In 2001 the Premier purchasing alliance lost 29 hospitals and a major shareholder when it refused to budge from its one-size-fits-all national contracting policies.
Trinity Health in Novi, Mich., which at the time purchased $1.4 billion in supplies annually-about $454 million under Premier contracts-instead forged a four-year contract that allowed for customized contracting with Consorta, a Rolling Meadows, Ill.-based group purchasing organization. Although Premier had bid on the contract for Trinity's purchasing business, Premier explained at the time that Trinity's demands fit poorly with its steadfast strategy, which gave Premier members throughout the country equal access to Premier-negotiated group contracts.
Public scrutiny of GPO business practices, competition from aggressive, more flexible companies, and the growing realization among senior hospital executives that supply chain management is the last frontier for squeezing savings in a revenue-static economy have now converged to change the GPO landscape and Premier's once intractable policy. After a five-month evaluation process, GNYHA Services, a for-profit affiliate of the Greater New York Hospital Association, last week said that it had renewed its contract with Premier Purchasing Partners, the group purchasing affiliate of Premier. Financial terms were not disclosed, but the seven-year contract, effective July 1, for the first time allows for greater purchasing flexibility through customized regional contracting that will be tightly managed by the GNYHA.
The GNYHA inked the deal with Premier on March 12 in the New York office of Giuliani Partners. Modern Healthcare covered the signing on an exclusive basis and broke the story on the magazine's Web site, modernhealthcare.com, on March 15.
The new contract marks a watershed moment for Premier, which has been virtually the last holdout for national-centric contracting. Spurred by the oversight of a Senate panel, Premier's period of glasnost over the last two years has finally dismantled its once Kremlin-like control over the purchasing habits of its 1,500 member hospitals. For the GPO industry in general, the great experiment in national contracting that was born out of GPO consolidation in the 1990s has devolved into a greater focus on regional demands.
"I think this is the next evolution for GPOs and Premier," said Susan DeVore, president of Premier Purchasing Partners. "Greater New York is a microcosm of what all our customers want."
Premier may not have had a choice to do anything but meet the GNYHA's demands. Losing the New York association's business would have put a big dent in Premier's purchasing business; in 2003 purchasing activities accounted for $344 million of the Premier hospital alliance's $392 million in total revenue, according to Premier's income highlights posted on its Web site, premierinc.com. GNYHA's current seven-year contract with Premier, which expires June 30, covers more than 100 not-for-profit hospitals that collectively purchase about $2 billion in supplies-about 11% of Premier's total purchasing volume of $17.5 billion. With the newfound freedom to go out and leverage Premier's national contracts to negotiate even better prices for its regional hospitals, the GNYHA will grow its purchasing volume to $4 billion within 24 months, said Lee Perlman, president of GNYHA Ventures.
"This is clearly a sea change for Premier," Perlman said. "Premier always has been in a position of one price for all, but it's clear to me that Premier understands and has embraced the notion that regional contracting is essential."
Rather than renewing its partnership with Premier, the new contract strengthens GNYHA's role, establishing it as "the centerpiece" of the relationship between Premier and its hospitals, Perlman said. Returning to its roots, the GNYHA will get back into the contracting business, in many instances negotiating even better pricing for its members than Premier's national contracts provide. The GNYHA also has the ability to go out and negotiate with vendors who do not do business with Premier, something it was not completely free to do before, pocketing all of the revenue-generating administrative fees for itself. To handle the extra work, Perlman said he plans to beef up his staff of about 45 by as many as 20 new employees who will be involved in contracting chores.
The new business model hinges on the GNYHA's ability to persuade its hospitals to adopt an "all for one and one for all" policy to aggregate their purchasing power in order to achieve lower pricing on a regional basis. To realign priorities among all its members, the GNYHA will encourage the 12 New York hospital systems that are shareholders in Premier to give up their equity stakes. Premier has promised to refund those investments-about $10 million collectively-in two years rather than the customary five. Also, though senior executives from Premier-member New York hospitals have historically sat on Premier's board of directors, Perlman said, "I would hope to be considered" for a spot on the board, although there are no provisions for that in the new contract.
For 1,119-bed Montefiore Medical Center, a Premier shareholder, the equity in Premier amounts to $1 million, said Don Ashkenase, Montefiore's executive vice president. The hospital, which spends $300 million on supplies each year, purchases about $100 million of that through Premier contracts. Giving up the hospital's stake in Premier will remove the financial incentives that might encourage Montefiore to focus on anything but the regional pricing, he said.
"Supply chain pricing is not an area hospitals should be competing on," Perlman said. "We should all be working toward lower prices in New York."
Though the GNYHA will be able to leverage Premier's national contracts to its favor, Perlman said that the process would not circumvent Premier's vow to end its exclusive contracts with vendors of medical-surgical supplies in favor of multisource contracts for so-called physician preference items. Premier swore off "sole source" contracting on non-commodity medical devices as part of a code of conduct it adopted in 2002 under the scrutiny of the Senate Judiciary Committee's antitrust subcommittee. Aware of the new GNYHA contract, Sen. Herb Kohl (D-Wis.) said in a prepared statement that Premier "has informed us that it will adhere to the commitments of its August 2002 code of conduct, including the commitment that there will be no sole-source contracting for physician preference items." As the subcommittee's ranking minority member, Kohl led the charge to reform GPO's business practices, which allegedly excluded small manufacturers and their innovative devices from the marketplace.
Customized contracting is only new for Premier, which at one time had a reputation for strong-arming contract compliance from its members with the threat of membership. "In the old days, a Premier (national) contract was good enough to deliver the business," said Bert Patterson, Premier's former vice president of contract administration and now president of Excel GSO, a group services organization. In contrast, during the past few years GPO upstarts Broadlane and MedAssets have marketed their business on their ability to tailor contracts to member hospital's individual needs. Even Novation, the nation's largest GPO, has been quietly customizing contracts for more than two years, although it has "not shouted it from the roof tops," said Jody Hatcher, senior vice president of Novation. "The market has been driving that for a period of time," Hatcher said.
DeVore said Premier members across the country were aware of the new configuration with the GNYHA and support "a more adaptive model." Premier is launching several collaborative initiatives with hospital systems that exploit Premier's new flexibility to encourage greater contract compliance. "I believe in the carrot approach," DeVore said.
It is uncertain whether Premier hospitals elsewhere in the country will now clamor for similar deals. With 41 hospitals in three states, Catholic Healthcare West represents Premier's largest member. "We don't have a comment at this time," said Tricia Griffin, a CHW spokeswoman.
Three GPOs-Premier, Broadlane and MedAssets-competed for the GNYHA contract, although MedAssets pulled itself out of the running on Feb. 3. "We felt it was in our best business interests not to go forward," said John Bardis, MedAssets' president, chairman and chief executive officer. "Greater New York's needs and overall focus and financial goals around their own organization didn't lead us to believe that it was the best business opportunity for us." Similarly, when the GNYHA hadn't reached a decision by the end of 2003, "we were confident that they were going to stay with Premier because it wouldn't have given them enough time for a proper conversion," said Joe Greskoviak, Broadlane's senior vice president of sales. "I think Greater New York chose to stay with Premier because Greater New York determined it was in their best interests to do so."
Meanwhile, Novation passed on the original request for proposals "in order to focus our full attention" on the GPO's more than 30 existing members in New York and New Jersey, said Kristin Lucido, a company spokeswoman.
Officials at the GNYHA and at Giuliani Partners, a consulting firm headed by former New York City Mayor Rudolph Giuliani and retained by the GNYHA to oversee the process, said Premier was ultimately selected for its ability to offer flexible contracting, its technology for managing contracts and for its financial viability.
So far New York-area hospitals are presenting a united front, toeing the GNYHA line. North Shore-Long Island Jewish Health System, which had been straying from Premier contracts in recent years, had recently asked several GPOs to bid on its business. But the effort was eventually put on hold in deference to the GNYHA initiative, said Charles Trunz, senior vice president and chief administrative officer for the 12-hospital system. "I have been impressed with Premier's turnaround over the last year and a half in terms of its willingness to work proactively with the GNYHA and its technology," Trunz said.
Pleased as it may be about the renewed contract, the GNYHA will still have to watch its back as MedAssets and Broadlane resume their aggressive marketing in New York. "We continue to believe that there is opportunity in the Greater New York marketplace and the East in general and we will continue to be competitors," MedAssets' Bardis said. "Where the opportunity presents itself to show a differentiated MedAssets model, we will continue to be aggressive."
Greskoviak of Broadlane said the GNYHA hospitals "owe it to themselves to go through their own evaluation to determine what their best opportunities are to reduce their supply spend." With the GNYHA GPO evaluation process now over, Broadlane is back in business actively negotiating "with a number of New York providers," he added.
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