Strategic move

Premier's planned initial public offering and reorganization is designed to boost its capacity to compete in the emerging data analytics and consulting market at a time when a small but significant number of hospital systems are turning away from traditional GPOs for purchasing, which makes up about 60% of Premier's business.

As one of the largest group purchasing organizations in the U.S., Premier traditionally focused on negotiating contracts for medical and surgical supplies on behalf of its thousands of hospital members, of which 181 are also Premier member-owners.

In recent years, it has also established quality initiatives and invested in the development of data and analytics tools used by hospitals to manage supply costs, improve quality and safety, and promote better population health management. The latter is becoming increasingly important and a hotbed of competition as hospitals—Premier's customers—move toward risk-based reimbursement.

Though the amount of capital it will raise from the IPO is still undecided—the prospectus filed last week with the Securities and Exchange Commission included a $100 million placeholder price tag—the new cash should help Premier continue its move away from traditional purchasing activities. The company hopes to become a major player in helping hospital customers meet the demands of a cost-fixated environment.

“We believe the future for healthcare providers in the United States will require transformational change, due to intense cost pressures, a shifting competitive landscape, a changing regulatory environment, the evolving use of data and analytics and the transition to a fundamentally different payment model,” Premier said in the IPO filed Aug. 26.

These same pressures are also bearing down on the GPO market, which is highly consolidated and facing its own internal and external competition. During the past two years, at least two health systems and one insurer have formed GPOs, and about a dozen large health systems are participating in two joint ventures that are working to improve the cost-quality equation for pricey medical devices.

“Providers will be turning to their GPOs and other opportunities to look at how they can reduce their costs,” said Thomas Hughes, executive director of the Strategic Marketplace Initiative, an advisory group of suppliers and healthcare providers focused on supply-chain issues. “That's what I think is going to stir up the marketplace.”

An increasingly savvy set of hospital supply-chain executives are pushing to lower supply costs and some are reducing their reliance on GPOs or even forgoing the use of a GPO. And, as pricing has become somewhat comparable between the big GPOs, hospitals sometimes base their decisions when choosing a GPO on distinguishing services, such as revenue-cycle management or supply-chain analytics.

These decisions are driven by the pressure hospitals face on the reimbursement front and the anticipation that slack patient volumes will continue during the next few years.

“The one fundamental truth that everybody understands (is) that it will change and belts will need to get tighter,” said Ed Hissock, president of Optime Supply Chain, a supply-chain technology and consulting firm. “Hospitals are beginning to engage in various experiments to try and put forward better supply chain wherewithal.”

Premier, along with Novation, based in Irving, Texas, and MedAssets, based in Alpharetta, Ga., and the only other publicly traded GPO, are the three largest purchasing organizations in healthcare.

GPOs have been diversifying their business model, building out data offerings and providing numerous consulting services, with most of the activity occurring during the past five years. Still, Premier's supply-chain services segment has “grown rapidly” because of market-share gains, growth in the alternate site program, and what Premier called a “focus on consistent innovation and acquisitions,” according to the filing. The segment includes the GPO and other supply chain-related services, such as data and analytics.

“Big data is going to be king,” said Curtis Rooney, president of the Healthcare Supply Chain Association, a trade group for GPOs. “Those GPOs that fine-tune their data capabilities will be able to help hospitals reduce costs while also improving patient quality and safety. That's the next big push in the supply chain.”

While Premier has grown its membership from 1,949 hospitals in 2012 to 2,020 in 2013, it has lost some big-name and big-spending members. Its membership retention rate dropped to 93% in 2013, down from 99% the previous year, according to the IPO filing, even as its total revenue grew 13% to $869 million.

The Cleveland Clinic, a former member-owner of Premier that spends more about $1.6 billion on supplies each year, recently moved its business to Novation and formed a joint venture with Novation's owner VHA to address the costs of implants, stents and other physician preference items. The Children's Hospital Association in 2012 shifted $2 billion in spending to Novation.

A recent flurry of testy letters between MedAssets and Premier revealed the heightened level of competition among GPOs. MedAssets alleged that the tactics used to recruit and retain members during the lead-up to the IPO violated the nation's anti-kickback statute. It later hired a lawyer to evaluate a business plan that it said was similar to the one offered by Premier.

The rival GPO even submitted that plan to HHS' Office of the Inspector General, which found that the plan “could potentially generate prohibited remuneration under the anti-kickback statute and that the OIG could potentially impose administrative sanctions.” GPOs earn administrative fees of about 1% to 3% on the contracts they negotiate with suppliers on behalf of their hospital members. Premier distributes profits from those fees to its member-owners.

In its regulatory filing, Premier said the terms of its reorganization are “distinguishable” from the advisory opinion published by the inspector general's office. As part of its public offering, Premier's member-owners will receive revenue shares of 30% of all gross administrative fees.

New investors would be issued Class A shares while the member-owners would be issued Class B shares. The hospital member-owners would retain about 80% control of the company, although the exact percentages were not listed in the prospectuses, and they would have the right to sell one-seventh of their shares each year after the IPO.

The company will have two reporting segments: one housing supply-chain services, including the GPO, and the other including data and analytics and consulting services. Chip Cater, its new chief marketing officer, is a veteran of Thomson Reuters, a financial data and information firm.

Some of the nation's largest health systems are Premier members, including Banner Health in Phoenix, Texas Health Resources in Arlington, Texas, and Universal Health Services in King of Prussia, Pa. The GPO's membership of about 2,000 providers also includes smaller hospitals such as Mammoth Hospital, a 17-bed standalone hospital in Mammoth Lakes, Calif. An additional 900 or so hospitals use one or more of the company's other products or services.

There has been speculation in the past year that Premier was going to file an IPO. GNYHA Services, a group purchasing subsidiary of the Greater New York Hospital Association, converted from a member to a member-owner in January and is now the largest member of Premier. It owns 14% of outstanding partnership interests in Premier and reported $12 million in net administrative fees for fiscal 2013.

Industry executives speculate that the IPO lends itself to two opportunities: The company can gain access to new capital to improve data and analytics offerings, and it may serve as a way to recruit and retain members at a highly competitive time.

The lack of available effective data to improve the efficiency of the healthcare supply chain is a complaint often made by executives at hospitals and GPOs. By developing data tools that hospitals find necessary, Premier may be able to maintain or establish ties with current and potential members.

“You want to have some glue,” Hughes said. “It's got to be valuable to your members. If not, you're going to have a hard time surviving.”

While industry executives agree that the market for GPOs is changing, all say that GPOs will continue to play a significant role in the hospital supply chain, notably with the work they will continue to do on contracts for commodity items.

However, in other categories, such as physician-preference items and purchased services, hospital executives have said that GPOs have been less successful in helping drive down costs. Health systems look to control and reduce the costs of preference products such as joint implants and cardiac rhythm management devices because these devices usually make up the largest supply expense.

“The focus has been on the high-cost physician-preference items because they're able to drive the most impact on the bottom line,” said Dean Diaz, an analyst with Moody's Investors Service.

That focus led the Cleveland Clinic, which spends $180 million on implantables a year, to form its venture. Also, UnitedHealthcare partnered with several large integrated delivery networks—including Baylor Health Care System, Dignity Health and Advocate Health Care—to form a joint venture called SharedClarity, which aims to identify best-performing devices and then negotiate purchasing agreements for those products. Dignity last year indicated that it planned to form its own GPO.

“The key driver is getting better knowledge about how the medical devices perform,” said Mark West, SharedClarity's president. “There still isn't a solution out there with independent review of medical devices.”

The lack of data is a significant factor for hospitals trying to even the purchasing playing field. Without cost and quality data to compare how different devices or even products such as syringes and bandages perform, hospital supply chains can't function efficiently. That's leading some hospital systems with stable finances to bring in seasoned leaders who may want to rely less on GPOs. “Some organizations are doing their own thing and they invested in top talent, which is critical, to either complement what the GPO does for them and not to use a GPO,” Hughes said.

And that is forcing change at GPOs such as Premier and at the majority of U.S. hospitals that will continue to rely on them. “We can't afford to be that complacent anymore in hospitals,” said Hissock of Optime.

Follow Jaimy Lee on Twitter: @MHjlee