Shopping for a GPO

After Robert Wood Johnson University Hospital converted to a new group purchasing organization in 2008, the academic medical center reported first-year savings of $6.5 million.

The goal of switching GPOs was to cut costs, says William Stitt, vice president of materials management at the not-for-profit hospital.

Factors ranging from the hospital's use of physician preference items to the complexity of the patients it treats as well as its status as a Level 1 trauma center led to increased economic pressures for the organization in recent years, according to Stitt.

Previously a member of GNYHA Ventures, a for-profit subsidiary of the Greater New York Hospital Association, Robert Wood Johnson University Hospital began an evaluation of its purchasing organizations in 2009. It later selected HealthTrust Purchasing Group, a Brentwood, Tenn.-based GPO. “One of the primary objectives was: How do we reduce our spend?” Stitt says.

By choosing HealthTrust, the New Brunswick, N.J.-based hospital opted into the GPO's committed purchasing model, which requires stricter compliance with vendors but can deliver better pricing.

The hospital saved $2.2 million in 2010 and is expected to save about $4.5 million this year, including a targeted operating room initiative that aims to cut $2.5 million in costs. Most of the first-year savings were “directly relative to the conversion to contracts” with HealthTrust,” Stitt says.

Robert Wood Johnson University Hospital reported a $2.9 million gain in operating income for fiscal 2009, compared with the $3.4 million operating loss it reported in fiscal 2008, according to a Moody's Investors Service report from August 2010. Moody's cited three factors that led to the hospital's return to profitability: a 3.5% increase in admissions, revenue cycle improvements and expense controls that included the switch to a new GPO.

Hospitals and health systems are scrambling for ways to reduce their operating costs to preserve their margins, and that scramble includes comparison shopping for GPOs or putting pressure on their GPO to do more for them.

“The hospitals in this country have placed an additional set of pressures on the GPOs they work with in terms of how they perform,” says Jody Hatcher, president and CEO of Novation. “Increasingly, what's happening is that hospitals are looking toward their GPOs to provide services and results that have a dramatic impact on the costs of supplies.”

Novation is a supply contracting company owned by VHA and the University HealthSystem Consortium, two national healthcare purchasing networks.

While hospitals and health systems differ in the reasons why they change GPOs, the bulk of the decision to contract with a new purchasing organization remains rooted in the ability to cut costs. “Price is the primary driver,” Stitt says. “Rarely do you see someone switch a GPO if they don't save money.”

Interviews with several healthcare organizations in the U.S. showed a marked difference in what factors played the deciding role in choosing a new GPO.

Some providers cited sophisticated data analytics tools as key to their decision. Others say their hospitals sought out flexible purchasing models that would be of the most benefit to physicians and nurses. Other providers simply explained the importance of a cultural fit.

“Price still counts, but there are many other things,” says Todd Ebert, president and CEO of Amerinet, a St. Louis-based GPO. “Data and analytics are extremely important to identify opportunities not only to make sure that the customer is receiving the correct price, but to identify potential duplications and to identify therapeutic alternatives all the way to utilization and consumption.”

Tom Marchozzi, executive vice president and chief financial officer at Hartford (Conn.) Healthcare, says the four-hospital system began to look at implementing quality and safety programs that would support its coordination of care initiatives in 2009.

Hartford Healthcare, previously a member of VHA, awarded a seven-year contract to GNYHA Services, the Premier healthcare alliance, and Nexera, a consulting firm owned by the GNYHA, in December. GNYHA Services, the GPO arm of GNYHA Ventures, functions as a regional GPO for Premier.

“It's not like we were looking for a new GPO initially,” Marchozzi says. “We were looking for the tools necessary to be successful in healthcare reform in the future and provide our patients with the best quality care.”

Because of GNYHA Ventures' longtime partnership with Premier, the system also has access to Premier's programs and has elected to participate in Premier's readiness collaborative for accountable care organizations and the Quest program, a collaborative for 200 high-performing hospitals in 35 states.

“As a nonprofit, we're going to choose whoever is offering opportunities to reduce costs,” Marchozzi says. “The reason we decided on Premier and the Greater New York Hospital Association was that it fits into our vision of providing high-quality coordinated care and keeping our costs low.”

Marchozzi also noted that the system relies on Premier's bricks-and-mortar presence in Washington—the company opened a Beltway office more than 25 years ago. The quality-improvement and group purchasing organization is based in Charlotte, N.C.

Marquette (Mich.) General Health System began to work with Premier for similar reasons. CEO Gary Muller says Premier's advocacy efforts keep the hospital linked in to Washington. Marquette is also participating in Premier's ACO readiness initiative.

The hospital started the evaluation process of its GPO four years ago, around the time Muller joined the 275-bed hospital as chief executive. The facility previously worked with MedAssets in addition to HPS, a regional GPO in Southern Michigan that is affiliated with MedAssets, he says.

“We meant to see how they compared to others,” Muller says, later adding: “They didn't have the breadth of value-added programs that Premier does.”

Muller, who had worked with Premier prior to joining Marquette in 2007, says the hospital reviewed six GPOs and chose Premier in March. He cited the facts that the organization is provider-owned; its clinical, financial and operational databases; and its competitive purchasing proposal, as well as the additional savings promised by Premier's regional purchasing groups, as factors in the decision.

Hackensack (N.J.) University Medical Center estimated the committed purchasing model will save more than $20 million—about 8% or 9% of the 703-bed hospital's annual supply spending—in the first year of its contract with HealthTrust Purchasing Group, according to Karl Blomback, the hospital's vice president of finance.

“The committed model is the big difference,” he says. “They can really drive some tremendous savings.”

When Blomback was evaluating GPOs, he saw that the HCA hospitals work with HealthTrust. He declined to say what GPO the hospital previously worked with.

“Knowing that those are for-profit hospitals, that also made me very sure that the pricing had to be the best because when you're a for-profit hospital, you know they're not going to accept anything with a higher price,” he says.

Hackensack immediately saved $9 million by switching to HealthTrust's pricing in 2011, according to Blomback. He says that there had been no pushback from physicians and nurses about the transition from a flexible purchasing model to a committed purchasing model.

Jim Fitzgerald, president and CEO of HealthTrust, says the GPO has experienced an “unprecedented level of interest in our model over the last year.” The GPO's committed purchasing model requires approximately 80% compliance of a hospital's total annual supply-chain spend, he says. While the GPOs vary in terms of the compliance they require, HealthTrust's model is considered to require the strictest compliance.

“When health systems become challenged operationally, that opens up the evaluation of lots of services and things that they do, which can often include the GPO,” says Sean Angert, a managing director at Huron Consulting. “As some health systems have grown in size and volume and spend, many of them are looking for additional flexibility.”

Yet most providers agree that the differences in pricing are limited. GPOs that offer committed purchasing models may be able to negotiate slightly lower prices, but both providers and GPO executives say that the distinctions in most of the purchasing organizations are more likely tied to their investments in data and technology offerings, as well as programs aimed at quality improvement or revenue-cycle management.

“We're all within a very close ballpark when it comes to price,” Amerinet's Ebert says. “It's what else you can do—how can you help them with an overall solution to save money?”

Six GPOs accounted for nearly 90% of total GPO purchasing volume in 2007, according to a Government Accountability Office report from August 2010. The Health Industry Group Purchasing Association has reported that about 96% to 98% of hospitals in the U.S. use GPOs, as cited on the trade group's website. There are six GPOs that each managed at least $7 billion in annual purchasing volume for fiscal 2010, including Premier ($43 billion), Novation ($40.1 billion), HealthTrust Purchasing Group ($18.1 billion), GNYHA Services ($9 billion) and Amerinet ($7.2 billion).

MedAssets, which does not report annual purchasing volume, reported $45 billion in total management spend for fiscal 2010. The Alpharetta, Ga.-based GPO acquired the Broadlane Group, a rival GPO, in an $850 million deal announced last September.

Competition in the GPO market is based on a number of factors, according to MedAssets' annual 10-K securities filing. Some of the factors include the ability to deliver financial improvement and return on investment through the use of products and services; breadth, depth and quality of products and services; quality and reliability of services, including customer support; and price. In the same filing, MedAssets reported that it “primarily compete(s) with Amerinet, HealthTrust, Novation and Premier, Inc.”

“We're seeing a huge, huge appetite and desire to understand how best to manage spend, with the GPO being a component of that, and what are the other opportunities to not only recognize the immediate benefit but to use a platform—a delivery model—that allows them to sustain those gains longer term,” says Joe Greskoviak, president of spend and clinical resource management for MedAssets. “This is about sustainability.”

MedAssets began working with the Texas Purchasing Coalition, a coalition made up of 11 hospitals and health systems in Texas that previously contracted with Novation. The coalition's contract with MedAssets, in which the savings period began July 1, 2010, generated $43 million in savings in the first year. Its annual purchasing volume is approximately $800 million.

“There was no foregone conclusion that the TPC members would leave VHA,” says Geoff Brenner, president and CEO of the Texas Purchasing Coalition. Brenner noted that the value proposition proposed by MedAssets was more competitive than the proposals provided by the other GPOs.

“We were interested heavily in the economic impact; theirs was the most aggressive,” Brenner says. “They had, in our view, the best capabilities around physician preference items and analytics capabilities. Those two are really important and for our group, we felt like the greatest economic savings opportunity would come in the form of physician preference items.”

Physician preference items were a factor that played into Scottsdale Healthcare's decision to contract with Novation in 2009, according to Michael Hildebrandt, the health system's associate vice president of supply chain.

He says that PPIs account for “a huge part of our total spend” and VHA's physician gain-sharing program had particular appeal for the three-hospital system in Arizona. Scottsdale Healthcare, which had worked with Amerinet for about 20 years, evaluated GPOs in 2009 to address financial concerns that included a recent net operating loss as well as the addition of a new 60-bed hospital.

“We had a bit of an off-year financially,” Hildebrandt says. “We were saying: What are some of the things we can do to improve our financial performance?”

VHA not only provided a more aggressive cost savings guarantee proposal that promised $12.5 million in savings opportunities over a two-year period, Hildebrandt also identified the organization as a cultural fit for Scottsdale Healthcare, which currently uses VHA's benchmarking programs.

Roxborough Memorial Hospital in Philadelphia signed a contract in June with Amerinet, which had been serving as a “sub-GPO,” after working with the Broadlane Group for five years, according to Robert Souaid, CEO of Solis Healthcare, the owner of the 137-bed hospital. Souaid says the acquisition of Broadlane by MedAssets led to Roxborough's decision to evaluate GPOs.

He attributes Amerinet's customer service as a major factor in the decision to work with the St. Louis-based GPO.

As hospitals and health systems continue to face cost pressures, supply costs will remain under scrutiny. Huron's Angert says that he expects to see more independent delivery networks attempt to leverage their collective volume and become less reliant on GPOs. Yet, providers that are using the technology and tools available through their GPOs may find it difficult to transition to a new system, in the case of a GPO conversion.

Marchozzi says that the question used to be: What GPO is going to bring the best value in terms of dollars and cents?

“Now, it's more of a decision abut how that GPO fits into the larger strategic vision of where we want to drive the organization.”