More than a century ago, New York-based hospital and railroad company executive W.V.S. Thorne may not have known how his pioneering work — considered innovative near the beginning of the 20th century — would launch, mold and shape what would become the healthcare group purchasing industry.
Thorne’s blueprint for “cooperative buying,” which he presented at a meeting of the Hospital Conference of the City of New York at the Academy of Medicine in April 1909, led to his founding 11 months later the Hospital Bureau of Standards and Supplies Inc., largely regarded as the forerunner to and progenitor of the modern-day group purchasing organization (GPO). Cost to access its contracts? The annual hospital membership fee reportedly came to a whopping $5, today roughly the cost of a mocha frappacino.
Ushering in what would become the Golden Age of Group Purchasing, Hospital Bureau spawned a franchise network for local and state hospital associations looking to offer their members cooperative buying services. Hospital Bureau offered its services up and down the East Coast first before expanding westward in the ensuing seven decades. Unfortunately, it faded into the footnotes of healthcare history, supplanted and replaced by more daring and enterprising models arguably focused more on revenue for service than the service itself.
Gilding the Golden Age
For much of group purchasing’s six-decade-long Golden Age, Hospital Bureau set the stage for a scattershot rise of competitors, initially on the local and regional levels, including a number of regional groups centered in major metropolitan areas, such as New York, Cleveland, Philadelphia, Chicago and Los Angeles.
By the 1950s, these “cooperative buying services,” typically appended to local or state hospital associations representing not-for-profit facilities, offered volume-oriented contracting for a host of commodities and supplies. Hospitals gained access to these contracts as an adjunct service offering of their association membership by paying their association a membership fee.
Meanwhile, investor-owned hospital companies would emerge during this time, too. Because these organizations owned their facilities they could control and direct contract usage and purchasing patterns of their committed “for-profit” hospital properties, stretched over larger regions spanning several states. Furthermore, they wielded their cooperative buying clout as a market share reward for suppliers willing to pay them administrative fees for access to contract-compliant hospitals. Interestingly, several Catholic-sponsored systems also experimented with administrative fees.
Curiously, a twin-tiered system seemed to develop with each running parallel. The larger hospital associations created buying clubs for their members that paid to participate and access volume-based contracts at competitive rates. The smaller investor-owned companies, on the other hand, offered their facilities’ collective purchasing power directly to suppliers for a fee that covered much of the operational management and overhead necessary to deliver market share.
The shining Silver Age
By the late 1960s, the healthcare industry began to witness a colossal market shift between these two distinct models. Entrepreneurs and executives working within both models perceived more enticing and longer-lasting benefits by embracing an opportunistic part of the smaller model. In effect, they foresaw greater reward in collecting fees from deep-pocketed suppliers versus the budget-conscious providers.
By the late 1970s, administrative fees emerged the more favorable and predominant funding mechanism — even for Hospital Bureau and its franchised programs around the country.
Veteran healthcare group purchasing and supply chain executives largely agree that this time in group purchasing history represented a key turning point in its history even as the industry would face challenges and hurdles and achieve noteworthy milestones in the future.
Based on their experiences learned from these two cooperative buying models, executives from providers and suppliers created, developed, launched and operated a burgeoning number of larger, regional “for-profit” GPOs representing not-for-profit facilities. Basically, these GPOs eliminated the membership fees, set up contracts with many suppliers and offered “at-will” compliance programs while collecting administrative fees from contracted suppliers. These GPOs enjoyed considerable growth during the high-flying, seemingly free-wheeling years of the Silver Age of the mid-1960s through the very early 1980s.
Reimbursement revolution
But a major hurdle debuted in the early 1980s. To curb what was perceived as runaway hospital costs, the government embraced managed care and enacted he prospective payment system (PPS) that categorized costs by bundling procedures into “diagnosis-related groups” or DRGs, which would define reimbursement going forward. The move effectively shifted market control to payers from providers, and left the Silver Age GPO community scrambling to respond by gaining government protections of their business practices and offering different types of contracting while maneuvering to justify their performance to suppliers through early computer tracking of buying patterns.
During this period, bar coding, first-generation electronic data interchange (EDI) and product standardization efforts, along with expanded contract programs and services emerged to demonstrate GPO cost-management value to the supply chain process and to justify supplier investment.
By the end of the go-go 1980s, GPO competition seemed to have peaked as the Modern Age of Group Purchasing emerged in the early 1990s with the Clinton Administration’s healthcare reform program motivating a significant consolidation wave among providers that formed “integrated delivery networks” to incorporate and oversee different types of facilities to control patient care and reimbursement. Meanwhile, suppliers saw data and information as the key to their growth, demanding accountability from GPOs for provider member market share claims.
GPOs, pulled between providers and suppliers as their contributions and participation was questioned, alternatively focused on solidifying compliance and support from committed members and suppliers through longer-term contracts and intensified efforts on product standardization and market share migration through sole- and dual-source contracting. GPOs, along with distributors that also feared “disintermediation” from what was perceived as a complicated supply chain process, also re-ignited support for supply chain data standards for products and services, emphasizing the benefits that information technology offered to justify their participation and position in the process.
Managing the Modern Age
By the turn of the millennium, several had merged into larger organizations as a counterbalance to competitive threats by the leading investor-owned hospital chains, reimbursement cutbacks, the emergence of online exchanges, Congressional scrutiny into alleged antitrust behaviors, a renewed push for data standards that also involved the clinical and financial areas and a resurgent healthcare reform program from the Obama Administration that saw the emergence of “accountable care organizations” as perhaps the 21st century version of IDNs 2.0.
Yet this contemporary era, which represents much greater consolidation than the historic disparate landscape that came before it, seems no more homogenous as smaller, local IDNs pursue their own contracts for a variety of physician-centric products and services, among others, and despite efforts by some of the larger GPOs to carve out special programs exclusively for these IDNs just to keep them engaged and in their fold. These larger GPOs also have expanded into other areas to generate revenue, including clinical data consulting, and labor-oriented workflow and workforce management.
Whether these latest maneuvers represent cracks in Fortress GPO or reinforced market relevance and security going forward remains to be seen.
Twelve years ago, the late Ken Westenhaver, then President of Coordinated Healthcare Services Inc., a local GPO in east Tennessee that owned 50 percent of the now defunct National Purchasing Alliance where he also served as President, shared with Healthcare Purchasing News his observations about the “evolutionary cycle for group purchasing organizations.” The industry started with local groups, expanded to regional and then national groups until local groups re-emerged in the 1990s in the form of IDNs, and the national groups countered by offering customized contracting for local providers.
“The IDNs can act more like the proprietary hospital corporations did back in the 60s and 70s because they have the ability to standardize and commit,” Westenhaver noted. “This looks like a ‘full circle’ scenario.”
But Westenhaver balked at labeling the investor-owned hospital chains “GPOs” even if they did influence GPO market direction.
“The proprietary hospital corporations, such as Humana, Hospital Affiliates and HCA were not GPOs per se,” he argued. “They simply had a more centralized contract services area and could, because of their ownership of the hospital providers, direct contract compliance from the top down. Those contracts did indeed become the boilerplate and benchmark for GPOs, but they probably should be in a category distinctly separate from the GPO industry.”
In terms of modeling, however, Westenhaver acknowledged at the time the idea of a group purchasing spectrum with the investor-owned hospital companies on the right with more stringent compliance and control measures, voluntary GPOs on the left offering “free” access to multiple contracts financed through supplier administrative fees, and the alliance/cooperative model occupying the middle-right group by offering elements of the other two. The latter is simplistically more relaxed than those on the right, but more disciplined than those on the left, reinforced by provider investment in the GPO that extended beyond the traditional membership fee in the days of yore.
Robert “Bud” Bowen, retired former CEO of Amerinet Inc. (now Intalere), seemed to echo the cyclical nature of GPO development.
“As I look back on the past 40 years of GPO history, I am struck with the enormous changes that have occurred in the hospital purchasing universe,” he said. “But as I look at the emergence of the regional purchasing alliances, I cannot help but note the similarities of these organizations to the state and local GPOs of the 1970s and 1980s that spawned the GPO universe that exists today.”
Ruminating over rubies
HPN began chronicling the GPO industry in the midst of the Silver Age, and as HPN celebrates its 40th (ruby) anniversary this year, it looks back on what happened among GPOs and why, as well as peering ahead as to what might be versus what might have been.
In reminiscing about healthcare GPOs and their various business models over the past four decades, one wonders whether GPOs currently face a crossroads. Perhaps they’re engaging in a perennial rebuilding process? Or are they in store for a renaissance? Are they more or less as homogenized as ever? Is there enough choice and competition among the remaining “parent” GPOs so as not to alarm federal or state regulators?
The uncertainty was enough to inspire one veteran hospital-turned-GPO executive, who asked not to be identified, to encapsulate his impression with a degree of skepticism tinged with cynicism: “The canary in the coal mine is on life support,” he observed. “The market is shifting so fast I’m uncertain if they [GPOs] can shift fast enough.”
Under the notion of learning from the past to influence and predict the future, HPN reached out to about two dozen veteran healthcare supply chain management executives within the provider, supplier and GPO communities to glean their long-standing impressions of the industry’s development and growth over the last four decades and how that might shape the industry’s future. HPN asked for overarching themes that represented change and alternately maintained the status quo.
At HPN Online, these supply chain experts share their insights decade by decade, from 1977-1987, 1987-1997, 1997-2007 and 2007-2017.
HPN also provides its exclusive GPO Headliners tally during each of the four decades for readers to reminisce about old names long gone and see how the industry has progressed over time.
Story 1: GPO Inc. demonstrates heavy, but precious mettle
Story 2: Looking back to where GPO Inc. may be heading
Sidebars:
GPO Evolution and Progress, 2007-2017
GPO Evolution and Progress, 1997-2007
GPO Evolution and Progress, 1987-1997
GPO Evolution and Progress, 1977-1987
