Hospital alliance VHA will launch a new business model on July 1 aimed at what officials describe as greater efficiency, flexibility and transparency -- and ultimately more cash -- for its roughly 1,400 hospital members.
Though it does not represent a fundamental upheaval in how the not-for-profit cooperative makes money and distributes dividends to its hospital shareholders, the new model attempts to simplify the uniquely complex web of charges, distributions and rebates that flow between VHA and its members. Under the new business model, hospitals will pay only for the services they receive.
As an alliance, VHA has always been different from smaller, "pure play" GPOs. But its new strategic direction, which began 18 months ago, marks a shift from its department-store-like approach for servicing hospitals to a narrower focus on activities that generate more money and fewer nonmonetary frills for its members (Aug. 23, 2004, p. 8). This subsequent change in how VHA charges members for services and then distributes the cash proceeds of its business enterprises will make it clearer to members what value they are getting from membership, said Curt Nonomaque, VHA's president and chief executive officer.
The new business model arrives as the entire GPO industry, under the scrutiny of a Senate panel, is struggling to demonstrate its worth as the middleman in the hospital supply chain.
With comment from members, Nonomaque said, Irving, Texas-based VHA is refocusing on two core activities: hospital networking, some of it through the alliance's 18 regional offices; and supply chain management, through both VHA and Novation, the group purchasing organization that VHA jointly owns with the University HealthSystem Consortium.
For the first time, hospitals will have to pay for both core businesses if they want to remain VHA members, Nonomaque said. And rather than continuing to subsidize unprofitable business lines with the lucrative proceeds of its group purchasing and other activities, VHA has shed and will continue to shed its money-losing services, such as some of its consulting businesses. Requiring members to pay only for the services they receive will particularly benefit larger health systems, which may not use as many services as smaller hospitals, he said.
"VHA had a reputation for being all things to all people," Nonomaque said. "Now we're focused much more narrowly and going a mile deep."
Healthcare group purchasing is in the midst of a 3-year-old self-examination, spurred by the scrutiny of a Senate panel and stiffening competition from newer, privately held GPOs. But Nonomaque said the new strategy was primarily member-driven, the result of talks that began when he took the helm two years ago. "All the environmental factors -- whether competition or legislative inquiries (played a role in the change) -- but they pale in comparison to what members told me when I came on as CEO," he said.
To address requests for greater transparency, VHA will now require members to pay "core" charges to access VHA supply and network services. Members also can elect to purchase extra "custom" services that are priced separately. Active VHA members won't pay any charges, however, as VHA will deduct the core charges from the administrative fees it collects from vendors that contract with Novation and VHA for supplies and services sold to hospital members. After an individual hospital's charges are deducted, VHA will return the remaining administrative fees that were collected as a result of the member's purchases. As a result, the new model is a more equitable system that only charges hospitals for the services they use, Nonomaque said.
Administrative fees are at the center of the feud between the GPO industry and small manufacturers of medical devices, who contend that the fees are essentially "kickbacks" that favor larger vendors. Nonomaque said though the new business model continues to rely on administrative fees as a primary source of revenue, VHA had considered ending them and charging hospitals for supply chain services instead. He would have "switched to that model in a heartbeat" if vendors would guarantee that every cent of those charges would go back to hospitals in discounts, he said. But fewer than half of Novation's top 20 suppliers would agree to that model.
Coupled with cuts in operating expenses and increased use of group purchasing services by members, the new model promises greater cash return for hospitals, particularly hospitals that make the most use of Novation contracts, Nonomaque said. Already, the strategic change has increased operating income 34%, to $162.3 million in 2004 from $121 million in 2003, and the cooperative expects to increase its operating income by another $40 million, or about 25%, in 2005, according to VHA. Half of the 2004 increase was the result of "improving the cost structure of VHA," including cutting 300 staff positions over the last two years, Nonomaque said, and the other half was attributable to members using services more.
Under the new business model, VHA members will receive their cash distributions and "value statements" every quarter rather than annually. Members will receive their first quarterly payment in December for the quarter ending Sept. 30.
Gary Duncan, president and CEO of 305-bed Freeman Health System, Joplin, Mo., and a longtime VHA member, said the co-op's purchasing services have always helped the system reduce costs, but he anticipated even greater return under the new model. Extra cash will "help keep community-based programs going," he said.
The prospect that the new model particularly benefits larger health systems does not concern Jim Dooley, president and CEO of two-hospital Finger Lakes Health in Geneva, N.Y., one of the smallest hospital members in the cooperative. "Some of the megasized health systems are basically subsidizing smaller members," he said, but even without the subsidies, the cooperative has a lot to offer smaller facilities.
"The GPO is the economic engine obviously, but the value of networking, particularly for smaller members of VHA, is very important. We pick up innovations that are occurring, so as a small organization, we tend to be on the receiving end," Dooley said. "There is not a lot of extra cash rolling around here, particularly for consulting services. We steal ideas from our colleagues in larger organizations, and they are happy to provide them."