In another signal of upheaval within the group purchasing industry, VHA is moving away from its wide-ranging, department store-like approach to servicing hospitals and refocusing on the supply chain in an effort to deliver more hard cash to its membership.
The for-profit, Irving, Texas-based hospital cooperative said last week that it eliminated 125 positions-roughly 10% of its workforce-as part of "an organizational transformation" that began last spring under the new leadership of President and Chief Executive Officer Curt Nonomaque.
Like many of the cooperative's 1,400 hospital members, VHA has been undergoing a restructuring aimed at shedding unprofitable service lines and renewing its focus on its core business. In VHA's case, that core business is supply chain management and network development, VHA officials say.
"The environment changes continually for hospitals, and it's the same now for GPO organizations," said John Porter, president and CEO of 116-bed Ephrata (Pa.) Community Hospital, a VHA member. VHA is overhauling its business model "to be more responsive to members' needs and provide greater financial return to members. This move is consistent with the business model that is evolving and should result in more return to members without losing the responsiveness that currently exists," he said.
The restructuring marks yet another mutation in the industry, which has been roiled by the public scrutiny of a Senate panel over the last two years. With competition stiffening as smaller, aggressive GPOs grab market share, VHA and its largest competitor, Premier, are returning to their roots in group purchasing (Aug. 16, pullout section). Common wisdom is that supplies represent the second-highest expense for hospitals after labor, and senior-level hospital executives increasingly consider group purchasing the last frontier for squeezing savings out of the healthcare system.
"Members are placing a higher interest on VHA focusing on (supply chain activities) because that is where their pain point is," said Lynn Gentry, a VHA spokesman. "That is where they see the greatest opportunity for them to reduce cost."
Still, with the two dominant GPOs shedding business lines and the newer GPOs adding them, the entire industry may be headed for a showdown. VHA's new strategy is the opposite of what Broadlane, a younger and decidedly aggressive GPO, is doing, David Ricker, Broadlane's chief operating officer, said in a written statement. "Our hospital customers across the country continue to tell us that they need help in virtually every area of their operations and we are expanding-rather than contracting-our efforts to develop and deploy innovative solutions that improve operational process and reduce costs."
Need for efficiency cited
VHA's workforce reduction included 100 current employees and 25 unfilled positions primarily in corporate support areas: accounting and finance, human resources, management information systems and marketing, Gentry said. "Obviously, this was done to make us a more efficient organization so we can return more to members," he said. He declined to say how much the restructuring would save.
Before the reorganization, VHA and Novation-the group purchasing organization VHA jointly owns with University HealthSystem Consortium-employed 1,268 employees. Of these, 1,006 were at VHA and 262 were at Novation. Six Novation employees lost their jobs in last week's reorganization. Last winter, also as part of VHA's renewed focus on the supply chain, approximately 80 Novation employees moved to VHA "so we could more effectively apply their supply chain expertise and link them to our local offices," Gentry said.
Gentry declined to elaborate on what businesses VHA would be shedding or provide more details on the "organizational transformation process" that prompted the layoffs. Nonomaque declined to be interviewed, but in the 16 months since he took over VHA's helm, he has hinted that change was afoot. Noting the aggressiveness of certain "niche players," he said providing top-notch supply chain services was one of his top priorities (April 14, 2003, p. 17). Then, in a speech to VHA members last April, he indicated that VHA would be narrowing the scope of the services it offers with the goal of raising member satisfaction from "a B-plus" to an "A-plus organization."
"We want to focus our efforts on those things that provide our members with a sustainable, competitive advantage and that we're uniquely positioned to offer in a best-in-class way," Nonomaque said at the VHA Leadership Conference in April. "VHA cannot be all things to all people, and so we've begun to focus what we do. We've also become very focused on results. ... We've also focused on maximizing our economic returns to our members."
This year, as part of an industrywide move toward more financial transparency, VHA reported selective financial information. For 2003, VHA reported net income of $114 million on revenue of $451 million, a 25% profit margin. That compared with a 16% profit margin in 2002. Those margins might seem fat to hospitals that struggle to achieve a 5% margin, but they were relatively thin compared with some of the other GPOs that responded to the Modern Healthcare GPO survey. For example, Premier reported a 35.3% operating margin in 2003 and a 43% margin in 2002. HealthTrust Purchasing Group, the purchasing arm of investor-owned HCA, reported an 86.5% margin in 2003.