For the third time in as many decades group purchasing organizations face yet another potential threat that arguably imperils their long-term future.
The first time occurred during the healthcare reform years of the mid-to-late 1990s when investor-owned hospital chains bulked up and exerted their market influence, not-for-profit hospitals gelled into integrated delivery networks promoting more localized control over purchasing power and suppliers acquired, merged or partnered with information technology companies to use data management as leverage in the supply chain.
The second time emerged on the heels of the previous one during the short-lived dot-com bubble that promised big bucks quickly through greedy yet gullible venture capitalists and strove to upend the traditional purchasing and contracting process. The plethora of healthcare business-to-business online exchanges (more than 90 at the peak of dot-com popularity in 2000) claimed to offer lower pricing, direct ordering and information technology capabilities to simplify data collection, a decade or so before data analytics and data science emerged as buzzwords. Only a fraction of that original count remains in operation with GHX, the undisputed industry and market share leader among healthcare organizations.
The third time seems to be surfacing now as a prominent global online exchange maneuvers its way into the healthcare industry and marketplace, offering attractive pricing, access to advanced logistics via consolidated service centers and third-party distribution expertise and consumer-oriented, user-friendly ordering. And unless you’ve been off-planet during the last quarter-century or so, you likely have ordered at least one item through their service or had one given to you as a gift. (Yes, it’s Amazon.)
Granted, healthcare group purchasing services consistently have been around since 1910 so it stands to reason that GPOs will weather the current competitive storm brewing. But not without changes. The question is how, how many and why?
Basically, if a consumer-minded, customer-service-oriented global online marketplace in the process of branching out into brick-and-mortar retail ventures can offer an easy-to-use, familiar and simple ordering interface, along with perceived lower pricing without a group/volume-buying/committed contract and include reliable deliveries via third-party logistics companies, how can or will GPOs compete? What service value can they offer healthcare organizations that a “virtual” retailer/supply chain organization can’t? Clinical expertise? Data management? Strategic consulting? Workforce management? Do these amount to enough competitive differentiation to fuel demand by healthcare organizations?
Healthcare Purchasing News reached out to six of the largest GPOs in the nation, as well as its top trade group, to gauge their impressions of market dynamics and how they’re prepping for the future. One declined to respond for competitive reasons. The two largest (by annual purchasing volume and number of members) and three others shared keen insights on capabilities and competitive issues.
Multi-layered customer centricity
At core: Healthcare GPOs make it a point to understand their customers thoroughly — and beyond supply chain demands and needs, according to GPO executives.
“[It] needs to start with the customer,” emphasized David Hargraves, Senior Vice President, Supply Chain at Premier Inc., Charlotte, NC. “Healthcare systems and providers are a unique customer. Decision making is more difficult and protracted because it involves clinical and scientific judgment and alignment with frontline clinicians.
“We already provide a convenient platform to purchase supplies,” Hargraves continued. “That is actually the easy part. What is hard is the upstream and downstream work needed within healthcare supply chain. This includes delivering best industry pricing supported by predictive aggregated demand and supply, demonstrated product value and clinical efficacy using value analysis, easy e-commerce enabled purchasing, long-term contracting, standardization and compliance, priority access to important products, clinical support, the ability to assist with product recalls or product shortages, and robust cost, utilization, and outcomes analytics to determine highest-value products and predict supply.”
By delivering on these services, Premier strives to make “healthcare supply chain teams better, smarter, efficient and effective,” according to Hargraves. “Our big competitive advantage involves a sophisticated selection process which relies on clinical and contracting expertise that has built credibility with members and suppliers over the past decade,” he indicated. “The supplies on contract are clinically-proven and carefully selected by Premier members for Premier members.”
Premier’s model works for a highly regulated supplier community, too, Hargraves insisted. “We provide suppliers significant value that is returned in lower prices by reducing their selling costs, aggregating and allowing more predictive demand forecasting, providing them with rigorous analytics and a dedicated supplier engagement team, and helping with standardization and compliance around their products,” he said.
Dwelling on past accomplishments no longer cuts it, according to Pete Allen, Executive Vice President, Sourcing Operations, Vizient Inc., Irving, TX.
“Long gone are the days when a GPO could show up and solve a health system’s challenges with no more than a portfolio of contracts, best pricing and leading terms and conditions,” Allen noted. “Likewise, gone are the days when our focus was solely on sourcing. Vizient has become a full-service healthcare performance improvement company with a deeply integrated sourcing component. We are working every day to tackle the expanding range of struggles our customers face — changes to their reimbursement model, achieving core quality measures, competing in a consumer-driven market, delivering on the expectations of medical advancements, preparing for the shift in demographics as our population ages, increasing competition from alternate sites of care. These trends are reaching into every aspect of the way they run their hospitals, and they lack the capacity to invest in the expertise that we can bring them.”
An online retail marketplace cannot deliver beyond its extensive fulfillment expertise, Allen insisted.
“An online exchange doesn’t seem like much more than an automation of a current process, which is a capability we’ve also invested in,” he said. “While it might deliver some degree of efficiency and savings, an online exchange is not really set up to address the array of issues we help hospitals manage through every day. Hospitals can’t save their way to greatness — they have to be better in many other ways. That’s why we have invested in areas such as clinical expertise, data management, analytics, strategic consulting, workforce management, purchased services and many others.”
Allen cited one example of how Vizient works to pull everything together for a healthcare customer. “We are currently working with a hospital around the financial and operational considerations of their orthopedic service line,” he said. “They need to align 25 of their orthopedic surgeons that are currently doing a certain procedure. They need supply and clinical data to understand how the different devices and processes being used by doctors are impacting patient outcomes as well as their organization’s cost structure. They also need data to benchmark their performance for like procedures against that of peer hospitals in California and New York to understand best practices. And, they want help in facilitating discussions between physicians and the supply chain team to ensure that service line improves the health of their community. Bringing all those disparate pieces together is what we do every day.
“An online exchange is not really set up to address any of these critically important issues,” he added. “Hospitals are clearly looking for these services, and we are far better equipped to deliver them.”
Julius Heil, President and CEO, Intalere, St. Louis, acknowledges the attractiveness of online exchanges but cautions against allowing that allure to misread depth of service.
“Certainly healthcare providers are focused on non-labor expense reduction activities, with the majority of their focus placed on reducing supply and purchased services costs,” Heil said. “As the dynamics of the market have changed, yes, online exchanges have gained a bit more of a foothold in terms of simple transactional purchasing engagements. The true value of group purchasing organizations has been, and continues to be, the value we provide outside of, or in addition to, that simple interaction. Things like supply chain planning, sourcing and procurement, operations, logistics and distribution. We look at it as an opportunity for us to provide solutions that advance the supply chain operations of members and stakeholders, especially with the unique best practice perspective of our owner Intermountain Healthcare to draw upon.”
Heil urges healthcare organizations not to underestimate GPO capabilities and contributions.
“The challenge is that hospitals and health systems have historically underfunded supply chain operations and narrowly focused the scope of operations resulting in an inability to realize savings through transformational expense management concepts,” he said. “We feel that we, and GPOS in general, can be uniquely positioned to provide value through information, services and solutions that result in high value healthcare and improved operational performance.”
GPOs offer healthcare organizations too much to be discarded or ignored, according to Joshua Sandler, Vice President of Group Purchasing, ROi, St. Louis, but that doesn’t represent a “too-big-to-fail” excuse.
“GPOs continue to develop offerings around data management and analytics, clinical advisement and physician engagement capabilities which will be hard pressed to duplicate by the online exchanges,” Sandler said. “As reimbursements continue to shift to quality over quantity, engagement between providers and GPOs will continue to evolve around patient outcomes versus just pricing. GPOs will be advisors to hospitals to ensure the right product/medicine is utilized on the right patient at the right time. GPOs will help providers to reduce variation in product selection and procedural process to ensure best outcomes are achieved. Providers will also look to suppliers to carry additional risk with regards to patient outcomes, which can’t be facilitated by an online exchange.”
Todd Ebert, R.Ph., President and CEO, Healthcare Supply Chain Association (HSCA), Washington, recognizes the competitive environment in which GPOs operate and urges healthcare organizations not to count them out or sell them short.
“While product pricing is very important, GPOs also recognize that a number of other services are needed and provide value to their customers, and have orchestrated a collaborative environment for providers, suppliers and the GPO,” Ebert said. “For example, providers require, beyond pricing, a predictive and dedicated supply of the products they use on a consistent basis (i.e., reliable contracts), confidence that the products they use are always high quality and meet all federal and state requirements, and reliable data for their product acquisition and usage process. Clinicians require consistency and standardization. Suppliers also benefit from their GPO relationships. They are able to reduce their selling costs, benefit from standardization and predictive aggregated demand, receive clinical and operational field support and product recall support, just to name a few.”
But GPOs support other critical areas, too, such as utilization of and coordination of clinical data and supply chain data, according to Ebert. “Many GPOs are very active in working with clinicians and supply chain experts to coordinate clinical best practices with supply chain data — reducing variability, improving quality care and reducing overall costs,” he said.
GPOs also assist in disaster preparedness and support, Ebert noted. “In the recent hurricanes, GPOs played an important role in supporting their customers and the patients they serve, providing critical medical supplies and support under very adverse conditions,” he added.
Becoming something else?
Virtual marketplaces may excel in a “fragmented consumer marketplace,” according to Premier’s Hargraves, but healthcare GPOs can customize supply chains and unify the processes between providers and suppliers, including injecting clinical expertise into decision making and streamlining “process improvements to make procurement less of a burden.”
GPOs aren’t — and shouldn’t — be just about automating processes and ordering faster, Vizient’s Allen said. Case in point involves how Vizient supported a New Orleans provider with a public works problem with the city water system.
“Freezing temperatures had damaged pipes, and some members didn’t even have enough water pressure to flush a toilet while others had no water supply at all,” Allen recounted. “While the city was working to fix the problem, who did our member call? They called us. We mobilized our teams and got on the phone with our large food vendors, and we were able to have water and ice shipped in to those affected locations in fairly quick order. We are here to help with day-to-day challenges as well as when emergencies and disasters strike. An online exchange is not set up to offer that level of service.”
Intalere’s Heil foresees and promotes GPOs “consolidating and morphing into service organizations where members will increasingly pay a fee for products and services” provided by or through the GPO. Heil points to customized solutions to “increase agility and flexibility” and “overcome pain points and challenges” in a veiled nod to an earlier era of cooperative buying.
“Strong collaboration between care delivery and supply chain, between suppliers and providers, and between patients and clinicians, is critically important,” Heil noted. “The evolving model requires a deeper cross-functional type of internal and external collaboration, aligning to product/operational performance and metrics or benchmarks that GPOs or other outside partners can assist in facilitating. The industry must continue to transition from a purely transactional focus to an integrated, enterprise-wide, collaborative partner.”
Contrasting to the online exchanges and virtual marketplaces, GPOs serve as a “real-time advocate and partner for members” in their operations, indicated Ash Chawla, R.Ph., Chairman and CEO, PDM Healthcare, Cincinnati.
“While exchanges may offer the allure of ease of use or allowing for independent decision-making for a healthcare facility, in truth, exchanges can be isolating and removed of
the several important factors that go into purchasing,” Chawla said. “Functions [include] product standardization and selection, product and manufacturer evaluations/comparisons,
clinical evaluation, pricing analysis and feedback from similarly situated buyers. This is where the key role of the GPO is seen. A GPO works on behalf of its membership to continuously improve their revenue optimization.
“A GPO has many decades of experience in evaluation and contract/price negotiations for a very wide and diverse range of products, ranging from pharmaceuticals to medical supplies, office supplies, equipment, technologies, etc., and brings this knowledge and skill to the table on a daily basis,” Chawla continued. “For example, a GPO will use its strategic processes and information to identify members’ true purchasing needs, assess under-performing areas and areas where pricing or terms need to be sharpened, and strives to negotiate the most competitive and favorable contracts for its members.
“A GPO will also provide guidance on the clinical aspects of products, the supply chain and distribution methods, and help with quick implementation of a new product or service into the facility,” he noted. “Overall, a GPO can assist members with cost projections and provide them with the resources to stay within their designed budget needs. A GPO will also go back to review past purchasing data expenditures, identify trends, and work to ensure that the member is maximizing savings and enhance revenue for their institution. All of these integrated functions work to improve a member’s revenue optimization, which is possible because the GPO is serving as a real-time partner while offering a check-and-balance system- to the member.”
Additional services beyond purchasing functions include staff training on purchasing practices, supply chain management, and distribution, complete analysis of the purchasing department’s policies and procedures, real-time price analytics, and serve as a liaison between members and manufacturers, according to Chawla. “This is important to providers because the GPO offers a proactive system to reduce purchasing costs,” he said. “Further, being an independent third party the GPO offers to the provider a streamlined transparent process and reports of all factors associated in the acquisition of products. Such information is not openly disclosed by these exchanges.
“In the long run, the GPO’s role helps the provider to make its own fair and informed purchasing decisions,” Chawla added. “These online exchanges are, in effect, infant
distributors/wholesalers and will need to work with and in alliance with a GPO if they want to grow into viable entities, just like the traditional brick-and-mortar wholesalers do.
ROi’s Sandler links GPO relevance to healthcare’s Byzantine reimbursement model.
“GPOs continue to develop capabilities in the clinical analytics and advisement area, which online exchanges cannot offer,” he said. “They are online exchanges to eliminate the overhead of brick and mortar locations as well as reducing the need for a large contingent of a field-based workforce. As we continue to shift to quality-based reimbursements and bundled payments, providers will need GPOs and/or other advisors for operational and clinical advisement. We will also see a shift in how we contract to a more risk-based approach between providers and suppliers. GPOs will be able to provide both of these services to providers, whereas the online exchanges as they are currently constructed couldn’t offer either one.”
GPOs demonstrate their value by moving beyond price, according to HSCA’s Ebert. After all, online marketplaces base their success on moving price.
“Price is very important, as is providing a very competitive portfolio, but the full GPO value proposition comes from total savings beyond just price,” Ebert said. The equation is simple. “For example, GPOs have become very effective at using and interpreting data that identifies opportunities to reduce or eliminate duplication in supply chain products, which leads to standardization. Standardization leads to reduction in treatment variability which improves care and reduces costs. Our GPO members all focus on these types of processes — beyond the price in a catalog.”
Resilience and relevance can be traced to adaptability, according to ROi’s Sandler.
“I believe that any business must evolve and adapt to the market to be successful,” he said. “GPOs must continue to utilize the data in the healthcare sector, as well as other business sectors, to advise providers on reducing costs while not jeopardizing quality. GPOs must continue to engage physicians and other key stakeholders in product decisions to ensure patient outcomes do not diminish. GPOs will continue to utilize the pricing available in the market to negotiate with suppliers, whether it be online exchanges or other price transparency tools available. I believe for best in class pricing, GPOs and their members should drive as much volume as they can to as few suppliers as possible in given product categories. By utilizing clinical and pricing data, GPOs can align their membership to do this. Suppliers don’t receive guaranteed sales volumes through the online exchanges as they can from GPOs. Also online exchanges are experts in small parcel shipments, which lends itself to the non-acute market. These same type of deliveries would create operational inefficiencies resulting in increased costs in the acute care setting.”