Past century mark, group purchasing wrestles with storied legacy

Planted today, but positioned for tomorrow?

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If you were to hop into a time machine — be it a hot tub, oversized egg, steampunk-style sleigh or a tricked-out DeLorean — and pop back to the early 20th century, collect one or two of the pioneers of “cooperative buying” and fast-forward them to today, how do you think they would react to their corporate progeny and to the progression of what now is known as group purchasing?

John Strong

John Strong, Co-Founder and Chief Consulting Officer, Access Strategy Partners Inc., and a veteran group purchasing organization (GPO) executive, expresses doubts about heritage.

“They probably would not recognize what they started,” Strong mused. “Back then, things were simple and based on one concept: Volume aggregation to get better prices. In those days, GPOs stuck closely to the business model of contracting. While the founding fathers may recognize the underlying theme of volume aggregation, there is little else they might recognize about the way today’s GPOs operate. Today, we see all sorts of extensions into consulting, data and other services.” He posits they might find one of the leading GPOs today looking familiar and “closest to home.”

Would they recognize their successors and see their inherent value? How would they react to the various group purchasing organization business models operating now and the personalities representing them?

Yet Strong thinks the cooperative buying pioneers probably would recognize the value of today’s models against the backdrop of demand for services.

“With the advent of big data, and the consolidation occurring in healthcare they may be astounded that the healthcare marketplace — providers — is actually doing some of the work they created their companies for,” he noted. “Consolidation of provider-customers may be one of the biggest threats to GPOs over time, unless they can demonstrate the efficiency they bring to the market, and the value of the services they provide.”

Historically, the original model of cooperative buying during the “Golden Age” of group purchasing started to fade by the 1960s. Back then local/metropolitan and state hospital associations either performed their own cooperative buying internally as a member service or they signed up with third-party companies that negotiated cooperative buying contracts for a service fee. The largest and most prominent company in the industry during the early decades of the 1900s was New York’s Hospital Bureau of Standards and Supplies Inc. Products purchased (generally commodities and staples) through these early groups carried pricing discounts hinged on order volume. If anything, companies like Hospital Bureau could satisfy the definition of purchased services today.

By the 1960s, the forerunners of contemporary GPO models began to emerge, along with the market influence of investor-owned hospital chains. Until the 1960s, providers paid for access to group contracts. By the end of the decade, even Hospital Bureau adopted the concept of contract administrative fees paid by suppliers for access to providers and marketing services to those providers by GPO executives.

“[The pioneers] would probably be astounded at the size of the ‘ask’ for contract administrative fees,” Strong said. “I think the early pioneers would say that they made a perfectly good living on no more than 3 percent. They would also be astounded at how convoluted some of the value reporting has become. It used to be very straight-forward, without a lot of explanation required. They may also be astounded at the amount of product being sourced by GPOs overseas and the extent to which some GPOs go to sell their own brands or co-brands of certain products.”

Through the 1970s and 1980s, GPOs proliferated in number with some of the newer business models recruiting provider members as investors in the organizations, shareholders and affiliates that earned dividends on contracting performance stemming from fulfilling commitment levels and GPO income, along with pricing tiers, contract rebates as additional discounts, and sole- and dual-source supplier contracts.

Through the 1980s, contracts would come in 3-ring binders, Strong recalled, and you would receive new hard-copy contracts to be added to the binder. By the early 1990s, one GPO debuted contracts on CD-ROM, succeeded by contracts on computer using electronic data interchange (EDI), then an explosion in automation, calls for data standards, open transactions and by the turn of the millennium, the internet. Later that decade, one of the first three GPOs that wasn’t an investor-owned hospital chain and went public on Wall Street flamed out; its successor also made a splash on the stock exchange in the early 2000s, along with another major competitor, the last one of which remains active.

From the 1970s forward, GPOs weathered legislative challenges, regulatory hurdles and competitive forays involving clinical and IT-related ventures — including online transactions.

In short, the first wave in group purchasing brought buyers together to save money, the second wave brought buyers and sellers together to save and make money together, and the current wave has brought buyers and sellers together to save and make money faster and more efficiently than ever.

As cooperative buying companies focused on contracting as a purchased service their successors expanded their reach and service offerings into such areas as clinical engineering, data management and labor and workflow/workforce performance improvement.

While the founding fathers may not have had today’s group purchasing practices in mind when they pushed forward, they might be able to recognize elements of those earlier services with some focus. But how might they evaluate these developments? And do providers really value what GPOs bring to them today as much as providers pursued and valued cooperative buying more than six decades ago?

Perhaps the key questions remain, what do providers today really want from their GPOs? And are those GPOs delivering?

Model GPO

In comparing the various GPO business models operating today with their historical progenitors, some GPO executives believe that the industry over time needed to advance beyond the foundation of cooperative buying in bulk for discounted pricing.

Michael Wray

“While GPOs have made progress in helping to aggregate volume through a cooperative buying model, aggregation alone is a small component of a holistic approach to sustainably reducing costs,” Mike Wray, Vice President, Clinical Integration, The Resource Group, Ascension, told Healthcare Purchasing News. “In traditional sourcing strategies where only volume aggregation is considered it is challenging to both satisfy end-users to achieve high contract compliance levels. In contrast, by focusing first on end-user satisfaction, organizations achieve a highly-accepted contract portfolio. As a result, contract compliance is higher and savings through aggregation are realized and sustained. An additional benefit through this approach is increased credibility with suppliers. When suppliers trust that participants will use their products and services and meet commitments, they are willing and able to extend their most competitive pricing available.”

For a brief exploration of The Resource Group’s model for Ascension, see Ascension’s The Resource Group balances demand with delivery.

Doug Swanson

Doug Swanson, Senior Vice President, Sales & Marketing, HealthTrust, and COO, CoreTrust, questions the degree and pace of GPO progress from its historical roots, arguing that today’s business models have miles to go.

“The catalyst for group purchasing was rooted in scale and beneficial value for supplier as much as purchaser,” Swanson said. “GPOs served as an efficient mechanism to deliver market share to suppliers in exchange for optimal pricing, and evolved to incorporate prerequisite clinical and service thresholds that ensured supplier performance. It was often a winner-take-all scenario that functioned well for providers in a rational and competitive market.”

Swanson attributes GPO model evolution to myriad influences: Sociopolitical, dynamic or irrational competition in certain categories, distributors’ influence and innovation, and providers demand for greater spend coverage.

“GPOs benefitted from increasing revenue — some of it channeled back to providers, the balance invested in expertise and programs to broaden coverage or expand service offerings,” Swanson continued. “Distributors advanced their own ‘source programs’ and suppliers largely experienced accelerated erosion of margins — as pricing became increasingly visible to the market — while their selling costs increased as a function of duplicative negotiations with GPO and provider.

“There is abundant evidence of value to the provider, both cost savings and efficiency, but I would not consider the evolution a ‘mastery’ by GPOs,” he added. “I am encouraged though by the appetite for the original premise of committed purchasing, which is mastery in my mind, as evidenced by the formation of a multitude of ‘committed programs.’ What is ironic to me is the notion that any other form of group purchasing could be sustainable, absent the commitment part.”

John Wright

Somewhat critical of GPO performance improvement from a business modeling perspective, John Wright, Vice President, Supply Chain/Support Services, Intermountain Healthcare’s Supply Chain Organization, also feels GPO development remains a continual work-in-progress.

“The GPO models that exist today provide valuable benefits to a large portion of the healthcare industry,” Wright acknowledged. “The services they provide fill a void that remains for many healthcare organizations resulting from years of under-valuing and under-resourcing effective supply chain teams. It is only in recent years that healthcare systems have understood the strategic and operational benefits that a well-educated and well-staffed supply chain can deliver.”

Of course, the dreaded “but…” follows.

“The current GPO business model has not ‘mastered’ the core cooperative/group purchasing principles that were envisioned by the original founders,” Wright argued. “The primary example is that often, the representative GPO does not have the best price available in the marketplace. Effective supply chain professionals within a given healthcare organization can often obtain better value by contracting directly with a given supplier. If you subscribe to the principle that there is ‘value in numbers’ then the aggregate volume of a GPO member base should exceed — exponentially — the volume of any individual member, and therefore warrant a better price from the supplier.”

Yet it signifies a double-edged sword wielded by the GPO and provider members, according to Wright.

“This conundrum, however, is not exclusively the result of ineffective GPO models as a portion of the responsibility also falls on the healthcare system member who often does not have the resources or fortitude to drive utilization to the contracted products,” he continued. “This lack of commitment from the healthcare system does not allow the GPO to guarantee a supplier a set purchase volume. Even when the GPO model in question requires a high degree of member commitment to the portfolio, there is often a lack of compliance or still enough variation in the product portfolio that does achieve the desired market share anticipated by the supplier.”

Intermountain Healthcare represents the majority owner of national GPO Intalere.

Perched atop the pecking order of GPOs based on reported annual purchasing volume, Vizient maintains a panoramic, if not positive, view of GPO development over the years.

Pete Allen

“I believe GPOs have made great strides to evolve and change with the health systems we serve,” said Pete Allen, Executive Vice President, Sourcing Operations. “At Vizient, we are continuously looking for ways to improve the sourcing and contracting services we provide our members. Long gone are the days when a GPO could just offer a portfolio of contacts with terms of conditions and pricing. Sourcing and purchasing have become far more strategic, complex and sophisticated due in large part to the amount of data now being collected. For example, at Vizient, we are leveraging the industry’s largest supply chain database and the largest clinical outcomes database to help members optimize their supply chains in ways not possible just a few decades ago.”

Aside from data collection and analysis, Vizient pursues customization.

“Sourcing and contracting are still critical services but the model has moved beyond a ‘one-size fits all’ approach to more individualized solutions,” Allen continued. “We work closely with each member to identify their goals, develop solutions and nurture systems that lead to true transformation that improves the cost of care, while improving the care itself. Our members are under more pressure than ever, and Vizient is actively engaged in bringing the best practices forward from both health systems and the supplier community. We have built a comprehensive model to help our membership improve cost, quality and their market performance. The GPOs that are not thinking strategically about the intersection of cost and quality will find it more and more difficult to compete in this fast-changing environment.

For the latest GPO Headliners, visit HPN’s 2019 Source Guide Supplement, published last November: http://digital.hpnonline.com/editions/z38o/0A148ky/1813-HPN/html/index.html?page=10&origin=reader.

Justifying service expansion

HPN asked GPO executives why their companies should have expanded their scope beyond classic and traditional cooperative buying and group contracts, giving them the ability to choose from seven pre-packaged responses that ranged from serious to silly, so long as they explained their selections. They also could offer their own. Their options spanned the following:

  • To offer more fiscal and operational “value” to their members (e.g., owners, shareholders, affiliates.)
  • To offer more services, collect more fees — American capitalism at its finest!
  • To differentiate between competitors for market share.
  • It’s organic development and progression of modern business.
  • This is what the clients/customers want.
  • To completely anger and irritate some people — providers, suppliers, politicians, regulators.
  • Why not?

Intermountain Healthcare’s Wright played it straight by flagging three serious contenders. One of them was the organic development and progression of modern business.

“The modern GPO is much more that a cooperative buying/group contracting service provider,” Wright said. “In many ways, they are consulting and solutions providers. This organic development of their business model was to address a need within their membership and this was achievable by leveraging an established funding stream that did not require hospitals to write a check for the services.”

But GPOs also want to offer more fiscal and operational value to their members.

“The GPOs have expanded to address other key needs of their members,” Wright continued. “Over the past decades, many healthcare organizations made money in spite of themselves. Years of neglect and unclear understanding of the ‘cost’ to serve did not require healthcare systems to invest in people, processes and technology as most were able to enjoy a profit while providing care. Regulatory changes, skyrocketing costs, customer expectations and non-traditional competition seemed to converge all at the same time, and many organizations were not prepared. This allowed the GPO to create other services that could be offered to members. They also had a funding stream for these services via the contract administration fee, which made the service offerings very attractive to members.”

Plus, GPOs today must be what the clients and customers want. “If members did not want these additional services, they would not be sustainable within the GPO model,” Wright added.

HealthTrust’s Swanson agrees that earning fiscal and operational value should resonate with providers as well as delivering what clients and customers want. But at core, GPO expansion into new areas simply serves to differentiate between competitors for market share.

“What is worthy is addressing the challenges of providers,” Swanson indicated. “There are many offerings which contribute valuable insights and operating best practices that can favorably influence performance. GPOs are in an ideal spot to serve as a shared service for evaluating technologies, providing analytics, engaging physicians and advancing improved clinical models. The group purchasing function may even take a backseat to expertise and collaboration that can enhance service line performance and patient outcomes.”

Vizient’s Allen concurs with the ideas of offering of more fiscal and operational value and satisfying what clients and customer’s want.

“Hospitals are focused on performance improvement — financial, clinical and operational — and they are looking to their GPO for solutions,” Allen said. “And as the models for delivering healthcare have changed, so have the ways we provide service to our members. The work of GPOs is more important than ever now. Providers are serving an expanding and aging population that is experiencing far more chronic conditions. At the same time, new therapies are entering the market at increasingly high prices while reimbursement is falling. New sites of care are also adding complexity to the supply chain function. This is stretching provider resources in ways the industry has never experienced. By helping providers better understand their utilization and costs, through data-driven solutions and resources that offer hands-on expertise, we help providers make the most of finite resources.”

The Resource Group’s Wray stressed parallel goals and aligned incentives for driving his company’s and its customers’ success.

“The Resource Group is a wholly-owned subsidiary of Ascension, and while we operate a GPO as part of an integrated resource and supply management model, our incentives are aligned with those we serve,” Wray said. “Our goal is to lower the cost of healthcare for providers and patients. To that end, any expansion of services serves that purpose.”

Yet if today’s expanded and expansive GPOs conceivably were forced for whatever reason to shed everything they do and offer outside of the classic and traditional cooperative buying/group contracting services, save for one additional service, GPO executives are split on what that additional service should be.

For some, it’s best practice advocacy or data management; for others it might be clinical decision-making and integration.

Looking at potential progress in the decade ahead, the white canvas welcomes a wheel of colors.

“GPOs today should be focused on bringing best practices forward for the benefit of their members and using their influence with suppliers to advocate for industry improvements,” insisted Intermountain Healthcare’s Wright. “These could include things like developing a ‘master item master’ with validated product attributes, accelerating adoption of data standards and packaging to meet UDI requirements, and moving the industry towards price transparency and contract administration efficiency. GPOs should leverage all available data — clinical, operational and financial — to help optimize the healthcare delivery model. They could serve as the intermediary between member organizations and provide platforms for best practice sharing and collaborative continuous improvement. The success of any GPO would be dependent on the clinical, operational and financial success of its respective members.”

GPOs should add vetting new technologies to its traditional role of contracting, Swanson emphasized.

“Given the pace of market innovation, I think it is imperative for providers to have a ready resource for evaluating the merits of new products,” he said. “Ensuring a patient benefit and a clinician’s efficiency is vital to improving care delivery. For every provider to have to replicate that function is not practical. Again, there is efficiency for supplier and provider alike.”

Vizient’s Allen concurred that data management may be the GPOs’ big play going forward.

“Providers today struggle with the clinical impact of economic decisions and the economic impact of clinical decisions,” Allen indicated. “They’re not two problems; it is one intertwined problem. We’re here to help them breakdown the complexity in that and find solutions. We’re a performance improvement company and we have a sourcing component to the company. For example: Sourcing and contracting services help manage the thousands of SKUs that hospitals use. Data on supply spend and utilization helps hospitals understand where there are additional savings opportunities either through greater commitment or reducing variance. Clinical outcomes data such as the Vizient CDB provides insights that come from benchmarking with peers to understand clinical variance and outcomes that can be improved via sourcing decisions. These variables are all interconnected and essential to achieving the clinical-to-supply integration necessary to reduce the cost of care while also delivering quality outcomes. At Vizient, not only can we provide them all of the data, we have the clinical expertise, peer-to-peer networks, and sourcing capability sets to help them along this journey. So the one service would be connecting the vast amount of clinical data that we have to the supply chain world to enhance member decision-making across clinical, financial and operational spheres.”

Sidebar:

Ascension’s The Resource Group balances demand with delivery

 

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