It's been a schizophrenic year for group purchasing organizations, the services and supply brokers for the nation's hospitals.
After three years of political pressure from the Senate Judiciary Committee's antitrust subcommittee, GPOs this year launched a collaborative public relations offensive even as they continued their bruising and relentless battle to differentiate themselves and drive greater compliance from their members.
Based on the unaudited information GPOs reported for Modern Healthcare's GPO survey this year, all the groups are growing both in membership and penetration -- the amount of hospital supplies purchased by hospital members under their respective GPO contracts. The 16 groups reporting purchasing volume this year collectively brokered
$83 billion in supplies and services in 2004, a 17% increase from the $71 billion in purchasing volume reported in 2003.
At the same time, 18 GPOs collectively reported 13,886 hospital members -- more than twice the number of hospitals in the country. That figure would confirm the industry's calculation that most hospitals belong to more than one GPO. Hospitals' collective GPO membership grew by 725 hospitals in 2005, a 6% increase from 2004, according to the survey. The nine largest GPOs by hospital membership all reported gains, and rankings remained the same as in 2004.
The GPOs battled hard for every inch gained, calling off their competition only long enough to formulate a voluntary initiative designed to stave off the threat of legislation that would strictly regulate the industry. GPO members of the Healthcare Group Purchasing Industry Initiative promise greater transparency on an industrywide basis, although it is less clear how specific information will be to each GPO.
Coming out swinging, the initiative's members boasted last month that they had enlisted bipartisan support from five senators and seven hospital associations, although the antitrust subcommittee's ranking member, Sen. Herb Kohl (D-Wis.), says he continues "to have concerns regarding the initiative's enforceability and its transparency" (July 18, p. 4). A spokeswoman for Kohl says the subcommittee is tentatively scheduling a fourth hearing about GPOs on Oct. 19, but an agenda and list of witnesses have not yet been determined.
GPOs are the controversial middlemen that capture the collective buying power of their provider members to leverage lower prices with manufacturers, distributors and service companies. GPO revenue is generated primarily by the controversial administrative fees that vendors pay for bringing business to them. Critics charge that the fees are essentially "kickbacks" that favor powerful, well-established vendors over small, innovative companies.
With a limited pool of hospitals to tap into, GPOs are increasingly trying to differentiate themselves from their competitors by offering a variety of services beyond a portfolio of contracts. Indeed, Alpharetta, Ga.-based MedAssets now calls itself a "cash-flow improvement company," while San Francisco-based Broadlane refers to itself as "the group procurement services company for healthcare."
This year, 19 organizations responded to the second annual survey seeking financial, membership and business data for 2004 and 2003 along with projections for 2005. Surveys were sent to 65 groups engaged in purchasing. In 2004, 20 GPOs responded to the survey that was sent to approximately 60 groups. Modern Healthcare does not audit the results reported by the GPOs, which are all privately held and nearly all for-profit, but the survey asked that the chief executive officer or chief financial officer sign the survey, attesting to the accuracy of the information provided.
Judging by the responses to the survey, most GPOs will be disinclined to publicly disclose financial data as part of the voluntary ethics initiative launched this year. This year, only five GPOs reported any financial data compared with six GPOs in 2004. "I think we'll be an anomaly. I don't think some groups will ever disclose that," says Sandra Green, CEO of Shared Services Healthcare, Atlanta, a not-for-profit GPO that fully disclosed its financial data. Shared Services, which markets MedAssets' contract portfolio for everything but professional services, reported a 27% operating margin in 2004 on $5.1 million in operating revenue.
HealthTrust Purchasing Group, which is owned by investor-owned HCA and other for-profit hospital companies, declined to participate in this year's survey altogether. Alan Yuspeh, senior vice president of ethics, compliance and corporate responsibility for HCA, has played a key role in the development of the industrywide initiative, acting as chairman of its working group.
"We find the Modern Healthcare questionnaire to be similar to the Healthcare Group Purchasing Industry Initiative questionnaire, but the industry initiative questionnaire permits a full and complete explanation of business practices," says Jim Fitzgerald, president of HealthTrust Purchasing in an e-mail. "We do not believe that the "yes/no" structure of the Modern Healthcare survey allowed appropriate response to the questions."
Among those declining to disclose financial data in the survey this year was Premier Purchasing Partners. Two years ago, Premier began publicly reporting some limited financial data under a new ethics policy adopted in 2002 as part of its effort to stake out the ethical high ground for the industry. Gina Clark, Premier's senior vice president of marketing, communications and alliance relations, says Premier thought better of reporting the data on the survey because competing GPOs did not disclose their financial information last year. Although Premier continues to post some of its finances on the public portion of its Web site, "we wanted to be consistent with what was being reported by others in the survey," Clark says.
Likewise, Broadlane declined to disclose income data for this year's survey, unlike last year, although it did report operating revenue of $123.7 million in 2004, a 35% increase over 2003. "We deliver our services in a highly competitive marketplace, and we made a judgment this year that answering some of the questions in the survey would not be wise from a competitor intelligence perspective," says David McAdam, Broadlane's chief marketing officer. "We believe that the survey instrument invites the potential for inconsistent or misrepresented facts given that it is almost entirely dependent upon self-reported responses from companies that are not subject to any sort of audited third-party review."
Schaumburg, Ill.-based Consorta was the only one among the six largest GPOs by purchasing volume to disclose all the financial data that were requested. John Strong, Consorta's president and CEO, says that despite what other GPOs do, Consorta intends to publicly disclose whatever information the industry initiative elicits through its own survey.
Earning $40.5 million in operating income on $58 million in revenue, Consorta posted a healthy 70% margin and is projecting a 75.3% margin next year, Strong says. Consorta, which primarily serves faith-based organizations, returns 100% of its net income to members in cash -- another distinguishing feature, he says. "We have the highest rate of return in the industry and have for a number of years," Strong says. "It's an expectation of our owners that we'll generate a significant return."
Turning up the volume
With one exception, all the GPOs reported gains in volume, and for the most part retained their rankings from 2003. Hospital alliance Premier leapt to the top of the ranking in 2004, however, because of a retroactive reformulation in the way it reports purchasing volume. The restatement increased purchasing volume in 2003 to $24.2 billion from the $16.1 billion that Premier originally reported last year. For this year's survey, Premier reported more than $25 billion in purchasing volume for 2004. Officials declined to say what the purchasing volume would have been under the old formulation.
Clark says the purchasing volume numbers were restated for the past two years after studying what other GPOs reported last year. Most of the discrepancy was because of Premier's underreporting of wholesale pharmacy and alternate-site volume, she says.
"The business models of Premier and its competitors are very different, so this number is never going to be apples-to-apples," says Stacey Brown, a Premier spokeswoman. "We are confident that we have adhered to your definition in the truest sense and these numbers are an accurate reflection of Premier's total purchasing volume."
Novation, which Premier superseded at the top of the list, has been consistent in how it reports the same numbers, says Jody Hatcher, Novation's senior vice president.
This year, for the first time, GPOs also were ranked according to penetration -- how much in supplies the average hospital was purchasing from its respective GPO. Although the number does not take into account variations in the sizes of hospitals, it nevertheless offers a rough approximation of members' compliance to their groups' negotiated contracts. GPOs consider compliance an important piece of marketing information that can leverage greater volume discounts from vendors on behalf of their hospital members.
The number rearranges rankings considerably, lifting smaller GPOs to the top of the list and dropping some of the larger GPOs to the lower levels. Under this measure, GNYHA Ventures, a for-profit subsidiary of the Greater New York Hospital Association that makes Premier's national contracts available to its members, soared to the top of the list, outperforming even Premier.
The showing seems to validate the GNYHA's strategy to enhance Premier's national contracts with customized regional contracting under a seven-year contract inked last year (March 22, 2004, p. 6). Still, with $2.1 billion in purchasing volume projected for 2005, GNYHA
Ventures has to double its distance to attain the $4 billion purchasing volume mark Lee Perlman, president of GNYHA Ventures, predicted it would reach within 24 months after signing the contract.
"Clearly, we've spent a lot of time on increasing the throughput -- what we call 'same store growth,' " Perlman says. "As we continue to hone the portfolio, we're going to be able to increase the amount of group purchasing done by our hospitals."
The same measurement lifted Consorta to fourth from sixth and dropped MedAssets to ninth from third.
Even with Premier's restatement of its purchasing volume, the two stalwarts of the industry lost market share to the smaller GPOs in 2004. Together, Premier and Novation commanded nearly 60% of the market share in 2004 compared with their joint 63% market share in 2003.
As was the case last year, many GPOs say their biggest area of growth is in the alternate, non-acute-care market. With a limited pool of hospitals to court, most GPOs are tapping the alternate-site market for new members. "The equilibrium of acute-care members is relatively consistent," says Todd Ebert, Amerinet's president of operations. "You hear a lot of noise about members changing (between GPOs) but the volumes, from what I see, continue to go up."
For HealthCare Purchasing Partners International, a companion company to Novation with the same joint owners, membership in the alternate-site sector grew by 20% between 2004 and 2005, while at Amerinet, alternate-site membership rose 19%.
"We feel like there is a lot of untapped potential in long-term care and pharmacy," says Green of Shared Services, noting that the GPO has added a salesperson for long-term care and is looking to add another in pharmacy. Premier targeted
$1 billion of growth in purchasing volume in the fiscal year ended June 30, achieving the goal through additional purchasing volume from new owners as well as greater penetration from existing members, but it also plans to grow its alternate-site market, Clark says.
Changing their stripes
GPOs may have come together in the past year long enough to design the voluntary initiative to provide greater transparency to what was always a very closed industry, but they also are busy reinventing themselves as they battle for market share. The strategies are unique to each GPO. VHA, for example, the majority owner of Novation, in the past year decided to shed unprofitable businesses and focus almost exclusively on two core strategies: networking and supply-chain management (May 9, p. 17).
Premier's informatics division, which crunches clinical data, has likewise "become increasingly important to us and goes a long way as to how we define ourselves," Clark says. "We believe we are the clinical GPO."
Hatcher of Novation says its biggest growth has been "primarily organic" insofar as members are looking beyond contracts to reduce supply costs. "We're working with large members in different ways to meet their objectives to reduce costs. We're working in a very customized way," Hatcher says.
Premier also is looking to do more regional contracting and exploring "alternate types of membership models," Clark says, although it has not replicated elsewhere in the country the unique relationship with GNYHA Ventures.
Taking a different tack, MedAssets and Broadlane are broadening rather their trimming their offerings, while Consorta and Amerinet remain "pure-play" GPOs focused solely on the supply chain.
"We're a GPO, although I will say that GPOs are much more than a portfolio of contracts," Amerinet's Ebert says. "The portfolio is the basis from which it all drives from, but you are much more than a price in a catalog."
Whatever a GPO's particular niche, competition has pushed all GPOs well beyond the historical definition in which GPOs simply negotiated supply contracts. "Most can't just sell a contract portfolio anymore," Green says. "It's not just passive contract negotiations."
Similarly, Broadlane spends "an enormous amount of energy" advising its customers of the benefits of its contacts and helping them comply with them, McAdam says. "This is not a passive relationship," he says.
In short, GPOs are trying to grow by driving greater compliance from hospitals.
GNYHA Ventures' Perlman says the days of what he calls "field of dreams contracting" -- if you negotiate a contract, provider members will use it -- are gone. "I think everyone has realized over time that group purchasing is a lot more complicated than just negotiating contracts," Perlman says. "I believe creativity is going to win the day. The scrutiny of the industry is a good thing that will make everyone more competitive."
For contact information for all Group Purchasing Survey respondents as well as additional survey charts, visit the Surveys/Lists/Data section of modernhealthcare.com
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