NEWS
Taking
charge without
accepting charges
Evaluating & managing group purchasing services
For a variety of reasons, hospital
executives – materials managers in particular – maintain a love-hate
relationship with their group purchasing organizations.
Some welcome the capability to offload
and outsource a host of activities and responsibilities so that they can
focus their efforts in areas they value more to enable
revenue-generating and expense-reducing results to their facilities.
Others bristle at having to tow the GPO line, inwardly relishing reports
of hospitals and other healthcare facilities that "break free" to
function logistically on their own as an integrated delivery network (IDN)
and collect their own potentially lucrative administrative fees.
Lingering federal government
investigations into GPO activities and the industry’s own restrained, if
not tepid, response, have done little to scrub away the tarnish that has
emerged within the last few decades of a nearly century-old business
operation.
Yet it’s safe to presume that no
amount of public and private scrutiny, as well as regulatory hurdles,
will eliminate a service-based industry that has developed and evolved
for almost 100 years. Because group purchasing as a function represents
a useful and valuable cost management tool for healthcare facilities,
GPOs are here to stay. However, the way they operate, under what model
they ascribe and to what degree of administrative and financial
transparency they support may change over time.
No matter the side on which you stand,
evaluating GPOs to support and managing those relationships from day one
can be a challenging and sometimes thankless task. Some justify their
relationships by the dividend and rebate checks or contract pricing
discounts they receive. Others justify their relationships by the
breadth and depth of services they can access.
GPO services can make or break a
facility’s bottom line. In fact, a growing number of them have migrated
into areas to fortify a facility’s top line, too. In short, GPOs are
weaving their menus into every facet of a provider’s clinical and
business interests, interlacing themselves on both sides of the balance
sheet. That’s why selecting and cultivating the right GPO relationship
is a serious matter that can spawn serious consequences.
A means to an end
But one misconception about evaluating
and managing group purchasing services is that it can be relatively easy
to take a GPO relationship for granted and not give it the thorough
analysis and continual nurturing that it deserves. Just pick one and
sign the contract. Then they do all the work. However, in order for a
facility to gain the optimal administrative, financial and operational
benefits of working with a GPO that facility actually has to do its
homework. It’s an ongoing process and shouldn’t be considered an
out-of-sight, out-of-mind throwaway decision based solely on pricing or
rebate check values.
"Some hospital execs assume that
simply by being a member of a GPO, they will automatically receive best
available pricing," said Patricia Klancer, a former hospital director of
materials management now serving as a senior consultant with Amerinet
Inc. "In reality, success requires attention to detail, management of
the program and implementation of the contracts that fit the
organization’s needs and meets their strategic objectives."
Joe Colonna, director of The Coastal
Cooperative of New Jersey, Neptune, NJ, concurred. "One of the biggest
misconceptions is not understanding that a GPO relationship is like any
other successful partnership. You can’t just sign a few documents and
assume all is right with the world," he said. "Both the CEO and the
supply chain manager must realize that you will have to continually work
the GPO relationship in order to achieve optimal results. There should
be a well-organized strategy developed with the GPO, complete with a
process for executing that strategy and clearly defined roles for each
stakeholder." Colonna formerly served as a high-ranking executive with a
regional GPO that is now part of MedAssets Inc.
When done right, choosing a GPO really
isn’t an easy task, according to Norman Krumrey, a former veteran
hospital materials management and GPO executive who retired in January
as a consultant with Amerinet. Neither is fully and properly using one.
"A GPO is a tool to help the supply
chain manager take advantage of savings available," Krumrey said. "A
tool. If the hospital pays to get to use this tool they should be sure
it gets used properly. It takes payroll hours and skill to use a tool
properly. What I see is that hospitals use the GPO very heavily,
sometimes, for med/surg purchases but neglect using the tool for more
costly goods and services where bigger savings are possible. In many
cases this is due to lack of skilled staff with time to use the tool
correctly. Many supply chain management staffs have been reduced, and
time to use the GPO tool suffers. Some supply chain managers may feel
they can do better in pricing than the big GPO miles away. Short term
this may be possible, but why undermine the GPO chosen to help? I say
the GPO tool used properly can save time for the supply chain manager."
Time seems to be the fleeting
commodity in need for proper GPO evaluations. "In reality most hospital
supply chain management departments are so busy with placing POs they do
not have the time for in-depth analysis of what the GPO could really
do," Krumrey noted. "In some cases hospitals delegate pre-purchase order
placement duties to department heads who are not aware of GPO
capabilities. Supply chain management is not aware of this activity
until told to place a PO."
Answering the call
Growing GPO credibility issues only
complicate matters further.
"GPOs struggle to provide ongoing,
quantifiable value to their member hospitals," noted Ron Sigar, a
consultant with Amerinet Inc. "With GPO contract pricing being at
parity, GPOs must educate and clearly communicate their program
strengths while emphasizing their distinct value proposition and their
solutions to assist the supply chain leader and executive management in
achieving their organization’s strategic objectives."
Today’s GPOs must shed the
"old-school" image of a decade ago "where their focus is on developing a
book of supply agreements with nothing else of real substance to help
healthcare providers improve financial and operational performance,"
according to Mark Miriani, senior vice president, contracting and member
services, MedAssets Supply Chain Systems, Alpharetta, GA. "Most GPOs are
still vendors in that they do not offer enough to earn the role as a
business partner in eyes of the customer." Miriani estimated that
customers make time for only four to six strategic business partners
whom they choose carefully.
Reported GPO savings and value
typically throws up a red flag for Mark Pollock, materials manager at
Denver-based National Jewish Medical & Research Center. "Scant
information other than summary outcomes is ever reported to back up
figures," he said. "Diligent purchasing professionals demand details,
methodologies and believable documentation from vendors – not just
splashy graphs and summaries of dubious origin. They should demand no
less of GPOs. As long as all parties in the reporting hierarchy, from
vendors to hospital departments to materials managers to IDNs to GPOs,
etc., have motivation to skew data and perspectives toward rosy
outcomes, many outside the process will never have more than mediocre
faith in it."
Pollock urged GPOs to respond to
claims that they base savings formulas on "cost avoidance" and
meaningless market pricing, rather than true price reductions. "I don’t
expect or demand continued price reductions every year – no group could
deliver that," he added. "But I do expect GPOs to be honest in their
performance measurements and presentations."
Sigar agreed. "In today’s competitive
marketplace, GPOs cannot simply propose savings just to win the business
without clearly communicating the initiatives and changes that are
necessary to achieve the proposed savings," he said. "The successful GPO
will invest the time and resources to create partnerships with their
customers and to ensure long-term results through proactive follow-up
with executive management."
Pollock also hoped that GPOs won’t get
sidetracked from their core business, allowing revenue side consulting,
data management and online exchange services to marginalize purchasing
expertise.
"To some supply chain managers the GPO
is just another sales rep trying to increase their share of purchases
made," Krumrey said. The hospital must work toward building the
relationship to improve the savings realized from a GPO. Each hospital
must look at the supply chain management staff to be sure they can
affect the savings
available."
Miriani indicated that savings is only
part of the equation. Consequently, supply chain managers and CEOs must
look at the bigger picture, or at least place group purchasing and
supply expenses in a broader context. "Supplies affect not only expense,
but cash flow, quality of care, operational efficiency, reimbursement
and margin," he said. "For example, as in the automobile industry, the
cost of parts that are used to build a car are covered by the selling
price of the car. If assembly line workers arbitrarily added more
expensive parts without notifying those setting the prices, the margin
on the car would quickly diminish or disappear. The same theory holds
true for use of supplies in a hospital. The supplies used on a patient
affect the profitability (or lack thereof) of each case. You need a
partner that understands and can help you manage this."
Staking the claims
GPOs routinely stress that they can
save a hospital tens of thousands, if not millions, of dollars annually
based on that hospital’s actual usage of a GPO’s contract portfolio. So
a supply chain manager, and potentially the CEO, must look beyond the
marketing materials, dividend and rebate checks and sales hype to
determine whether the claims are true and results reliable.
Determining how much value a GPO can
deliver to a facility can be as simple or as complex as necessary,
provided you know some specific hard-hitting questions to ask and key
reports to request to scrutinize.
Although the proper time to conduct
such analysis is when a facility is considering switching GPO
allegiances, but the best time may be with its existing GPO.
"Supply chain managers should start
with their current GPO relationship and fully understand the existing
value and opportunities and the work effort necessary to obtain the
value," said LeAnn Born, vice president of contract and program services
at Novation and a former hospital and IDN materials management
executive. "Then carefully compare the existing value and opportunities
to the marketing messages that other GPOs are ready to bring in to the
executive offices of the health system. Compare the approach that you
already have access to with the approach available from a new
relationship. If the new approach is better aligned with your
organization, make a change. If the existing approach has a chance,
commit to it and go after the savings."
Furthermore, Born encouraged hospitals
to look at the whole picture. "What one might offer in price, another
might recapture with more in added value through rebates and dividends,"
she added. "Certainly price is the most efficient way, but it’s not the
only way to capture value."
Colonna cautioned hospitals about how
they compare their current GPO’s performance with any prospective GPOs.
The first question you should answer is whether you’re maximizing your
current GPO’s contract portfolio and resources, he noted. "Because if
you are not, then the odds are any other GPO will look better then the
one you have, when it comes to savings," he said. "It is a fact that
when organizations compare GPOs, they are not comparing ‘best’ price to
‘best’ price. They are comparing the prices they are currently paying to
the new prices offered by the contender GPO. The contender will use
‘best’ price, and since most organizations fail to maximize their GPO
portfolio and/or do not always qualify for the ‘best’ price – the
incumbent GPO, more times then not, comes out looking bad."
That’s why evaluating GPOs can be
tricky, according to Colonna. Most hospitals do not participate in
best-tier pricing for all products with their current GPO, nor are they
fully aware of all the services that their GPO can provide.
Three key questions that Colonna said
should be asked are: What is involved with reaching the best tiers of
pricing? What tools will the GPO provide to easily identify contract
savings opportunities? How will the GPO help facilitate product changes?
"Choosing a partner that can get the
lowest price may be important to you," Miriani noted. "However, you must
ensure that you are actually getting this price on every purchase. This
may involve cleaning up your item file to maximize on contract spend,
consolidating all of your contracts (national, regional and local) into
one electronic catalog and tracking your performance over time."
The best method to evaluate GPO
savings is to prepare a market basket, or sample list of products with
annual usage and current costs that can be compared from one GPO to
another, according to Klancer. The market basket should include a
variety of manufacturers and products used by the hospital, focusing on
the top 10 percent of the items that would account for a significant
portion of the hospital’s top expense. The hospital should compare both
the invoice pricing and the rebates and allowances that will be returned
by the vendor or GPO. This should provide the facility with a
"reasonable estimate of the overall benefit to be gained from several
different GPOs," Klancer noted.
Keep in mind that a hospital should
identify how closely the GPO portfolio matches the hospital’s current
product usage, Klancer continued. "In reality, it is still extremely
difficult and time-consuming for members to convert business from one
brand to another," she said. "Since the vast majority of GPO pricing has
very small differentials, finding the portfolio that provides the best
match and flexibility for the member will drive savings in a more
consistent and timely manner."
Miriani, however, doesn’t believe
"market basket pricing" or "contract portfolio size" represent
meaningful criteria for choosing a GPO business partner. A more
effective process involves focusing on how the GPO connects supply
expense to reimbursement, how it uses and offers technology to automate
processes and how they focus on supply areas with the greatest
bottom-line impact, such as physician preference items.
Pollock advised GPO-hunting hospitals
to devise "a system of tracking actual prices paid, void of complicated
savings formulas, rebates or guesses at market prices avoided" as
the primary barometer of GPO purchasing value. "Non-purchasing
activities such as information sharing ventures should stand on their
own merits," he added.
Krumrey indicated that hospitals
shouldn’t avoid even the most fundamental of questions, which can be
hard-hitting in their own right. They include: How much representation
does the GPO have in the area? What are their qualifications other than
sales? What is the communications system? Email on line chain of
command? How large is the home office staff? Can an answer to my
questions be obtained rapidly? Can you furnish regular reports within 30
days of purchases? How are contracts provided to users? Is the GPO a
401(c)3 or a for-profit? Who owns the GPO? Can the savings reports show
the hospital PO number to tie the purchase to the savings?
"The most common tactic used by GPOs
to respond to RFQs or market basket assessments is to respond with the
lowest possible price within the GPO’s portfolio — whether the
organization could actually qualify for it or not," said Fred Crans,
director of materials management at The Finley Hospital, Dubuque, IA.
Crans previously served as a consultant with VHA Inc. and subsequently,
Broadlane. "The basic question the supply chain manager needs to ask is,
‘What will my organization pay for these items?’ In fairness to the GPO,
the GPO should be aggressive enough to offer cost improvements available
to the organization if it were to migrate to new vendors – often a huge
hurdle."
The bottom line is that a supply chain
manager must be able to generate proof, typically through other
hospitals, that a GPO – or prospective GPO – actually does what it
promises to do, according to Miriani. He encouraged site visits of
reference accounts "and really look under the hood." He also advised to
look for "proven technology solutions that are in place and running as
claimed." He added: "Be wary of vapor ware, beta sites and other
concepts that aren’t really in place. Also ask if outside companies are
really the source of technology – that spells higher risk versus the
company being the innovator themselves."
Making a case
Choosing a GPO can be challenging
enough. Cost-justifying your choice to the C-level executives, if
they’re not involved already, can be even tougher, particularly if
you’re trying to do it beyond price alone. Many experts agree you
should. That’s why they must work with a variety of internal indicators
and performance measures beyond price just to state their case.
Such indicators include purchasing
expenses over time, documented savings, savings as percent of supply
expense, supply expense per adjusted admission and contract compliance
(percent of purchases made on contracts) to understand their current
performance, according to Born.
"Beyond price is a tough question
because so many GPOs are now offering supply chain ‘solutions,’" Colonna
said. "But if we focus just on the work around the traditional
deliverable of a GPO – getting to the best price – I think the question
comes down to resources. Most healthcare organizations do not have the
internal resources to fully maximize their contract utilization. Yes,
[materials management information systems] will make sure you pay the
price on the P.O. but how do you get to the best tiers of pricing? If
the total answer includes things like managing utilization and shifting
product lines, then part of the measurement should be around how good a
job the GPO is doing at helping you manage utilization and product
shifts."
A strong GPO partnership should extend
far beyond contracts and price and involve increasing competitive
advantages and improving margins, Klancer urged. "Members should look
critically at the GPO services – understand their value proposition and
ensure that they offer the tools and resources to increase provider’s
margins – to maximize both supply chain and revenue cycle performance as
well as offer education, member input opportunities, customer service,
and portfolio adherence to member requirements," she added. Furthermore,
she noted, matching key suppliers between the hospital’s existing
contract portfolio with that of the GPO will demonstrate whether the
hospital actually can achieve quoted savings.
"Respectable performance measures
include not only real savings, but also delayed price increases,
reasonable estimates of cost avoidance through standardizations,
value-added services like education and training and real-time
information on products, services, government regulations, etc., that
helps materials managers and other hospital staff do their jobs,"
Pollock said.
Follow the numbers
During a detailed and extensive GPO
evaluation process, and a similar ongoing relationship management
process, a hospital can collect and share scores of data and
information, overwhelming the materials management staff sorting through
it all and trying to make it all make sense in a meaningful way. It
doesn’t have to be rocket science, even though it may feel like it.
Born’s solution is to "spot check"
everything and assign portfolio managers to review the details of the
comparisons. "Make sure the GPO is comparing apples to apples and make
sure someone knowledgeable is reviewing the details," she said. "This
approach validates clinical acceptability. You don’t want to be
surprised when you think that a quarter million dollar savings is
available, but the item that is cross-referenced is not a clinically
acceptable alternative."
It’s tough, acknowledged Colonna, but
maintaining control goes a long way. "You have to look at it like RFP
development," he advised. "You would not ask the responding vendors to
give you the specs because the vendor will always slant those specs to
their own strengths. The supply chain manager has to take control of the
process, provide the data and demand that it be returned in a very
specific format. This should not be done in a vacuum, but instead the
manager must reach out to other departments and the executive suite for
input on developing the criteria and metrics that will be used to judge
to evaluate the GPOs."
Hospitals should start with a GPO RFP
that reflects their own internal goals and objectives, according to
Klancer. One hot spot to watch involves custom contracting and services.
"GPO performance in these areas is highly differentiated, and some GPOs
are unwilling to provide members the support and flexibility to tailor
these high-impact programs to the hospital’s unique requirements," she
said. "Meaningful comparisons should include a sampling of the
customized agreements the GPO has supported in the past."
Supply chain managers should present
complete and concise purchase volumes and primary distributor usage
reports to prospective GPOs, as well as non-distributor supply items,
according to Sigar. He also encouraged hospitals to have the GPO
identify product conversion areas and tier levels necessary to obtain
the proposed best contract pricing.
The bottom line is that the supply
chain manager simply has to review it, scrub it, revise it and see how
it can be loaded into such key benchmarks as supply costs as a percent
of operating budget and as a percent of net revenue, and supply costs
per adjusted discharge and per patient day," Crans summarized. "In doing
so, any anticipated rebates or participation benefits need to be
factored in to reduce operating costs and create the proper adjusted
cost total."
Miriani stressed that GPOs should
provide services and technology that will help a facility make better
financial decisions. "Start with the organization’s business goals and
what is needed to build the business case," he said. "Focus on the
financial impact to be delivered on a schedule. Ask for the proposals in
this format. Get support from business analysis or decision support team
to help analyze the financial proposals and present it in a way that’s
easily digested by the executive team." HPN
To see a chart of the top
12 GPOs by purchasing volume, click here.
To see a list of 40
tips for more successful GPO relationships, click here. |
