Executive Interview: Premier’s Susan DeVore on contracts totalling $18 billion

Premier is on the move. Literally. The national alliance is vacating its Chicago office and moving its contracting activities to Charlotte, N.C., home of the former SunHealth Alliance. (Premier CEO Richard Norling is based in the company’s San Diego office, where financial operations are housed.)

Indeed, Premier has moved a great deal since it was formed in 1995 through the merger of Premier Health Alliance (Chicago), American Healthcare Systems (San Diego) and SunHealth Alliance. Back then, the organization comprised approximately 1,700 hospital members and a combined purchasing volume of $10 billion. Today, due to hospital mergers, acquisitions and attrition, the number of Premier’s hospital members has dropped to approximately 1,500. Yet it (and the company’s 30,000 non-hospital locations) purchases more than $18 billion in Premier contract items.

Like other group purchasing organizations (GPOs), Premier was hit hard in early-2002 by adverse publicity in newspaper and television news reports. The U.S. Senate held its first hearings on group purchasing in April 2002 and asked the industry to establish a code of conduct to curb some of its excesses.

Premier responded aggressively, adopting a code of conduct that was even tougher than that adopted by the Health Industry Group Purchasing Association. The company pledged to contract with more suppliers, refrain from investing in supply companies and limit its administrative fees to 3 percent. Long contract periods were eliminated.

Today, Premier continues to face its share of challenges. For example, the company lost four owners between February and December 2004, leaving it with a total of 198. And, like other GPOs, it is considering the implications of proposed federal legislation to oversee its industry, and working hard to balance the needs of its big integrated delivery network (IDN) members with its own national contracting program.

These challenges notwithstanding, Premier continues to develop new services for its members. For example, in late-2003, the company signed more than 275 hospitals to its Hospital Quality Incentive Demonstration Project, the first national test by Medicare of the impact of economic incentives on quality of care. And Premier Healthcare Informatics maintains a sizable comparative clinical database, which integrates clinical, financial and operational data, and provides tools for use in a variety of performance improvement and research activities.

Recently, The Journal of Healthcare Contracting (JHC) spoke with Susan DeVore, president of Premier Purchasing Partners LP, and Bob Hamon, senior VP and lead executive for Premier’s Group Purchasing Services, about the challenges and opportunities facing Premier. Following is what we learned.

The Journal of Healthcare Contracting: Have the Senate hearings, the media attention on group purchasing and the Medical Device Competition Act changed Premier’s approach to contracting?

Susan DeVore: I think that what we’ve done is consistent with our owners’ need to have choice in their product selection and to drive price to its lowest level. From my perspective, our current business practices, including the way we source products and services, are consistent with many of the proposals in the legislation. And we think that strategic sourcing, which is used by many industries, enhances our ability to drive better economic value.

Bob Hamon: In 1996, Premier led the industry in rethinking group purchasing strategies by negotiating some great blockbuster deals. But as the industry has evolved, Premier has evolved its business model.

JHC: What is strategic sourcing?

Hamon: It means determining buyers’ needs and suppliers’ capabilities for individual product categories, and then figuring out how to leverage them in a data-driven event, in which you allow the industry to create some competition.

So instead of saying, “We’ll lump a lot of products together in one contract,” you look at individual product categories. This way, you foster innovation and competition, and you let the product category drive your strategy. Strategic sourcing drives strategy at the individual product level.

DeVore: One problem with the blockbuster deals of the past is that they were long range. They were probably very competitive in years one, two and three, but they became less competitive over time. So they actually became a disservice to our owners. These contracts didn’t move and change as fast as the market did.

Hamon: In strategic sourcing, you set the term of the contract based on what’s happening in that individual market. If it’s a very stable product area, that is, one in which there’s not a lot of new technology, you may do a longer term contract. But if it’s very technology driven, in which the introduction of new technology drives prices down, contract terms are shorter.

JHC: Ten or 15 years ago, “partnering” with suppliers was considered to be a forward-thinking concept, and one that was in step with concepts like “total quality management.” Has today’s political environment killed the notion of partnerships between buyers and sellers?

DeVore: We want the most aggressive and creative process in place to secure the best set of contracts for our owners. Once we get to that best economic value, we want to absolutely partner with our suppliers and [use our field sales force and consulting personnel] to drive contract penetration among our owners, so they can see the savings associated with those contracts. We want our suppliers to value the fair and independent process we use to assess value. So I believe in partnerships, but with the best set of suppliers in any given product category.

JHC: How does Premier’s role differ in contracting for the two main types of products: commodities and physician-preference products?

Hamon: I think that there are more than two kinds of products. On one end, you have very innovative technology, perhaps with just one supplier. Then there are “made-to-order” products, such as diagnostic imaging equipment. And at the bottom of the spectrum, you have products that the market considers to be commodities. We have to have a different strategy for each category. We need to evaluate the market and the products, and understand the impact on our members, as they consider moving from one to another.

With physician-preference products, our challenge is to provide hospitals and physicians with the best available data, so that the decision is based not on mere preference, but on data. That way, we can help them understand the economic impact of their product decisions.

DeVore: We have multiple methods and tools for sourcing multiple categories of products. We also use a quality-cost database, which helps our members assess the products on contract.

Hamon: We create a matrix for each product category. The closer the product is to being a commodity, the heavier the emphasis is on price. At the other end of the spectrum, the product’s clinical attributes and issues around service, delivery and support become more important than price, although price will always be an important component.

JHC: How do you attempt to differentiate Premier from other purchasing organizations?

DeVore: Premier has small hospitals, alternate site locations and large – even national – IDNs. Their needs differ. But generally, they’re all looking for economic value, not just price, but total economic value. They want their group purchasing organization to help them manage their supply chain spend. That’s why, every year, we develop supply chain improvement plans for all of our members. We jointly develop supply chain savings targets for individual members and for Premier at large.

We build these plans and supply chain objectives with the materials management executive, as well as the clinical and financial people in the hospital. We use our supply chain database to benchmark an individual member’s performance with that of others. The customer signs off and validates whether Premier did, indeed, help them achieve the targeted savings. That way, we are all on the same page.

Second, our members want technology and data (price verifiers, data analytics) that make a complex set of information easier to manage. They want to know when they’re buying products on contract and off contract.

They’re also looking for networking and breakthrough thinking, which they can share with others. That’s why we bring our owners together. We’re big enough that we can bring together big groups as well as small ones. In these settings, our members share with each other what they’re doing in their own organizations to drive savings and economic value.

Hamon: We touch our materials managers often. We have a common customer: the clinician. Materials managers are asking us to link our clinicians with [the clinicians in their facilities]. This way, they can bring the right information to the table, so they make decisions that are not only clinically important to their institutions, but that are centered around economics.

DeVore: We have a large consulting practice, which is fully integrated with the group purchasing organization and the informatics division, to drive supply chain value, contract penetration and implementation of strategic clinical contracts.

JHC: How do you balance your national contracting program with the desire by some IDNs to do their own contracting?

DeVore: Over the last two or three years, Premier has developed a more flexible model, and that is consistent with strategic sourcing. We have a process to deliver a national contract portfolio. But we have IDNs that can deliver a level of commitment in excess of any tier or that can be a show site (for new technology). They are differentiated from the rest of the membership. We don’t want to get in the way of supply chain savings for a member. If we say that our goal is to collaborate with our owners to drive supply chain savings and quality product usage, we need to own that and to have the flexibility to drive those results. We use a wide variety of models, all consistent with the national contracting strategy.

Hamon: If you think about it, the concept of disaggregating volume to get a better price defies logic. More often than not, local contracts are negotiated in categories in which the buyer has difficulty delivering commitment. Our platform is a national platform, but we think we have to be active in categories that present difficulties for our customers, that is, those in which the supplier dictates price and conditions. Our goal is to work with our owners to change that paradigm. At a local level, they may know they’ve gotten a better price than Premier. But unless they work with their group purchasing organization, they don’t know they’ve gotten the best price.

DeVore: If we say that we address 100 percent of our owners’ supply chain spend, that means we have to work with them on national contracts as well as categories they want to address locally or regionally. That has led to an evolution of our vision: to [encompass] not only contract spend, but total spend, including renovation projects, service agreements and everything else that affects the 20 percent line item on their P&L. You need a more robust strategy to do that.

Hamon: There may be a need to multi-source many of our national contracts in order to give people some product choice. But our contracts are structured in such a way that the buyer can use them in a sole-source way in order to get the most value.

DeVore: We believe this model drives higher and higher levels of compliance. If you own 100 percent of that spend, you’re driving toward higher compliance and penetration.

JHC: What’s the rationale behind the move to Charlotte and where you are in the transition?

DeVore: Premier was formed in 1996 by a combination of three group purchasing organizations and alliances. All three had office locations. Our owners want as much return to them in their relationship with Premier. Clearly, there’s an economic benefit of being in two offices instead of three. If you believe that you need clinicians, negotiators and data managers together to build the best portfolio of contracts, you ideally want them in one location. So we had to identify the best place to house most of the purchasing partners. We ended up choosing Charlotte. We went through wave 1 of the move last summer, and we’re gearing up for wave 2 this spring. The last wave will occur next spring.

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