Group purchasing organizations mustered the willpower this year to resist what had been an overpowering urge to merge.
The stream of blockbuster deals that transformed the buying landscape during the 1990s found respite just as hospital systems that buy independently got a boost from Internet services that promise to make healthcare customers kings.
Purchasing groups are the brokers that have created formidable buying blocs. They started by corralling the spending of stand-alone hospitals and later moved on to the multihospital systems that are the dominant providers today. In return for their buying services, the groups collect administrative fees from manufacturers, levied at about 2% of purchase price, and a slice of rebates paid on order volume. Hospitals that play along are rewarded with discounted prices and fewer supply headaches. That's the idea anyway.
To gauge the state of the ever-changing group buying industry, this summer MODERN HEALTHCARE conducted its 11th annual group purchasing survey.
Thirty organizations responded to surveys sent to 90 groups and health systems large enough to be considered group purchasing organizations in their own right. Twenty-eight organizations responded to last year's survey.
The top 10 respondents in 1998 reported total purchasing volume of $32.2 billion, a 23.8% increase from the $26 billion reported the previous year. Two groups, however, had not provided figures for 1997. For all the groups that reported their volume, total purchasing was $33.2 billion in 1998, 25% higher than the previous year.
MODERN HEALTHCARE does not audit the reported financial results, and some figures may reflect double-counting of distribution volume and sales through affiliates.
Customers as competitors. Traditional purchasing groups are under siege these days, however, as some of their customers have metamorphosed into competitors. Big health systems, bulked up through mergers and affiliations, now command supply budgets that rival the purchasing volume of some groups. Purchasing professionals know that motivated purchasing executives at even modest-sized health systems can get the products they want at prices that meet or beat those offered by the brawniest groups.
Whether solo purchasing is worth the considerable administrative expense and effort, however, is another story, whose outcome seems to be reviewed regularly by health systems across the country.
Electronic complications. To make matters more interesting, the Internet has added a new wrinkle to the purchasing equation. Investors eager to cash in on Internet mania have launched a slew of dot.com companies that electronically connect buyers and sellers.
Medibuy.com, Medicalbuyer.com, Neoforma.com and Promedix.com are just a few of the purchasing sites that have crawled out of the venture capital nursery and onto the computer screens of purchasing managers. These services sport varied strategies, ranging from electronic requests for bids to guaranteed prices on hard-to-find items and online auctions for used equipment.
Though it's far too early to predict the survivors, much less the winners, e-commerce contenders promise shopping convenience anywhere a personal computer has an Internet connection. Some speculate that the Web-purchasing breed could shove aside purchasing groups as the preferred provider for healthcare purchases, while others believe the middlemen will learn to co-exist.
The Internet is becoming a bustling laboratory for solutions to the supply problems that confront healthcare supply buyers. But before that can happen, more buyers will have to hook up to the Information Superhighway. Group purchasing executives estimate that only about one-third of materials management departments have direct access to the Internet.
For the third year, MODERN HEALTHCARE asked groups about the buying strategies and purchases through committed purchasing programs that give healthcare providers deeper discounts for guaranteed loyalty to certain brands. More than two-thirds, or 22 of 30 respondents, have committed-buying programs for supplies, with 14 in place for pharmaceuticals and an even dozen for medical-surgical products. The minimum purchasing requirements to play the committed buying game ranged from 80% to 100%.
We asked the groups how they measured and reported the value of their services. More than two-thirds, or 22 of 30, provide a report card to members documenting savings. Groups use various comparisons in these reports, such as street prices and list prices.
Big groups, bigger volume. Despite the challenges, the large groups have seen their purchasing volume rise.
Novation, the jointly owned supply company of VHA and University HealthSystem Consortium, led the pack with $11 billion in purchases during 1998, an 11% increase for its second year of operation.
"We try to demonstrate our relevancy to large integrated networks every day," says John Burks, a senior vice president at Novation. "We absolutely know that there are consulting firms and others who would question the value of what group purchasing does." Undaunted, Novation believes that national buying still makes sense. Even so, the company has come to terms with the need to offer special services and contracts to certain customers.
Novation's custom service is not available to all comers, a spokesman says. Interested health systems must meet specified volume and participation criteria to qualify.
To date, Novation has worked with several large health systems-such as Sutter Health, Sacramento, Calif., and Providence Health System, Seattle-to craft customized contracts.
Some networks can choose to turn back the clock and buy without a group, Burks acknowledges, but why they would is beyond him.
"We don't think there is high incremental value beyond what we could do. If all they can do is just as well or even a little bit better, why would you want to do it?" he asks.
The second-largest national player was Premier, which had $10 billion in purchasing volume in 1998, up 17.6% from $8.5 billion in 1997, according to the survey.
After a couple of years when defectors outnumbered joiners, Premier is turning the membership tide.
Membership, including affiliates, rose to 1,781 hospitals this year, 43 more hospitals than in 1998.
"We've had some very good success in recruiting," says Richard Norling, Premier's chief executive officer.
Starting next month Mount Sinai NYU Health, New York, will spend about $150 million per year for supplies through Premier. The 12-hospital system, including affiliates, was created through the 1998 merger of New York University Hospitals and Mount Sinai Hospital, a founder of Premier. The NYU hospitals previously purchased through Novation.
Norling says Premier's growth was boosted by customers' greater use of traditional contracts and growing acceptance of new arrangements for clinical-preference items.
If you can't beat 'em, help 'em. Some groups are taking a radically different tack to growth.
Joint Purchasing Corp., New York, has decided to hedge its bets by placing some important chips on helping health systems buy independently. "GPOs in their current form are really at the top of their life cycle," says Ralph Dean, JPC's president and CEO. "They have to find a new raison d'etre."
So venerable JPC, established in 1922, decided last year to give interested health systems a helping hand in forming regional co-ops, which would essentially function as GPOs for their owners. JPC earns its keep on the co-ops through a percentage of new revenues they generate in manufacturer rebates rather than as a percentage of spending. Dean says co-op hospitals can save 7% to 10% compared with the national groups. Patronage dividends are often paid upfront on projected purchasing volume. For hospitals, these prepaid dividends create a handy source of off-balance-sheet revenues for strategic investment.
JPC's first such venture, Coastal Cooperative of New Jersey, was launched a year ago by JPC and Meridian Health System, a three-hospital system based in Wall, N.J., and affiliated nonacute-care facilities. JPC launched a second venture, called Cooperative Healthcare Services of South Jersey, last November. The members, JPC says, now include eight hospitals from AtlantiCare Health System, Egg Harbor, N.J., and Virtua Health, Marlton, N.J.
Some of New York's biggest hospitals struck a blow for cooperative purchasing early last year. With considerable fanfare, Continuum Health Partners, New York, the parent of Beth Israel Medical Center, left the Premier purchasing alliance and formed a buying co-op with St. Luke's-Roosevelt Hospital Center and later Long Island College Hospital, both in New York.
Called Health Works, the co-op hasn't realized its goal of signing on any other systems as customers, but that may change soon.
Joanne Foulke, corporate director of materials management at Continuum, says discussions with several systems got under way in late spring.
They are interested, Foulke says, partly because of the broader demand for choice and control that is sweeping the country. Besides ample buying power, big health systems have the discipline to stick to sole-source contracts, which the national purchasing groups still can't match, Foulke says. The combination appeals to vendors, and increasingly, to materials management executives, she says.
"More people seem to be doing something on their own," she says.
Even if they don't all strike out on their own as Continuum did, she says, many purchasing execs want to contract independently for some items, use a regional GPO for others and finally tap a national group for certain contracts when that is convenient.
The big groups seem to have gotten the message.
"There's all this debate about whether integrated delivery networks can get better pricing than groups," says John Strong, president and CEO of purchasing group Consorta, based in Rolling Meadows, Ill. "I think the answer is yeah." Manufacturers are willing to reward strong commitment to purchasing contracts, he says, a condition that nimble systems can meet more easily than national groups.
But Strong sees another way for groups like his to pull members together to operate like a super-system. By working collectively, a manageable number of systems can commit to high-compliance contracts and deliver orders in bulk. With well over 200 hospitals, Consorta has plenty of buying clout and the discipline to deliver the purchasing volume it promises, Strong says. He points to the company's 96.4% compliance to an eight-year, sole-source contract with Abbott Laboratories for IV solutions. The pact took effect Sept. 1.
Groups that can act like megasystems may be the best of both worlds, he says.
As the finances of health systems across the country deteriorate, top management is asking purchasing and materials management to cut expenses. By extension, the groups say, they feel pressured to deliver more value.
"We're being asked to generate larger and larger savings for our members," says Eugene Banner, president and CEO of Health Services Corporation of America, Cape Girardeau, Mo. The cost-saving imperative is driving many systems to consider bold moves.
"They're doing things they said they would never do," such as buying clinical preference items through the groups, he says.
HSCA is one of several groups, including AmeriNet, Novation and Premier, that have recently added these contracts for items that doctors have usually chosen without much regard for price.
Banner says his members are demanding more help with data on contract utilization and purchasing patterns. Bringing "more science" to bear on purchasing, he says, is at least as important as low prices.
The continued growth of the biggest national groups and the rise of independent systems is putting the squeeze on some of the smaller buying organizations.
At National Purchasing Alliance, Knoxville, Tenn., for example, acute-care purchasing is off, as some hospitals buy from competing groups, according to Kenneth Westenhaver, president of NPA.
Most NPA members, like most hospitals, belong to at least two groups, he says.
Starting in 1990, NPA diversified to include alternate-care sites. Membership in the category zoomed by about 45% to 4,123 sites in 1999, boosted by new contracts for more than 800 dialysis centers.
"The preponderance of our members are in the alternate-care sites, but we cannot ignore the acute-care business," because hospitals remain the "center of the universe that the continuum of care will still follow," Westenhaver says.
Ultimately, he thinks, groups like his, with a strong regional presence, have an edge over purely national buyers because of amazing differences in the way medicine is practiced across the country.
"I hate like the dickens that we are losing some volume on a national basis," he says.
But locally directed purchasing has enough advantages to weather the storm.
"I promise that no corporate entity in San Diego or Dallas has any idea what is needed locally in east Tennessee."