At first glance, Modern Healthcares 2007 Group Purchasing Survey might appear to reveal little in the way of market-trend surprises. But as any good statistician would tell you, dig a little deeper and youll find that numbers always tell a story. This years findings weave the tale of a mature marketplace forcing group purchasing organizations to consider whats next if they are to continue to grow as individual businesses and as an industry.Download the Group Purchasing Survey from our Databank/Surveys section, Group Purchasing: 2007.
Moving beyond the hospital
Our annual Group Purchasing Survey shows continued growth, but focus has turned toward post-acute markets, other channels
In a year when trend news from the group-purchasing market has been a bit scant, and GPOs have largely competed to hold on to market share, it would be easy to see little more than the predictable shifts in hospital membership that can accompany contract expirations.
The 2007 survey reveals that GPOs have mostly achieved market saturation when it comes to signing up hospitals as purchasing-group members. Overall, only 58 additional hospitals were added to the membership rosters of the 16 GPOs that participated in this years survey.
That saturation means that while individual companies can grow their businesses by winning over competitors members, there is little room for GPOs as a group to increase hospital membership. As a result, GPOs large and small are looking away from organic market growth as an area ripe for development and toward building opportunities for expanded business with existing customers.
I think its been the case for quite some time that there arent a lot of hospitals out there that arent represented by a GPO, says Bud Bowen, former chief executive officer of GPO Amerinet. Bowen now works as a consultant helping suppliers conduct business with GPOs. I think 97% to 98% of hospitals are affiliated with at least one GPO.
Based on overall purchasing volume among GPOs that reported figures for this years survey, the top two organizations are Irving, Texas-based Novation, which projects $33.1 billion in volume for 2007, up about 4.7% from the previous year; and Charlotte, N.C.-based Premier Purchasing Partners, which estimates 2007 volume will hit $31 billion, a 7% increase (See chart, p. S2; two GPOs among the top 10 in last years surveyMedAssets and GNYHA Venturesdeclined to provide volume figures this year).
Over the past couple of years, much has been made of GPOs efforts to grow business among nonacute-care providers such as nursing homes, clinics, physicians offices and college-campus healthcare facilities. That growth continued over the past year, with alternative-site membership among the survey participants growing more than 13% to 191,810 in 2007, from 169,507 nonacute-care providers in 2006.
But as Alan Weinstein, former president of Premier and a current board member for a number of healthcare companies, observes, hospitals are still the major revenue providers for GPOs. I dont think there is a group purchaser out there that gets more than 10% to 12% of their dollar volume from nonhospitals, he says.
So where exactly are GPOs looking for growth opportunities?
According to GPO executives and industry experts, many are working to do more contract development between hospitals and vendors in areas like outsourced services and capital equipment. Both types have traditionally received less attention than contracts with vendors of medical-surgical supplies, according to Weinstein.
He notes that only about 60% of hospitals purchases are made through GPO-negotiated contracts, because the other 40% of goods and services purchased by hospitals either arent available to be purchased through GPO contracts, or the existing contracts dont meet their needs. So, theres a lot of room (for GPOs) to capture more of hospitals purchasing business, Weinstein says.
Bowen agrees, but says doing so will be no simple task. Id say GPOs dont have great product penetration in those areas because it involves a lot of heavy lifting, he says. He notes, for example, that negotiating capital equipment contracts between hospitals and vendors is an area of business that is not necessarily untapped, but certainly is unfulfilled.
Decisions on major capital equipment purchases can vary from one hospital to the next and one system to the next, Bowen says. Its based on employee preference, and GPOs can certainly help hospitals make that decision, but they will have to go hospital by hospital to create contracts.
Similarly, it can be difficult for a GPO to sell outsourced services such as call-center operations or food services en masse to its hospitals, as requirements for such services vary system to system and hospital to hospital. Its difficult to aggregate volume when all your hospitals have different needs, Bowen says.
But as GPOs look to increase their revenueas well as savings for hospitals, a goal GPO executives consistently cited during interviewsmore are looking to make headway into these elusive areas of contract development.
Jody Hatcher, senior vice president of Novation, says his company has experienced substantial growth in service contracts this year. For things like nursing services, the percentage of growth has been pretty significant, both in terms of the availability of new services and hospitals use of the services, Hatcher says.
While pharmacy and medical-surgical supply purchases continue to be the largest single area of Novations business (member hospitals pharmacy purchases make up nearly 40% of the companys annual business, for example), growth between 2005 and 2006 was more robust in the area of service-contract purchases. According to figures supplied by Novation, its affiliates University HealthSystem Consortium and VHA experienced growth of 15% and 17%, respectively, in service-agreement purchases made by member hospitals. By contrast, member hospitals pharmacy purchases grew only 7.3% for all Novation affiliates, which includes VHA, University HealthSystem Consortium and Provista.
Premier Purchasing Partners tells a similar story regarding growth in its service-contracts business. According to company President Michael Alkire, the GPO increased its facilities service contracts being used by hospitals by 87% in 2006. Weve had an incredible amount of success with contracts such as elevator (maintenance) services over the last 18 months, Alkire says. Weve also recently added more services such as nursing-staff contracts. Hospitals have had a great deal of shortage in the staffing areas, so from the GPO perspective, it will be a very, very fast-growing area (of business) for us.
Alkire says Premier also has focused on beefing up its capital and construction program, which helps hospitals plan for and negotiate vendor contracts for capital-equipment and construction-project purchases. The company had a 22% growth in purchasing volume in this area during 2006, according to Alkire. He notes that capital and construction contracts are a particular area of focus since industry estimates project hospitals will spend some $200 billion on construction over the next decade.
According to Alkire, Premier has created capital and construction analytics that, similar to medical-surgical analytics, can be used to help members gain savings on capital equipment and construction purchases. Well be able to do group buys in areas like MRI equipment or carpeting, because well be able to use collected data to forecast when hospitals will need to purchase and upgrade equipment, he says.
While they look to develop new areas of growth, GPOs arent losing focus on areas that traditionally do well, Weinstein says. He notes that GPOs also are looking to grow business by pushing for greater contract compliance from their member hospitals in the area of medical-surgical supplies purchasing. Many are trying to increase compliance by demonstrating that hospitals can realize greater savings by switching to a sole-source supplier for all purchases of a particular product.
John Strong, president and CEO of Schaumburg, Ill.-based GPO Consorta, says the philosophy of using a sole-source for medical-surgical supplies to drive sales volume and bring member hospitals greater savings was part of what prompted not-for-profit, Catholic-affiliated Consorta to partner with the for-profit GPO HealthTrust Purchasing Group, Brentwood, Tenn., earlier this year (Jan. 8, p. 6). We thought there was value in combining our GPO operations with HealthTrust, Strong says. Like us, HealthTrust is willing to do sole-source contracting when we see the value in it. We expect 80% compliance from our members with these contracts.
Not all of our contracts require compliance, but when we do, we expect to see a very significant level of volume. We feel by doing that, our savings (to members) are significantly better than other GPOs.
Part of the challenge that GPOs face in pushing for greater contract compliance among members is convincing them that giving up the option of purchasing specific supplies off-contract is well worth the savings.
To that end, Todd Ebert, president of St. Louis-based Amerinet, says his GPO has invested heavily over the past year in demonstrating the potential savings for hospital clients that comply with purchasing contracts. One of the major shifts we made this year was getting more representatives out into the field to work with customers on identifying opportunities to use contracts, Ebert says. As a result, the GPO anticipates a 5% to 7% increase in purchasing volume on existing contracts this year, he says.
Lee Perlman, president of the New York-based GNYHA Ventures, says his organization embraces a similar philosophy when it comes to building its business. GNYHA Ventures, a Premier-affiliated regional GPO that represents nearly 300 hospitals in New Jersey, New York and Puerto Rico, relies on dozens of field representatives whose sole jobs are to visit hospitals and work with materials-management and clinical staff in identifying appropriate, cost-saving products and services contracted through GNYHA Ventures, Perlman says. The GPO increased its membership by 15.6%, up from 256 hospitals in 2006, in the past year. Perlman says direct customer service is essential to the organization continuing that level of growth.
The days of field of dreams contractingthe belief that if we build it they will comeis over, Perlman says. I think the GPOs that will be successful are those that will hold the hands of their customers and help them understand the value of an individual contract and how it will help the hospital. You cant just hand them a list (of vendors) and hope theyll buy off the contracts.
In addition to increased customer service, GPOs are also promoting the potential for member hospitals to receive higher administrative-fee rebates or dividend payments as a reason for committing to greater contract compliance.
According to Weinstein, a growing number of GPOs are promising to give a greater percentage of the administrative fees collected from vendors back to their member hospitalsrates that vary depending on the GPO. Under a long-running formula, GPOs finance their business costs, and, in the case of for-profit GPOs, generate earnings, by collecting 1% to 3% of the revenue vendors earn through their sales to member hospitals. Weinstein believes both the 2006 Senate subcommittee investigation into GPO business practices and a desire to compete for and keep hospital membership are behind the higher-reimbursement trend.
Theres definitely an effort on the part of GPOs to not hang on to profit from administrative fees, but to distribute them to members, Weinstein says. He points to Consorta as an example.
In 2005, the GPO returned 76 cents of each dollar it collected in administrative fees to its member hospitals, and last year it returned 75 cents of each dollar. Those rates are significantly higher than the roughly 69-cents-per-dollar rate it returned to hospitals during the early part of the decade.
Well (return 75 cents on the dollar) again this year, even with the loss of (64-hospital) Ascension Health as a member, says Consortas Strong. Ascension left Consorta for Dallas-based GPO Broadlane in October 2006 in search of greater efficiencies (May 14, p. 6).
Curtis Rooney, president of the Health Industry Group Purchasing Association, an industry trade group in Washington, says no one trend defined the GPO industry over the past year. As a result, he says industry watchers can expect to see GPOs making movements on a variety of fronts in the coming year, including possible further consolidation and more regional group-purchasing activity.
That may be particularly true now that MedAssets, which did not participate in this years survey, has made public-investor money a part of the equation. On Aug. 24, the Alpharetta, Ga.-based supply chain and revenue cycle-management company filed a preliminary prospectus with the Securities and Exchange Commission indicating it plans to be the first GPO to become publicly traded. The announcement ended long-time speculation that MedAssets would go public, and it may well have established a new area of questioning for future annual surveys should other GPOs follow suit. According to the prospectus, MedAssets hopes to use proceeds of the stock offering to pay down hundreds of millions of dollars in senior debt and grow the company.
The GPO business is no longer just straight contracting, says Rooney of the changes happening within the industry. GPOs are making investments in informatics and materials management outsourcing and analytics as well.
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