Group purchasing organizations have consolidated, muscled up and mutated in the four years since Modern Healthcare last conducted a GPO survey.
Despite all the tumult, the industry as a whole appears to be gaining ground in spite of its fixed pool of hospital customers. For the 17 groups reporting volume this year, the GPOs collectively brokered $68 billion in purchases in 2003, a whopping 68% increase from the $40.5 billion reported by all the respondents in 1999.View web-exclusive charts related to this story.
The top 10 respondents by volume of business reported a total of $65 billion in purchases for 2003, a 66% jump from the $39 billion reported by the top 10 GPOs in 1999.
Though the small, aggressive GPOs that have emerged in the last four years claim they are rapidly gaining market share, the survey reveals perhaps only a slow-moving game of musical chairs. Membership has remained static at best for the two gorillas of the industry: Irving, Texas-based Novation and San Diego-based Premier. Novation remains the market leader in the volume of purchases by its members. However, two newcomers-San Francisco-based Broadlane and Alpharetta, Ga.-based MedAssets have shot out of nowhere for a first time appearance on the top 10 list.
Four years ago, the potential of e-commerce was the hottest thing in the industry. This year, the groups are picking themselves up and brushing themselves off after two years of scrutiny from the Senate Judiciary Committee's antitrust subcommittee and a smattering of federal investigations into GPO business practices. The Senate panel has been investigating whether GPO business practices thwart the market introduction of innovative technologies developed by small, niche manufacturers. Because of their commanding market share, Novation and Premier so far have been interrogated under the bright lights at two subcommittee hearings in the last 28 months.
The threat of stricter industry regulation has not diminished. The subcommittee is widely expected to hold a third hearing sometime after Congress reconvenes in September. Those close to the action say draft legislation might be floated at that time.
Nearly all of them private and for-profit, GPOs were once the stealth weapon of the healthcare industry until they came under the spotlight of public scrutiny. Traditionally, GPOs are the invisible brokers that capture the collective buying power of their provider members to leverage lower prices with manufacturers and distributors. GPO revenue is fueled primarily by the administrative fees that vendors pay for bringing business to them. But as competition stiffens and supply contracts are negotiated to the optimal pricing, GPOs are increasingly branching out to differentiate themselves, offering to manage a host of functions related to supplies and purchasing.
With supplies representing the second-highest expense for hospitals after labor-some say supplies eat up approximately 20% of net patient revenue-all the GPOs agree that senior-level hospital executives are now turning to GPOs to help squeeze out costs from their operations. The newest GPO buzzword is "technology." Virtually every GPO on the national scene boasts that, hands down, it offers the best technology in the marketplace for capturing purchasing and pricing information and ensuring that hospitals are paying the lowest possible price under the group's contracts.
This year, 20 organizations responded to the survey seeking financial, membership and business data for 2003 and 2002 along with projections for 2004. Surveys were sent to approximately 60 groups engaged in purchasing. In 2000, 29 GPOs responded to a similar survey that was sent to 70 organizations. Modern Healthcare does not audit the results reported by the GPOs.
The six GPOs that voluntarily disclosed their operating revenue and profits evidence the industry's move toward more public disclosure of its business practices. That does not include Novation, whose financials are reported through its owners, VHA and University HealthSystem Consortium, nor HealthCare Purchasing Partners International, which is a companion company to Novation with the same joint owners.
Judging by the results, group purchasing is a high-margin business, especially compared with the business of running hospitals. Collectively, the six GPOs that responded earned $273.1 million on $675.5 million in revenue in 2003, an average 40.4% profit margin. By far the most profitable of the six reporting GPOs is HealthTrust Purchasing Group, which is owned by investor-owned HCA, Lifepoint Hospitals, Triad Hospitals and Healthcare Management Associates. HealthTrust, Brentwood, Tenn., reported income of $92.5 million on revenue of $106.9 million in 2003, a cushy 86.5% profit margin.
Individually, the two lions of the industry barely held their ground over the last two years and have lost market share since 2000. Novation reported $20.7 billion in purchasing volume for 2003, a 6% increase over the $19.6 billion it reported in 2002. Premier slipped backwards, reporting $16 billion in purchases in 2003, a 1% decrease from the $16.1 billion in supplies purchased by its members in 2002.
Together, Novation and Premier commanded 62% of the purchasing volume in 1999, according to Modern Healthcare's 2000 GPO survey. This year their joint market share has slipped to 54% of the purchasing volume reported by the 20 survey respondents for 2003.
Meanwhile, MedAssets burst on to the top 10 list, reporting $7 billion in purchases by its members in 2003, a 56% increase from the previous year. MedAssets is projecting a 43% increase in 2004 when it says purchasing volume will reach $10 billion. Broadlane's $4.9 billion in purchasing volume was good enough to put it in sixth place for its first appearance on the top 10 list, a 32% increase from 2002, when Broadlane reported $3.7 billion in purchasing volume.
Membership might be static for Novation and Premier, but it's growing for the industry as a whole, countering the prophesies of several years ago that large integrated delivery networks were poised to abandon their GPOs and strike out on their own. The 20 GPOs that responded to the survey reported that they collectively negotiated for 13,807 hospitals that are purchasing supplies under their contracts-more than double the number of hospitals in the country. That fact confirms common wisdom that most hospitals belong to more than one GPO.
Alternate sites-nursing homes, ambulatory surgery centers and doctors' offices-appear to be the fastest growing customer segment for GPOs. This year, 126,334 alternate sites are purchasing supplies through the 20 respondents' contracts, up from 105,870 in 2003. Though Premier lost about 35 hospitals from 2003 to 2004, which represents 2% of its hospital membership, it gained 6,019 alternate-care sites this year, a 25% jump. Meanwhile, Novation lost a little ground on both hospital members and alternate-site members.
Jody Hatcher, senior vice president of Novation, says despite the stalled membership growth, revenue has increased though there has been a slight margin decrease, but overall purchasing volume is projected to grow 9% from 2003 to 2004. That all points to higher purchasing commitments from members, especially Novation's 15 largest members whose purchasing volume climbed 29% for the same period, Hatcher says. Some of that growth may be attributed to medical inflation, he says, "but by and large what we're seeing is we're pretty effective in our ability to mitigate it and the growth is a reflection of hospitals looking for every avenue to reduce their supply costs."
With that in mind, Novation's owners are increasingly exploring ways to support supply chain activities beyond pricing contracts, Hatcher says. They are especially focused on finding ways to engage independent-minded clinicians into group purchasing activities with the end result of lowering costs. Novation similarly is focusing more on the areas with the greatest impact on its hospital members: cardiology, pharmacy and surgery, which represent more than 60% of a typical hospitals' buy, he says.
Premier takes a different spin on its depleting hospital membership and lower purchasing volume. Membership is down because of affiliate hospitals that come and go but owner membership actually is up, says Susan DeVore, president of Premier Purchasing Partners, the purchasing arm of Premier. Purchasing volume is down because with its "technology advantage," Premier offers the most competitive pricing for the 1,100 items under contract.
As Premier continues to "unbundle" contracts and break apart the categories of supplies, DeVore predicts Premier over the next couple years will triple the number of contracts it had four years ago. Like Hatcher, DeVore says Premier is focused more now on its core business of purchasing and also is headed away from the "one-size-fits-all" approach of national contacting with greater emphasis on regional contracting and customization. Large hospital systems are "pushing us to deliver the best-priced national contracts and are also building the structure to do some regional and local contracting," DeVore says.
Both Hatcher and DeVore acknowledge that market dynamics, specifically the emergence of new competitors such as MedAssets, drove much of the change in the last four years. "New competitors in the marketplace have raised the bar for all group purchasing organizations," Hatcher says. "Competition is good for the end-user and those who play in that space."
Gary Johnson, vice president of marketing and marketing services for MedAssets, says integrated delivery networks "that are just choosing a different kind of business partner" are fueling much of MedAssets' growth. MedAssets differentiates itself in its technology and its management of so-called physician preference items-supplies that are traditionally purchased according to the likes and dislikes of individual doctors, thus driving up costs, he says. Orthopedic implants, cardiac devices and spinal components "are getting a lot of scrutiny by providers because these lines are still profitable and generating cash" to offset the losses of other service lines, Johnson says. Still, the cost of these components is growing at double-digit rates, he adds.
Problems and frontiers
Not all GPOs have fared well in the last four years. Coordinated Healthcare Services, a local GPO owned by 14 hospitals in the Knoxville, Tenn. area, has lost some membership "and a tremendous amount of volume," says Kenneth Westenhaver, its president. "I can tell you specifically on acute care most (of the lost business) went either to Novation or Premier. As I'm sure you are aware, most hospitals have access to more than two GPOs, so we haven't lost members per se but mostly dollars." MedAssets and others have "gained some significant ground, but primarily from acquisition and affiliate agreements with other GPOs rather than just marketing hospital to hospital," he adds. Indeed, Coordinated has entered into an agreement with MedAssets for pharmacy supplies, he notes.
From Westenhaver's perspective, the alternate-care sector is the last frontier for national GPOs. Also, despite predictions in the last several years that large hospital systems would try striking out on their own for purchasing, the warnings never panned out as some GPOs have begun offering customized contracts as an alternative.
Nor has much of the change been driven by the public scrutiny, he says. "We had to go through a lot of administrative effort to derive a standard of ethical conduct," Westenhaver says. "It was just another instance when government involvement had the unintended consequences of increasing costs to GPOs, but I don't think it literally changed anything."
Karen Matjucha, a principal and national practice leader in provider supply chain consulting services for Deloitte and Touche, agrees that the movement away from GPOs toward self-contracting never materialized. Healthcare providers have learned that no matter how much market power they amass, it's dwarfed by the market power of large manufacturers, she says.
"They have found that the amount of time and effort it takes to contract for every item is not worth the effort for the pennies that it would save, and they just don't have the manpower," Matjucha says. "They are sticking with (the GPOs) and even the organizations that moved away are going back. A lot may switch from Premier or Novation to MedAssets or Broadlane just because they feel the philosophy is more in line with helping an individual provider retain control."
The federal scrutiny was simply what "started the firestorm of providers moving away, but I don't think it had the impact we expected it to except to increase ethical standards," Matjucha says. "That's been a real positive, but overall in terms of pricing, I don't think it's been a big impact. I think the whole industry has a heightened awareness around ethics and making sure they are independent in their relations with vendors."
'New competitors in the marketplace have raised the bar for all group purchasing organizations. Competition is good for the end-user and those who play in that space.'--Jody Hatcher, senior vice president of Novation.
If you would like to order extra copies of this issue, please contact customer service at 888-446-1422. If you would like reprints of this article, please contact Cathy Fosco at 312-649-5297 or at [email protected]View web-exclusive charts related to this story.