GPO Differentiation: The Real Deal

From relatively humble beginnings as metropolitan and regional shared-services organizations, today’s group purchasing organizations (GPOs) are seeking to serve as total financial resources for their members.

Contract portfolios may remain the bedrock of their offerings. But most GPOs believe they must do more than send out lists of new contracts. Now, they believe they must help their members use those contracts for maximum value. Many are providing networking tools, onsite consulting and electronic systems to help their members do just that.

Some of the GPOs are dabbling into the internal supply-chain and financial operations of their members by offering consulting services. Others are crossing into clinical services, helping their members tie together product usage with clinical outcomes. Still others believe that they have something to offer their customers on the revenue side of their operations, helping them charge appropriately for their services and then collect all the reimbursement to which they are entitled.

The Journal of Healthcare Contracting spoke at length with six group purchasing organizations for this two-part series – Amerinet, Broadlane, Consorta, MedAssets, Novation and Premier – to learn how each is attempting to differentiate itself in today’s market. In this issue, Amerinet, MedAssets and Novation will be profiled.

Amerinet: Paying attention to what keeps its customers up at night.
A conversation with Bud Bowen, CEO, recently retired; and Todd Ebert, president.

The Journal of Healthcare Contracting: How would you characterize the competitive landscape among GPOs today? On what basis are IDNs and hospitals making their GPO choices? Given that, how is Amerinet attempting to differentiate itself in the market?

Amerinet: The decision factors for a hospital and system go way beyond contract pricing, which is pretty comparable across all major GPOs. That said, pricing is an essential piece; you have to be in the game pricewise. But the ability to impact margins and revenues is really the more overarching consideration that hospitals and systems use to decide which GPO they will choose to be their cost-containment partner. There’s the question of value: How much does it cost [to participate], and what value does it yield? Trust, comfort and philosophy are important too. What’s the integrity of the organization? Does the hospital have trust in it?

There are many types of IDNs and systems. Some are looking for value-added services, perhaps on the revenue side. Others are very price-driven. Our goal has been to ask, “What solutions do you require?”

JHC: Amerinet has made it clear that helping its members enhance their margins is a crucial initiative. Revenue cycle management appears to be a big part of that. How and why did you come to this conclusion?

Amerinet: All GPOs keep an eye on one another, and we’re looking at areas that others are getting into as an indicator of what we should be looking at. But if you read the industry publications and keep your ear to the ground, and you pay attention to what keeps CEOs and CFOs up at night, it’s revenue cycle management. In fact, at our recent annual CEO Forum, the breakout session on revenue cycle management was the most popular one.

Providers’ margins are razor-thin, and they realize this can have a meaningful impact on their organizations. Our strategy with revenue cycle management will be the same as with other things we do: Rather than do it ourselves, we look at companies that can do it best. We like to partner with best of breed.

JHC: Can you define Diagnostix and its role in your organization?

Amerinet: Diagnostix is a separate, wholly owned subsidiary of Amerinet. Its purpose is to address the huge data challenge that hospitals and, particularly, IDNs, face when conducting their daily affairs in purchasing and materials. AccuPrice and AccuSave are the two tools we offer.

AccuPrice is a price accuracy monitoring tool originally developed by Amerinet for LSU [Louisiana State University Health Sciences Center], a very significant customer of ours. They are a publicly owned entity, and have strict rules and requirements about invoicing, contracting and all of those issues. They were [faced] with requirements to check the accuracy of the prices of their purchases.

Originally developed for the pharmacy, AccuPrice catches the prices at the invoice, then bumps them up against a pricing file to make sure they match within very, very tight tolerances. Where they don’t match, an exception report is kicked out, not only to the hospital (within minutes of the time the purchase order is cut), but to the distributor as well. Early on, we found a lot of line-item prices that were in error – most in the suppliers’ favor. By catching them quickly, the distributor can correct the problem in its files (when appropriate). This way, the hospital avoids the cost of checking for errors, and the distributor avoids the cost of crediting and rebilling. Lab and dietary are in the beta-testing stage.

The other thing we’ve discovered is this: Once you start to clean up one wholesaler’s pricing file, all the members who use that particular wholesaler benefit.

AccuSave is used primarily in the med/surg area. Much more of a data cleansing tool, it is used within the hospital’s or IDN’s own chargemaster and item master files. If they have the same product in multiple locations in their system, they can use AccuSave to make sure they are using a consistent description and product number; and that pricing is identical across the system. We also use it to identify where a facility might be missing contract opportunities.

JHC: Last year, Amerinet said it was intending to accumulate outcomes data and tie it to product decisions made as a result of Clinical Advantage projects. [Clinical Advantage is Amerinet’s program that helps members enlist physicians in the selection of high-dollar implants.] Can you report on your progress in this area?

Amerinet: It is the next level of where we need to take Clinical Advantage, but we’re still in the development stage. Our overall goal is [to be able to prove to members] that by making a particular choice of implant, they will not sacrifice clinical outcomes.

JHC: Is this statement true or false: “Vendors have cut just about everything there is to cut on product price. True savings can only be achieved through standardization and better product utilization.”

Amerinet: It is true and false, depending on the product category. For example, while working with Amerinet Choice [Amerinet’s private-label program], we have evaluated OEM manufacturers for existing name-brand companies. In the process, we have been able to introduce much lower prices in some of the commodity areas where you wouldn’t have thought that any opportunities for price movement existed. So it’s looking at things differently, changing the paradigm, and having the willingness to take risks.

The only area where margins have been pretty much squeezed out is distribution.

JHC: Is this statement true or false: “There’s very little difference in pricing from Group A to Group B. To compete, GPOs must differentiate themselves on the basis of something other than price.”

Amerinet: If you look at the overall value that any national GPO brings to the customer from a price standpoint, they’re pretty comparable. The key is product mix, that is, how an individual GPO lines up with an individual hospital or system. That has a lot to do with whom that GPO has contracts with. Are they the vendors that the particular hospital or system wants to use? Would the IDN have to change products if it were to join the GPO? These are the subtle things that change the value proposition from one GPO to the next.

JHC: In its 2005 Industry Report, Amerinet identified four key areas it has targeted for evaluation and growth: capital solutions, non-acute care products, private-label and new and emerging technology. Can you address the opportunity with each of those?

Amerinet: Regarding capital solutions, we believe many opportunities within group purchasing are missed, simply because we’re not aware of what our customers require. What we’re trying to do is identify, as much as we can, what they plan to buy and when, and then work to meet their needs. So we’re doing a fair amount of surveying.

Non-acute-care products: We believe that not all acute-care products will be used in non-acute care settings. So we will differentiate on those markets or classes of trade. There are lots of opportunities to expand in that arena.

New and emerging technologies: This is something we feel very strongly about. It’s very challenging as a GPO to identify what’s new. If we do evaluate new technology, we want to add it to our portfolio. We don’t want to be seen as exclusive, but as an organization with a solid desire to support and promote new technologies.

Private label: Amerinet Choice is an important part of our effort to differentiate ourselves to manufacturers and IDNs, and to the industry at large. A number of our Amerinet Choice manufacturers are smaller manufacturers who would fit into the [Medical Device Manufacturers Association] model. The program is providing opportunities to manufacturers who might not otherwise have had a relationship with a large, national GPO.

JHC: Amerinet had an idea to promote new technologies, but it died for lack of interest. Can you comment on that?

Amerinet: There are a lot of start-up companies with new concepts and ideas. They invest a lot of time, money and energy developing a product. Then when they go to market, they find they’ve missed the mark. Maybe the product has been priced too high, or providers aren’t able to get reimbursement for it.

Our concept was this: Allow these companies to have early access to users (Amerinet members). We would enlist volunteers to test products in their early stages, to make sure the companies didn’t go down the wrong road. But the idea didn’t take off. Plenty of members thought it was a great idea, but we didn’t get much of a reaction from the supplier side.

JHC: Five to 10 years ago, many observers predicted that IDNs would contract on their own for many products and services, and outsource the contracting of commodities to their national GPOs. Has this occurred? If so, how has Amerinet responded?

Amerinet: It really started in the mid-1990s, with IDN mania. Hospitals were throwing themselves together to form IDNs. Typically, one of the first things they said was, “Because we’re bigger, we can get better prices; we can do it ourselves.” But they found that this involves a lot of work and people. They realized they had a GPO that did a pretty good job, so they looked for a balance between their efforts and what they should allow the GPO to do.

Some GPOs decided this was a battle line, and decided to fight the trend. But we didn’t look at it that way. We said, “If they put their mind to it, they probably can do better on their own. But they’re our customers, so why not work with them to help them do it?” It’s been a great strategy for us.

 

Amerinet
Year founded: 1986 Website: www.amerinet-gpo.com
Corporate model: Subchapter T cooperative.
Acute-care members/customers: 1,970
Non-acute-care customers (e.g., physicians, clinics, long-term-care facilities, etc): 33,902
Annual purchasing volume: $6.35 billion. ($95 million spent through Amerinet Choice, private-label program).
Shareback returned to members (2005): $35 million

 

MedAssets: Driving cash flow, improving margins
A conversation with Rand Ballard, MedAssets COO, and president, North American Sales.

JHC: How would you characterize the competitive landscape between GPOs today? On what basis are IDNs and hospitals making their GPO choices today?

Ballard: GPOs did a great job in the 70s and 80s. But in today’s world, with concerns about supplies and revenue, and the importance of having accurate cost-accounting and decision support, everything has changed.

JHC: MedAssets says that its mission is to “improve healthcare providers’ margin and cash flow by solving significant operational problems with a customized solution of technology and services.” Can you explain that?

Ballard: We solve meaningful business problems. We’re uniquely positioned because of our revenue cycle management offerings, our supply chain software technology and our decision support technology. We’ve put the financial performance of our customers first. We use our GPO to support the financial decisions a hospital makes. For example, Avega Health Systems [which MedAssets acquired in January 2006] has been rated the best analytical decision support software company in the world. Customers have used it to analyze all their clinical and operational businesses.

JHC: How important are your revenue-management programs in attracting and retaining members? How important are they when compared to your portfolio of contracts? Would you consider your product portfolio to still be the bedrock of the organization’s offerings?

Ballard: Price is an important part of procurement, and our contracts and supplier partnerships are very important. But large IDNs are very interested in controlling cash. That’s why the bedrock of our program is helping our customers use technology to make sure that cost-per-procedure as it relates to reimbursement is fair and equitable; that they are paying the correct price for products every time; that they can keep their master item file updated and “CrossWalk” that over to the chargemaster; and that they can pre-audit every bill before it goes out. [CrossWalk™ is a MedAssets product that automatically links supply cost data with charge data. It is designed to ensure that the provider’s charges cover costs with a reasonable and payer-compliant markup.]

As a general rule, revenues are five times as large as supply costs. So, a 1 percent improvement in revenue will have a greater impact than a 1 percent supply chain improvement. But the linkage between the two is really important. With technology, you can answer questions like, “I have had a change in procurement; how will that affect my chargemaster?”

JHC:Are these two statements true or false?

  • “Vendors have cut just about everything there is to cut on product price. True savings can only be achieved through standardization and better product utilization.”
  • “There’s very little difference in pricing from Group A to Group B. To compete, GPOs must differentiate themselves on the basis of something other than price.”

Ballard: As a general rule, the commodity-products vendors are willing to work with hospitals to create value in return for commitment. In addition, there is a tremendous opportunity to take significant price reductions from physician-preference vendors, who produce 3 percent of the units [in hospitals], but account for 47 to 50 percent of med/surg costs. We do not have national contracts with these vendors. This is something that must be tackled at the local level – by physician, by hospital.

Our solution uses decision support to link the supply chain to revenue, and to look at acuity levels, physician utilization patterns, and length of stay [through Aspen Healthcare Metrics and Avega Health Systems]. With that information, we can have an intelligent conversation with the hospital and physicians, which many times results in significant reductions in the cost of physician-preference products.

We’re not looking at price so much as at the value proposition from the hospital’s perspective as it relates to specific clinical service lines. “Are spinal procedures making money? If not, let’s look at revenues, let’s look at supply costs.” We’ve seen hospitals that had great pricing, but weren’t billing everything they should. So you have to look at the whole thing.

JHC: Why doesn’t MedAssets have a private label program?

Ballard: We don’t believe in private labels; neither do the majority of our customers. We feel very strongly that we should limit all fees to 3 percent. Why would a GPO develop a private label product and take a margin greater than that? We’ve had no trouble converting private-label contracts when we’ve picked up members from other GPOs.

JHC: How significant is the non-hospital provider to your organization? What are their unique needs? How are you working to fulfill them?

Ballard: We consider ourselves a leader in non-hospital programs. We own Radiology Partners Inc., which focuses on the outpatient imaging center market; they have some 4,000 imaging centers. We have a major initiative with surgery centers; in fact, we have many of the top surgery center chains, including HealthSouth. We have a robust closed-pharmacy provider program, with an active and dynamic long-term-care customer committee directing our activities in this area.

The issues for closed provider pharmacies are different from those of imaging centers. That’s why you have to have people managing these programs who grew up in the business, who can take our tools and customize them. The one thing you can’t do is take acute-care products and try to shove them onto the non-acute-care market.

JHC: Can you discuss the impact of Congressional and media scrutiny of the industry on your organization? What’s your prediction for Congress’ involvement in the industry in the next 12-24 months?

Ballard: MedAssets would have to change no behavior at all if Congress passes legislation. We’re fully compliant to all proposed legislation. That said, we don’t think legislation is the best idea, because many times, the way laws are written, many other things get added, which could cost hospitals a lot of money. We’ll have to see what develops.

JHC: Within the next five years, how will group purchasing evolve? How will you attempt to differentiate yourself?

Ballard: We are very concerned about the future of healthcare in America. We believe that the financial pressures on hospitals will only increase. Medicare will continue to cut funding. Hospitals will need money to rebuild the infrastructure. They need some type of positive margin in order to do that. So we think we have tools right now that can help them significantly improve the numbers. Our obligation going forward will be to continue to find solutions that will drive cash for the hospital.

 

MedAssets
Year founded: 1999
Web site: www.medassets.com.
Corporate model: Private company with five subsidiaries: MedAssets Net Revenue Systems (revenue cycle subsidiary); MedAssets Supply Chain Systems (group purchasing and customized procurement solutions); Aspen Healthcare Metrics (supply chain and clinical consulting); Avega Health Systems (decision support solutions); and MedAssets Analytical Systems (supply chain technology and analytics).
Members/customers: 24,000
Hospital customers: 1,400 (MedAssets Supply Chain Systems).
Non-hospital customers: 22,000
Annual purchasing volume: More than $12 billion.
Number of employees (MedAssets Supply Chain Systems only): 218

 

Novation: Reflecting its members
A conversation with Mark McKenna, recently retired, president and CEO of Novation, the contracting arm of VHA Inc. and the University HealthSystem Consortium.

The Journal of Healthcare Contracting: VHA, UHC and Novation appear to be very committed to bringing together clinicians and administrators (contracting professionals, materials managers, CFOs, etc) to identify standardization opportunities, best practices, and ways to use Novation contracts to reduce costs. Is this a new development?

McKenna: It isn’t a new approach; it has evolved over time. We have drawn on people from across the industry – certainly with emphasis on the provider side – to head up our contracting effort. Our staff includes nurses, radiology technicians, laboratory professionals, and so forth. Then we link them to our member advisory councils. In our cardiology area, for example, we have cath lab professionals responsible for tracking the market and new technologies. Add to that the resources that VHA and UHC have – which are extensive. Altogether, we have well over 150 clinical professionals across multiple disciplines – nursing, pharmacy, cath lab, lab directors, etc.

JHC: How do you transfer their clinical knowledge and expertise to your members?

McKenna: We offer two opposite poles. [At one extreme], we offer services for members who are interested in the portfolio of contract services. [At the other extreme] are those members who look at us strategically and who want us to work with them as an extension of their organizations.

As an example of the latter, one of our cardiology professionals, who came out of a VHA shareholder, worked with the cardiologists from a five-hospital system. The initial engagement was over the phone; he was the only individual from Novation or the alliances [VHA and UHC] to be on the call, at the request of the cardiologists. The conversation was not so much about whom we have contracts with, as how we could match up our resources with their requirements. That was the beginning of the discussion.

Some initiatives [such as the Transformation of the OR and Transformation of the ICU] are really focused on the clinical enterprise, and as such, are driven by VHA or UHC. Certainly, the contract services that Novation provides are a point of contact; but members have told the alliances [VHA and UHC] that there are non-contract-related efforts that are important to them.

JHC: How would you characterize the competitive landscape between GPOs today? On what basis are IDNs and hospitals making their GPO choices today?

McKenna: From a pure-play GPO perspective, the first way we differentiate ourselves is the way we build our portfolio, access our members, and set up advisory councils with clinicians. Second is the expertise we have brought into our company, and the way we have set up our business along service lines to mirror those of our members [e.g., cardiology, orthopedics, etc]. The third differentiator is results, which I define as the ability to reduce the overall spend of the provider.

The fourth differentiator are our owners. We have the unique position to serve more than 90 leading academic medical centers, which suppliers want access to. Meanwhile, VHA’s owners include 700 hospitals under 100 beds, as well as large integrated networks. That combination brings us the scale and breadth of provider input.

I’ll plug in one more differentiator – the tools and technologies we offer to perform spend analytics – that is, the ability to take in a file from a provider, clean and sort it, look at the provider’s entire spend, and then work with them to reduce their costs. Given current procurement engines, most health systems don’t capture their entire spend in one place. [Some is captured by the pharmacy system, some by the materials system, some by vendors’ systems, etc.]

JHC: In the scheme of things, how important is your contract portfolio vs. all the other services offered by Novation, VHA and UHC, such as networking and clinical benchmarking?

McKenna: The contract portfolio is integral to reducing cost. If you look at group purchasing over the past 10 years, we’ve gone from being described as deceased, to each and every year experiencing significant growth. But there has been a shift. We have changed from simply leading with a portfolio to leading with, “Let’s look at your spend, and let’s find what tactics are necessary to reduce it.” The portfolio is integral to that effort.

JHC: Is this statement true or false: “Vendors have cut just about everything there is to cut on product price. True savings can only be achieved through standardization and better product utilization.”

McKenna: It’s false. There are too many factors in play to answer any other way. Depending on the category of product we’re talking about, the number of suppliers in the business, the type of contract we put into place, I believe there’s still room for price reduction. It has to be centered around level of commitment and the ability to drive it through standardization. [Another factor is] industry consolidation. In most cases, the consolidator is looking for effective ways to grow its business; there’s usually some value exchange, part of which are lower prices.

JHC: Is this statement true or false: “There’s very little difference in pricing from Group A to Group B. To compete, GPOs must differentiate themselves on the basis of something other than price.”

McKenna: Our experience is that there are differences in prices between groups. We spend a fair amount of time and focus pushing best price. [That said,], price is but one element in lowering costs. It is important, but you have to consider the ability to drive reductions through standardization or how products are used. [Conversely, you have to consider] the cost to the provider of converting from Product A to Product B. But there is price variance. And we see the ability to lower prices, time and time again.

JHC: There are many product-related initiatives out there today: physician-preference items, environmentally preferable items, safety devices, etc. What are the most exciting, important, and promising product areas to your customers today, from a contracting point of view?

McKenna: To categorize one product area as more exciting than another would be a disservice. But having said that, getting the most attention are physician-preference products in such areas as neuro, spine, orthopedics, etc. These products have shorter life cycles; there are frequent enhancements, and new products come out frequently. So the ability of our providers to manage them and control costs becomes a high priority. Not to mention that they take up so much of their budgets. This goes back to having the expertise on our staff to track new technologies and, at a minimum, educate the providers that they’re coming and the impact that they might have on their budgets.

JHC: Novation’s private-label program, NOVAPLUS, accounts for $1.5 billion in annual purchases. What does it bring to Novation? To your members? How important is it in your attempt to differentiate yourself to IDNs?

McKenna: It’s been a very important to our membership. We have focused the program on commodity-oriented products; so the barrier to conversion is lower. And we find that we approach double-digit savings to alternative products through the private label. We have a regulatory assurance and quality control assurance function; our staff conducts plant audits of the manufacturers. We’ve built a good, strong reputation among the membership; they look for the label.

JHC: Five to 10 years ago, many observers predicted that IDNs would begin contracting on their own for many products and services, and outsource the contracting of commodities to their national GPOs. Has this occurred? Is this a trend you’re fighting – or accommodating?

McKenna: Some of this occurs, but we don’t see it in large numbers. I think that, at best, it’s difficult to do. If you’re a large system, the barrier to initially signing a contract is low. But the ability to track what you’ve done over time and make sure you remain market-competitive is a challenge. That’s what our organization is expected to do. This isn’t to say that there aren’t some systems that have been able to do it and do it well. What we have seen is that this hasn’t occurred in large numbers.

Over the past three years, we have done very well in our custom contracting arena. We have formed a separate work group to service VHA and UHC members. We develop business plans with those members who want a unique strategic relationship with us. We have several in play now. These relationships don’t preclude us from putting a unique contract in place; but that’s the exception. It more about exchanging information, sorting it, setting priorities, working to maximize contracts or to plug in clinical resources to tackle specific problems; and then to make sure there’s a system in place to measure results.

JHC: Can you describe the impact of Congressional and media scrutiny of the industry on Novation? How is your organization different than it was prior to the hearings?

McKenna: [The public scrutiny] put this industry in the spotlight, and with that came increased responsibility and more transparency. We’re more accountable, as is the entire industry. Novation has built a Technology Forum on its Web site, where all suppliers – whether they are on contract or not – can introduce their products. We have had 300 submissions and have awarded almost 50 contracts for unique, innovative technologies. We wouldn’t have gotten there as fast as we did without the scrutiny.

[The group purchasing industry has] gotten to a size where we have to be mindful that the service we provide is valuable, and that being transparent in what we do is very important. It has made us better as an industry. Our company has been able to grow and thrive in this environment.

Novation
Year founded: 1998
Web site: www.novationco.com
Corporate model: Novation is a privately held LLC owned by health care alliances VHA Inc. and the University HealthSystem Consortium.
Members/customers: 2,500 members and affiliates
Number of hospital customers/members: 1671 (in 2005).
Non-hospital customers/members: 15,000 non-hospital sites
Contracts: Novation has agreements with nearly 700 suppliers and distributors.
Annual purchasing volume: $25 billion (not including Healthcare Purchasing Partners International, a GPO formed by VHA and UHC to serve providers that belong to neither organization).
Private-label program: NOVAPLUS comprises more than 300 product categories and 1,300 individual line items, and generates $1.5 billion in annual purchases.
Mark Thill About Mark Thill

Mark Thill is the Editor of The Journal of Healthcare Contracting and has been reporting on healthcare supply chain issues since 1985. He is a graduate of Dominican University in River Forest, Ill., and he received a master's degree in journalism from Northwestern University in Evanston, Ill.

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