Curt Nonomaque

Last year when VHA restructured its operations, reducing its staff by 300 and generating more than $45 million in cost savings, some providers, pundits and suppliers began to wonder whether the heightened government scrutiny into group purchasing organization business practices, the media and industry backlash and accelerated competition from some new players on the block finally were taking its toll.

This past summer when VHA retooled its business model into a more focused operation that specialized in network and supply chain management services, and requiring that members pay one fee for a core set of services and additional fees for any other services beyond the core, more questioned whether cracks were traveling up the walls of Fortress VHA and its executives were trying to patch them up with the green paint dominating its colorful new brand identity?

Not if President and CEO Curt Nonomaque has anything to say about it. Occupying the top post for about two years now, the VHA veteran who rose through the business operations and financial ranks of the alliance for the last 19 years, emphasized that the company he is leading is charting a new course for itself – not fully abandoning its past but certainly positioning itself for a fiercely competitive future.

In a teleconference with the trade press in late July to outline and explain the nation’s leading alliance’s moves, Nonomaque downplayed any suggestions that the Senate hearings and other government agency investigations directly or indirectly influenced VHA’s decision to change its business model. Instead, he attributed the shift as being motivated more by market competition.

"We had a lot of folks that were catching up to us," he said. "It’s my job to make sure that VHA is successful and provides maximum value no matter what gets thrown at us. I believe that legislation is bad for healthcare. However, if that comes to be, we will do everything in our power to make sure that no value is lost to our membership through this process." Furthermore, he noted that legislation "turns everybody to vanilla with no chocolate or strawberry or any other choices," thereby limiting the competition that legislative supporters purport it will create.

During the call he also said he envisions VHA playing a greater role in establishing larger group buys for physician preference items, guiding the alliance into a territory that national GPOs have yet to master.

Promptly following the teleconference, Nonomaque embarked on a much-needed vacation but gamely agreed to subject himself to more questions by Healthcare Purchasing News Senior Editor Rick Dana Barlow when he returned to the Irving, TX-based headquarters on August 8.

It’s interesting. I’ve never thought about it the way you described it. That could be. I wouldn’t project that into the future yet because you’re taking it a couple of more steps down the road. That’s a possibility, but clearly, what I’ve said right now is accurate to what our current strategy is. I’m not going to go further with that in terms of where we might take the next iteration of this. That is a possibility though.

That’s an excellent question – something that we wrestle with as well because if you look at Dell and Hewlett Packard, for instance, they’re as transparent as they have to be under the FCC regulations, but then there are clearly things that they hold from their public statements because they’re competitive. That happens all the time because Dell certainly doesn’t want Hewlett Packard to know its inner workings and inner strategies, and we’re no different from that. What I can say is that two years ago we embarked on Sarbanes-Oxley. Now, as you know, we’re a private company so as a public company Sarbanes-Oxley directly applies. We started in ’03, and at the end of ’03 we were compliant with all the provisions of Sarbanes-Oxley that were not specific to having public shareholders. We’ve gone through that entire process. In fact, we were one of only two private companies to achieve that by the end of ’03. We also have gone through that process again for a second year in 2004. A big component of Sarbanes-Oxley is being transparent from a financial standpoint, from a policy standpoint and from a business practice standpoint, but it does draw the line at divulging trade secrets. Over the next few years as we continue to get better and better at this, I think we’re going to continue to draw the line in an appropriate way. My belief is that I’m comfortable providing information about what we do as long as it doesn’t cause a competitive disadvantage for our membership. I think we’ll be more comfortable with providing additional information as we get some more experience with this.

When we completed our work in terms of restructuring the organization last year, and then on top of that [added] the new business model, I’m very comfortable that we’re competitive from a cost structure standpoint. Anything in the future related to what we do – whether it’s our Marketplace@Novation to Neoforma or anything else – is going to be always based on the continued value proposition to our members. Clearly, we’re always sensitive to the cost associated with anything we do, but what I can tell you is that my goal in restructuring this organization was to make sure that we were cost-competitive when we finished it, and we did achieve that. Anything else that happens beyond that is going to be driven most importantly from a strategic standpoint.

Neoforma’s services fall under the Core charges they pay VHA, and members helped us determine what should be labeled a Core Charge and a Custom Charge. What we tried to do with the new business model is identify the services that nearly all the members use or should use because it drives efficiency and put them in our Core portfolio, since we want members to pay only for the services they use. Nearly all the members have endorsed this idea, and at the end of the day, we are prepared to demonstrate that whatever a member pays to access Marketplace@Novation will pale in comparison to the value it provides.

That’s a good one. Let me just say this. We look at Novation, and have for a long time, as sort of the ‘Intel inside.’ We find that Novation, particularly between VHA and UHC, has terrific capabilities in the core contracting process, and we think that is very scaleable. However, a lot of the work that we’re doing around process improvement, particularly as it relates to the supply chain [calls for] a much more customized approach. That really doesn’t play to the strengths of Novation, and it’s not scaleable in the same way. UHC is a very homogenous organization of large teaching institutions. VHA is much larger in number of members, but we’re much more heterogeneous. We have everything from small rural institutions to large integrated healthcare organizations. Our approach, particularly in those customized areas, is going to be different for different membership segments in VHA, which is different from UHC, and therefore you see the need for why we wrapped the VHA supply chain strategy around Novation.

Some hospitals may come together to form regional GPOs, but even when they do, we believe they will outsource their contracting efforts to national GPOs. We’ve developed an expertise in contracting that’s hard to match. Contract negotiations are difficult and extremely time consuming. National GPOs have more resources and more leverage than large IDNs and regional groups, and can spread their costs out over a larger customer base. It’s unlikely that regional groups could negotiate equivalent contracting terms and conditions on their own for an entire portfolio of products; for selected products, yes, but not an entire portfolio. Our core competency is purchasing, and that frees up hospitals to focus on their core competency - caring for patients.

Our business model is simple. The administrative fees are clearly spelled out in the contracts, and those fees go into member accounts as they purchase. At the end of each quarter we disburse those funds, minus the ‘core’ and ‘custom’ charges. All of the revenues members generate through participation in VHA and Novation contracts will be clearly spelled out in their quarterly report, and they will also see the charges. There’s no room for confusion.

Your question really hits at the matter of integrity. We are committed to transparency in that regard. As a private company, we don’t have to audit our books and open them up to the public, but we do. We were one of the first private companies in healthcare to comply with the most rigorous requirements in Sarbanes-Oxley. We also have every employee participate in our ethics seminars and sign annually that they agree to live up to the standards and rules we’ve established for business conduct. These steps and others indicate our commitment to financial integrity. We expect the same integrity of the suppliers we work with.

VHA has a long history of tailoring contracts to meet the needs of its members. This includes the customized services that our members receive through our 18 regional offices. Members tell us they value the close working relationship they have with VHA through our member networks, and for many, it’s a key reason why members stick with VHA for many years and why others choose to join. Custom supply chain contracting is a service we’ve offered for several years. When Baptist Memorial signed their agreement with us, it indicated that we are probably doing it better than others, since Baptist is leaving another GPO to sign on with us.

Because members helped us develop this new model, we anticipate that it will help us to strengthen the bonds with current members and will encourage new members to join. We believe our new business model will encourage organizations that haven’t participated at a high level to increase their participation. We’re seeing evidence of it already. We see the new business model as a competitive advantage that will fuel membership growth.

VHA’s new strategic direction focuses exclusively on delivering industry-leading supply chain services and supporting member networks so they can drive sustainable operational and clinical improvements. The streamlined structure and portfolio of services make it easier to serve our members and help them reduce expenses, increase revenue and share best practices. Novation is at the center of our supply chain management strategy because of its expertise in contracting and contract management. But if you look at supply chain management, it involves contracting, information analytics, implementation services and clinical engagement. Our core strategy is to have strong offerings in all four areas. Novation covers one and VHA covers the rest.