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 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 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, Broadlane, Consorta and Premier will be profiled. Look for Amerinet, MedAssets and Novation in the next issue.

Broadlane: Focus on the supply chain
A conversation with Broadlane CEO Charles Saunders, M.D.

The Journal of Healthcare Contracting: How would you characterize the competitive landscape between GPOs today? On what basis are IDNs and hospitals making their GPO choices?

Charles Saunders: In the past, GPOs were part of a club experience; there were a lot of soft factors that influenced a member to join. Today, we’re seeing more and more financially driven systems that are being held accountable by their boards for metrics-driven operating results. That’s tracking with what’s happening in the general corporate world in the wake of Enron and the restructuring of corporate governance. With that said, providers are basing their GPO decisions on 1) the expected magnitude of savings in a quantified way; and 2) business model alignment.

“Expected savings” is a combination of several factors: first, the pricing the provider can hope to obtain; second, the services brought to bear to get those prices; and third, the tools (generally, technology tools) that are brought to bear to provide such services as verification of prices.

Regarding business model alignment: we’re seeing a desire to more closely align the incentives of the GPO with those of providers. Administrative fees are probably more aligned with the suppliers, because the group makes more money as total spend goes up. Providers would prefer more transparency in the reimbursement of the GPO; something that’s more predictable in terms of their budgeting; and they would prefer incentives that track with their goals, such as achieving supply chain performance metrics. In the past several years, Broadlane has migrated to a simple management fee. That is, we’re paid a fee based on the scope of the services we perform.

I don’t want to give the impression that the administrative fee is a bad thing. It does serve a useful purpose for hospitals that otherwise wouldn’t have the cash flow to fund supply chain initiatives; it is sized approximately to the size of the spend (so the linkage is not inappropriate); and it’s legally sanctioned.

Today’s group purchasing landscape is really divided into general camps. There are the large GPO networks that provide a portfolio of services based on multisource agreements and pricing tiers. Another camp [of GPO] is the more consulting-oriented organization. They provide an array of services, including revenue cycle management. [Their activities are based more on] custom contracting and working on a one-on-one consulting basis.

The third camp [comprises] those groups that focus on the supply chain and that try to maximize savings from it. This is Broadlane. We use sophisticated tools and techniques; we’re aggressive in driving down prices; and we maximize and simplify the management of resources.

From our perspective, it starts with having the lowest unit price in the marketplace, which we achieve through aggressive sourcing techniques (such as sole-sourcing, higher compliance and committed-spend volume). But unit price is only the start. Beyond that, the provider has to make sure it is paying the correct price, and not buying products that aren’t on contract. So the group purchasing organization has to help its clients improve the process of procurement. Focusing on standardization, utilization and smart product choices are all data-driven activities. [It’s also important to] focus on the purchasing process itself, to make sure you don’t have invoice mismatches, upcharges from suppliers that aren’t caught, blanket purchase orders you don’t have control of.

JHC: In its literature and on its Web site, Broadlane describes itself as “the procurement services company for healthcare,” and speaks of its “comprehensive set of services focused on contracting, purchasing, clinical and pharmacy cost management, labor, capital equipment and information management.” In light of all this, is contracting still the bedrock of your offerings?

Saunders: Contracting is the hub, and the rest are spokes. We focus on reducing costs. We do that by addressing the sourceable goods and services a hospital buys. But, as I said before, unit price is just the start. [A provider] might have a great unit price, but when you measure compliance rates, [it could be] in the 30 to 50 percent range. If it drove compliance to 80 percent, it would double its savings. Most hospitals have an insidious problem in the purchasing process itself, in information management and purchase order transactions, and in analyzing their spend. Some product categories are difficult to get at because they’re less dependent on unit price and more dependent on utilization. For example, you can have great prices on one or two clinician-preference products, but physicians are challenged to standardize on one or two products. To get good prices and lower utilization, you must have other clinicians sitting down with them with data, helping them make strategic choices on products, and then working with people to abide by them.

In pharmacy cost management, the real trick is managing utilization through such things as therapeutic substitution programs. Capital equipment is another area that is less amenable to a traditional group purchasing organization’s approach, because of the complexity of service terms, implementation, training and other cost components.

These are very people-intensive, expertise-intensive and technology-intensive activities, and they go way beyond what the typical GPO offers. But if you address all these things, the savings can be tremendous.

JHC: Broadlane is said to be the industry leader in contract nurse sourcing, managing more than $400 million in spending in this area. How does this fit in to your total offerings?

Saunders: If you look at all the externally sourceable goods and services a hospital buys, about 20 percent is consumed by supplies and drugs, 8 percent is capital equipment; 15 to 17 percent are purchased services (e.g., security, transportation), and 5 to 10 percent is temporary labor – and that’s a growing number, because of the nursing shortage. Hospitals are seeing double-digit inflation for outside labor, and we were seeing markups in agency nurses’ wages of as much as 75 percent. We offer labor services to address that pain point.

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.”

Saunders: We do 100 to 150 audits of health systems a year, and I can tell you that pricing is not the same. There’s no reason why a manufacturer would provide the same price to a 300-bed hospital in a small Midwestern town that they would to [an organization] with $10 billion in patient revenue and $2 billion in spend; or an aggregated play with $4 or $5 billion in spend that’s highly committed.

JHC: There are many product initiatives out there: physician preference items, environmentally preferable purchasing, safety devices, etc. Are there any exciting product areas in which GPOs can have a sizable impact in their contract portfolio?

Saunders: The hottest are high-technology, clinical-preference product areas. Most are rapidly rising in terms of cost and utilization. In addition, clinical practice patterns are changing. For example, everyone is using drug-eluting stents today as opposed to bare metal, and the use of automated defibrillators is skyrocketing.

We employ a regional and local-market-based approach. We bring in clinicians who work closely with a customer’s cardiologists, orthopedic surgeons, cardiovascular surgeons, to analyze and understand their costs, and to develop strategies that are specific to them and their clinical needs. We even go further. We analyze and profile the actual procedural costs, including consumed items and supplies. Then we try to devise creative strategies to reduce costs.

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

Saunders: We’re a strong advocate of living at arm’s length from our suppliers. We use a high-integrity, fully transparent, openly competitive process to compete for products based on specifications dictated by our customers, not us. Awards are made by our customers. So we’re trying to be fully aligned with our customers. A private label program achieves those goals less effectively. They are less transparent.

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

Saunders: It has not affected us very much at all. The practices and policies we put in place when Broadlane was formed are pretty much the ethics standards that the Senate Subcommittee have proposed. From the get-go, we capped administrative fees at 3 percent. We do not engage in corporate bundling. We’re openly competitive and fully transparent with fees. We never owned any vendor or had equity in a vendor. We accept no fees from suppliers. We don’t put on national conferences funded by suppliers. Having said all that, we welcome the Healthcare Group Purchasing Industry Initiative [formed by nine GPOs to promote and monitor best ethical and business practices]. We’re among the core group that formed it.

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

Saunders: This always will be an important part of the organization. Physicians are partners in delivery of healthcare. They make a lot of decisions [that affect product] consumption. They’re also indispensable to the acute care industry; they’re the source of patient referrals. Our clinical services are designed to engage physicians in value analysis teams and utilization/standardization approaches. Our approach also involves extending service and pricing to physicians affiliated with acute care hospitals, so they can get the benefits of scales of economy.

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

Saunders: I would go back to Question One. I really think the market is changing in a way that is tracking the way corporations are changing. There’s much more accountability and transparency, and a focus on results — in our case, savings. These things are significant in our industry and will continue to be for next five years. As a result, we’re continuing to deepen our focus.

Broadlane
Year founded: 1999
Web site: www.broadlane.com
Corporate model: Private company
Members/customers: 5,863
Annual purchasing volume: $8.9 billion (2005)
Employees: 602
Hospital customers/members: 890
Non-hospital customers/members: 4,973
Outsourced purchasing engagements: 4
Outsourced labor engagements: 28

Premier: Linking quality, safety and cost
A conversation with Susan DeVore, president, Premier Purchasing Partners, LP.

The Journal of Healthcare Contracting: How would you describe the competitive landscape between GPOs today?

Susan DeVore: Hospitals and providers are looking for a comprehensive approach to supply chain improvement. They’re looking for price points, which they’ve always looked for. But more and more, they’re looking for field support. They’re asking: “What is the delivery capability of the GPO with its contracts? Can it put people, technology, tools and databases inside its customer hospitals to help them optimize savings?” So in my opinion, it’s taking an implementation turn. IDNs are asking, “Can you not only give me the best contracts, but can you give me people to implement them, and the people and data to help me see where I’m leaving technology on the table? And at the end of the day, are you going to [send] back to me those distributions? Field support, technology tools and databases are that much more important to IDNs, because many are trying to manage multistate supply costs.

JHC: Premier offers consulting services, clinical and operational best-practices initiatives, and information-systems tools to help members analyze their usage of Premier contracts. How important are these programs in attracting and retaining members? How important are they when compared to your portfolio of contracts?

DeVore: Our mission is to improve quality, safety and cost at the same time. [The fact that we can] integrate our clinical database, Safety Institute, contracting portfolio and physician-preference database allows us to help our members with all these elements. Our IDNs and member hospitals very much want a service-line approach, with operational, cost-saving and revenue-optimization solutions.

That linkage between quality, safety and cost has been part of our culture, and will continue to be. It’s the execution of it that makes the difference. It all sounds good; everyone purports to offer pieces of it. But who can bring together the whole set of solutions? We have had great success in the physician-preference arena. We have clinical and cost data; and if we can relate clinical outcomes to certain products, then we have all the product and pricing knowledge.

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

DeVore: You can create value and pricing advantages for members with their commodities purchases, and you can stay with the Safe Harbors and good business ethics. I believe in creating competitive friction in commodity items. There are many ways to do this. You can get the essence of a private label program through reverse auctions, sole-sourcing and second-sourcing.

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.”

DeVore: GPOs who don’t have the pricing, or suppliers who would like price points not to decline, might agree with the earlier statement. You can conduct a reverse auction and create competitive friction in certain product categories; or you can create a portfolio of products that allows a member to move market share and aggregate volume; or you can have a clinical database that is helpful to suppliers as they launch new products. From my perspective, all of this is about the economic return and the economic level of savings to the provider and what they’re willing to do from a volume or market movement perspective. So I absolutely believe there are a lot of different ways to tap into savings; and I don’t believe we’re at the bottom yet.

It’s also true that utilization savings, standardization savings and service-line savings have potential. I continue to see opportunities in all parts of the portfolio. I don’t think GPOs have captured a lot of opportunities in the capital side – renovation, group buys, new technology.

JHC: From a sheer product point of view, there are many initiatives out there: physician preference items, environmentally preferable purchasing, safety devices, etc. Which are the most important to your customers today? What are the emerging, exciting product areas in which GPOs can provide a service through contracts?

DeVore: There is opportunity in commodities, capital, purchased services and construction. There are savings to be gained by eliminating the variation in departmental purchasing and in hospital purchasing within IDNs, as well as physician practice pattern variations. That’s why our implementation model includes field resources; you can’t succeed in this fully unless you’re with the CEO, COO, CFO, CMO, the cath lab department head, the imaging department head, the people in charge of capital and construction. You have to find a way to have the GPO interface with all the points within a hospital where these decisions are made.

JHC: Can you discuss the impact of Congressional and media scrutiny of the group purchasing industry on Premier? Have you backed off some of your non-contracting-related ventures because of it?

DeVore: If you belong to a GPO, you have to ask yourself, What are the value-added services the GPO provides, and can they stand alone? I don’t think GPOs are backing off those programs to the extent that they are part of their core offerings. I also believe our member hospitals are interested in investing money [in services] if there’s a significant return on the additional investment — a higher degree of savings.

A lot of people talk about consulting and databases, and others execute it inside their membership at reasonable prices and reasonable levels of support, to deliver validated savings to the owners. I don’t think we’re subsidizing anything. All those things are either part of our core offering, or they have such a return that people are willing to invest in them. So I see it as a total solution, not as a bunch of separate companies or offerings. Any one of [our services] offers a certain level of savings; but if you bring them all together, you can multiply the savings.

JHC: How is Premier different today than five years ago?

DeVore: All significant market events – whether regulatory or in the press — cause companies to re-look at the way they do business; and to look at their operational procedures and their personnel. These things, although painful at the time, are good for companies. They cause you to re-evaluate your strategy, and they force customers to see what’s important to them. I wasn’t at Premier [during the initial flurry of Capitol Hill and national media attention], but the savings that GPOs bring to member hospitals that have very little margins was lost in the debate. That’s the intent of the GPO, and it’s what they deliver. The member always has the choice of what they buy and don’t buy. So, it was good because it caused a re-evaluation. We wrote out all our rules of conduct, and now we have an ethics and compliance office.

JHC: Five to 10 years ago, some 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, is it a threat to GPOs?

DeVore: I don’t think it has occurred on a broad scale. What I think has developed for us is a closer relationship with IDNs, where you find all the ways to optimize the GPO’s national contracts with the market movement that an IDN can create. To me, an IDN has multiple aggregation opportunities if it has the flexibility of a GPO working with them and providing technology, tools and field support. IDNs would rather have all those options available than the option of totally doing it by themselves. We have evolved our offerings and will continue to work hand in hand with IDNs to achieve all the forms of savings. We’re open to different models to do that.

Premier
Year founded: 1996
Web site: www.premierinc.com
Corporate model: Shareholder model with all shares held by approximately 200 not-for-profit hospitals and health systems.
Business units: Premier Purchasing Partners LP (group purchasing and supply chain services); Premier Insurance Management Services (group contracts for insurance and management of self-insured pools to Premier’s members); Premier Healthcare Informatics (subscription-based access to benchmarking databases, consulting, and data-driven solutions in the areas of clinical quality improvement, safety (incident reporting), labor management and patient satisfaction/perception surveying).
Members/customers: Approximately 38,450.
Hospital customers/members: Approximately 1,450
Non-hospital customers/members: Approximately 37,000
Annual Purchasing volume: $25 billion
Number of employees: 950

Consorta: The business of resource management
A conversation with Consorta President and CEO John Strong.

The Journal of Healthcare Contracting: How would you characterize the competitive landscape between GPOs today? On what basis are IDNs and hospitals making their GPO choices?

John Strong: Providers are looking for several key things today. One is a competitive portfolio of contracts and services. But another is the ability of the group purchasing organization to use data to help members make targeted decisions around product selection, implementation and contracting. That is, to help the member identify the lowest cost, best practice and overall value proposition.

Many people would agree that most GPO contract portfolios are somewhat similar in terms of price and value. In the future, groups will have to move toward helping their members use data and targeted services to help in their supply chain beyond acquisition of product, such as pointing to non-contract items that are being purchased, helping identify pricing from suppliers that is plain wrong, helping to quickly and efficiently evaluate products and cross-reference brands, and all the things that go into procurement decisions.

JHC: Consorta refers to itself as a “group purchasing and resource management organization.” What does that mean?

Strong: Resource management means identifying the quality of products, particularly clinical products, in terms of overall performance. As a group purchasing organization, we need to get clinicians working closer with us to make sure we’re evaluating products on a level playing field; and that we really can compare not just their economic proposition, but their overall value proposition, in terms of product performance and cost- in-use.

JHC: Some GPOs are attempting to become a source of revenue-enhancement products and services for their members and shareholders. Is Consorta attempting to do the same thing, or have you chosen to outsource these types of services to contract vendors? [In April 2005, Consorta signed a contract with Medical Advocacy Services for Healthcare Inc., a service that identifies indigent, uninsured or underinsured patients who are eligible for public health benefits; and SMG Managed Care Solutions/Healthcare Financial Enterprises, designed to help providers receive full contracted revenue from third-party payers.]

Strong: This year will decide whether we need to take a direct role in revenue enhancement. For us, that probably would mean partnering with someone else. We have an interest in helping our members tie their revenues and chargemasters back to their supply chain systems. The reason is, we believe that in the future, healthcare facilities will need to generate cost estimates for various procedures. Consumer-driven healthcare will cause people to comparison-shop. Our members will need to estimate how much procedures will cost. An integral part of cost are the materials and services used on the patient.

Although we think revenue is important, we believe that the opportunity in overall cost reduction from spend analytics is probably higher. That means buying the right product, in the right quantity, from the right source. We have developed some spend analytics internally, and we are determining how we can enhance them. For example, we offer lost-cost-savings reports for pharmacy; and reports for signed and unsigned letters of commitment, so we can track whether members are entitled to committed-volume pricing

JHC: Do you see the distributions you give to your members as a form of revenue enhancement?

Strong: We see the fact that we return 76.3 percent in dividends for every revenue dollar received as a competitive advantage in the market. We believe it’s the highest in the industry. We believe our members see it as a tremendous value in belonging to this group.

JHC: How deeply can/will/does Consorta get involved in helping its members with their clinical practices? Consorta has a director of clinical integration (Jean Livingston), so it appears you have in-house capacity.

Strong: We’ve done a good job in engaging physicians and clinicians in product review. We were the first major group purchasing organization to write a sole-source contract for sutures with someone other than Ethicon; but we didn’t do it without the involvement of more than 2,000 surgeons. As we move forward, we need to have a physician engagement and clinical review process that works in concert with clinicians at each of our 13 shareholders. On high-clinical-preference items, we need to have more physicians involved in the evaluation phase. Our model calls for significantly increasing the amount of physician involvement in product review and evaluation, and in measuring the outcomes and implementation of products.

JHC: How deeply can/will/does Consorta get involved with helping its members with their internal operations? (In August 2004, Consorta introduced a free pharmacy consulting service to help members with medication formulary management services, best practices for medication safety and clinical interventions, assistance with new technologies and other types of consulting.)

Strong: We can provide a valuable role in pharmacy consulting. For example, we have come together for various therapeutic initiatives. In addition, we have created a clinical education network for our members, which provides continuing education credits in a wide variety of topics. And with the depth of our staff, we can provide consulting in supply chain strategy development. In the future, as we continue to gain more procurement data from members, we’ll play a stronger role in making that data more actionable. Right now, we’re getting procurement data from many of our shareholders, and we’re using it to help them identify product standardization opportunities, revenue enhancement opportunities, etc.

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. To what extent has this occurred? What effect has this had on Consorta?

Strong: Our custom contracting initiative has been very successful. When appropriately applied, it yields acquisition cost savings and a high rate of return on the resources used to create those contracts. Certain suppliers have their own strategy to contract with IDNs and circumvent GPOs altogether. The IDN at some point needs to decide whether it’s worthwhile to participate in the group purchasing organization vs. writing contracts on its own. If IDNs allow themselves to be disintermediated by suppliers over time, that will ultimately lead to higher costs.

By “disintermediated,” I mean that individual organizations may find it difficult to manage a portfolio of 500 to 800 contracts. Prices begin to creep up. Group purchasing organizations provide oversight and management of individual contracts. Without that, an IDN might find itself paying more for products over time.

JHC: From a supply side/product point of view, there are many initiatives out there: physician preference items, environmentally preferable purchasing, capital equipment, safety devices, etc. Which are the most important to your customers today?

Strong: One of the biggest opportunities is using data to evaluate preference items openly with clinicians and physicians, and then to make the best product selections possible. I don’t want to minimize environmentally preferred purchasing; our members want us to continue to play a role in that. I also see capital equipment as a rich area of opportunity, and one in which our shareholders are pooling their requirements. I’m referring to the whole capital equipment process – standard contracts, group buys, promotions, and one-off purchases we make on behalf of our members.

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.”

Strong: I completely disagree with that. There are huge opportunities for vendors to take costs out of their processes, and I don’t believe they’ve done that. They can take cost out of their research and development, raw materials sourcing, production methods, and sales and marketing. So I think it behooves the suppliers to work in concert with us.

But we can’t do that as long as suppliers are resistant to a common nomenclature system for products. [The lack of such a system] adds a huge layer of cost for providers and suppliers, that we as an industry have been unable to get at. If suppliers are really serious about taking cost out of the system, they should work with us to come to an agreement on some kind of nomenclature.

JHC: 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.”

Strong: There are a couple of bands in the marketplace; but for major national groups, there’s probably not much variation. There are outliers on both the high and low end. As a group that wants to do the best thing for its members, Consorta needs to figure out how to get to the bottom of market. I ask vendors, “Does that mean commitment, volume or both?”

JHC: Consorta’s Advantage program focuses on the non-acute-care provider. How significant is the non-hospital provider to your organization? What are their unique needs? How are you working to fulfill them?

Strong: As more care moves outside the acute-care setting, we know that to be effective, we need a program that works in the non-acute market. Recognizing that many of these are small providers, that program should be readily accessible, intuitive, and based on high service. Our non-acute market is still relatively small, but growing faster than any other market we serve. There are tremendous opportunities to take cost out of supply chain by looking at all providers and applying the principles of effective supply chain management and group purchasing to them.

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

Strong: We’ve had to change very little in terms of our overall operating practices. I’m proud to say we have tweaked our programs; and we have gone to the extra length of using a third-party auditor to examine how we are implementing our code of conduct. We’re discussing the possibility of another audit to make sure we are doing the things we said we’d do. In general, group purchasing has done a very good job in being transparent. Consorta is a founding members with eight others of the Healthcare Group Purchasing Industry Initiative, whose purpose is to promote ethical business practices in the healthcare group purchasing industry. This level of transparency is unparalleled in the industry.

But I think it’s time Congress looked at entire medical supply chain and evaluate the business practices up and down it – not just group purchasing. I point to the January editorial in The New York Times, based on their article of Jan. 22 concerning the payment of large consulting fees by manufacturers to physicians for a limited amount of work.

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

Strong: We will become closer to our member through sharing of data, and doing a better job of contracting and implementing those contracts in their facility.

Consorta
Year founded: 1998
Web site: www.consorta.com
Corporate model: Cooperative owned by 13 shareholders
Hospital members/customers: 520
Non-hospital customers/members: 1,950
Annual Purchasing volume: $4.5 billion
Total revenues: $69.4 million (FY 2005)
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.

Speak Your Mind

*