Hospitals across the nation are working to dig themselves out of financial holes created in part by falling Medicare and Medicaid reimbursements, rising expenses and increasing bad debt from patients. We have limited ability to reduce staffing, and we obviously should never cut corners on patient care. One effective tool at our disposal to help manage cash flow is controlling supply costs-which typically account for 30% of hospital budgets-through group purchasing.
Yet group purchasing organizations, which provide so many benefits to my hospital and others, have been repeatedly criticized and scrutinized over the past year. On July 16, hospital group purchasing once again was the subject of a Senate Judiciary Committee's antitrust subcommittee hearing (July 21, p. 14). Witnesses at the hearing included GPO and supplier representatives as well as industry observers. But the customer in this debate was noticeably absent; I was disappointed the subcommittee chose not to invite hospital executives because hospitals stand to be greatly affected by any changes the government asks GPOs to consider or implement. Contrary to testimony offered at the hearing, hospital chief executive officers and other healthcare executives have an intimate knowledge and understanding of the value and impact of group purchasing. Maybe that's why we weren't invited to testify.
Since the first hearing on this subject in April 2002, the leading GPOs-Novation and Premier-have made substantial changes in their operating practices to accommodate the desires of the Senate subcommittee, particularly in creating more contracting opportunities for smaller manufacturers of medical devices and ensuring member access to technology. Yet, as chairman of the board of Novation, I have been amazed at how much energy GPO critics expend in trying to undermine the industry. No one seems to understand that GPOs in many ways protect hospitals from the predatory pricing strategies that some manufacturers, large and small, might adopt if GPOs disappeared or were weakened.
Almost ignored in these discussions has been the positive impact GPOs have on healthcare and many hospitals' reliance on them for reasons other than purchasing, such as consulting services, support with information technology and clinical-improvement initiatives.
GPOs' core function is to provide a platform for mass purchasing, which reduces costs and increases supply standardization, a key to enhancing training, improving quality and reducing human error in any industry. Group purchasing also helps ensure that hospitals get the best equipment for the money. Through GPOs, locally owned hospitals can negotiate more effectively with manufacturers. Second, many GPOs use clinical councils, made up of representatives from member hospitals, to evaluate products. In addition, Novation has made a major new commitment to ensure that members have timely access to new and innovative technologies by limiting the initial length of contracts, rebidding or adding suppliers when new technology becomes available and creating new communication tools to inform interested parties about innovative technology.
Another overlooked benefit of GPOs is cost avoidance. By relying on buying groups to perform certain purchasing functions, hospitals reduce administrative burdens, creating more opportunities for staff to engage clinical personnel on topics such as contract utilization and other initiatives that save money or enhance patient care. For my own hospital, the cost-avoidance benefit has been calculated at about $400,000 annually. We use GPO contracts not as replacements for our own business skills and clinical judgment but as extensions of them. We are free to buy products from any manufacturer, with or without the help of a GPO contract.
Healthcare organizations also rely on GPOs to develop resources. For example, Novation developed an e-commerce capability so that my hospital and other members could streamline purchasing operations without having to invest in redundant services with perhaps unreliable vendors.
Throughout this past year, GPO critics have created a distraction by claiming that fees paid to GPOs by vendors somehow taint contracting decisions. This assertion ignores the fact that many cooperatives and buying groups in other industries are funded by vendor fees. The lesson from these examples is that the healthcare GPO business model is definitely not unusual. I also would argue that current financial realities would preclude hospitals from funding group purchasing activities on their own, so the current GPO fee model is still the most viable solution.
My hospital and hundreds of other healthcare facilities voluntarily use GPOs because they help us buy quality products more efficiently and inexpensively.
It's unfortunate that this debate has been simplistically depicted as a feud between manufacturers and GPOs. Instead, this battle represents the normal relationships between GPOs that are doing their best to control costs for hospitals and manufacturers that are doing their best to maximize profits for shareholders. There's nothing wrong with either objective, but this healthy tug of war doesn't mean that manufacturers are victims or GPOs are villains.
The recent attention to GPOs by various government agencies and a Senate subcommittee has been a healthy exercise, but it's time to stop focusing on the perpetual complaining of a special-interest group representing manufacturers. If state and federal governments continue this debate, they need to recognize the perspective of hospitals. Group purchasing helps, not harms, the cause of improving quality and making healthcare more affordable.
Ron Rees is president and CEO of Halifax-Fish Community Health, Daytona Beach, Fla., and board chairman of Novation.