hitching a ride on the purchasing groups' buying scale is just the starting place for managing supply costs.
"From a hospital perspective, leveraging GPOs is only one thing and is not necessarily the most powerful one" in taking a bite out of supply spending, says McKinsey & Co.'s Gupta.
He recommends, for instance, that hospitals follow the example of other industries to winnow the number of suppliers, simultaneously cutting complexity and building strategic relationships.
Most hospitals, he says, have yet to taste the savings that come from working with a small group of strategic vendors.
Most times, hospitals don't pay enough attention to making sure that the right product is being used.
Service scrutiny. Overall, Gupta counsels hospitals to pay more attention to spending for services, a more rapidly growing expense area than even straight supplies.
Furthermore, because most service vendors are local, they are probably under the radar for the groups, Gupta says.
Finally, hospitals and health systems need to give more than lip service to the strategic importance of managing total supply spending, Gupta adds.
Most hospitals spend almost a third of their operating budgets on supplies and services, Gupta says. While admittedly substantial, hospital supply budgets are only about half of what is shelled out by automakers or aerospace companies, pace-setters in reducing supply costs.
As a result, hospital executives, Gupta says, could learn a thing or two from the likes of Chrysler and Ford Motor Co. about how to tame the purchasing tiger. Namely, top-level commitment and a willingness to invest in a long-term capability to manage costs in the supply chain are just as important for hospitals treating patients as for factories cranking out minivans. "If you do it right," he says, you can shave "10% to 15% off your annual spending."