Purchasing coalitions provide a means toward effective cost management
Purchasing coalitions mean good business, and in today’s economy, smart business choices can make or break providers. As more small hospitals struggle to maintain their financial independence and avoid staff cutbacks, regional purchasing coalitions, or aggregation groups or alliances as some prefer to call them, continue to provide a viable means of effectively managing hospital costs, according to experts. So, the hospital financial officers and contracting executives continue to buy into them, and the group-purchasing executives continue to support them. And the purchasing coalitions aren’t standing still. They’re getting better all the time.
How they work
Simply put, purchasing coalitions are formed to maximize the buying power of their members, most often independent hospitals and small- to mid-size IDNs. Generally, members share a common locality, such as a state or region, and all belong to the same group purchasing organization. In fact, GPOs not only support the formation of these coalitions, they help facilitate them. The members of these purchasing coalitions work together to optimize their GPO contract portfolio. Their goal is to obtain better pricing from their manufacturer and distributor partners. In return, they can provide those suppliers with a substantially larger market share, creating a win-win relationship where little or none existed before.
Tom Nikiel, vice president, supply networks, VHA (Irving, Texas), has witnessed an approximate 30 percent annual growth rate over the last five years. “Five years ago, we had four or five supply networks,” he says. “Since then, we have added about 25 new ones, and we see continued interest from our members.” The GPO’s networks are comprised of various sized members, he adds. “Some of our networks are made up of small- to mid-size members, while others include larger facilities, such as Allina and Mayo Clinic. Even some large independent delivery networks (IDNs) regard supply networks as a means of leveraging their market share.”
For the last 11 years, Tom Spindler, area senior vice president and executive officer, VHA, has watched the GPO’s Mid-America region – representing 54 members and 185 hospitals – experiment with the concept of purchasing coalitions. “We have had various types of purchasing coalitions here in the last 11 years,” he says. “Today, 52 of our 54 members are involved in some kind of purchasing coalition. We have seen between 25 and 30 percent growth in the last five years.”
While the current economy may drive the growth of purchasing coalitions, it is not the sole force behind this trend, according to experts. “Regardless of where the economy is, [joining a purchasing coalition] is good business,” says Spindler. “Hospitals’ main expenses are supplies and staff. The more they can do to reduce costs, the less need they have to cut back staff. This is something hospitals should be doing to manage their costs more effectively.”
At Amerinet (St. Louis, Mo.), Laura Nolan and Joan Mullins each hold the title, senior director of regional alliance management. Nolan oversees the western half of the United States, while Mullins oversees the eastern half. They agree that hospitals and IDNs – particularly smaller ones – join regional alliances as a means of managing costs while maintaining their autonomy. “I have seen more discussion among hospitals [to this effect],” says Mullins. “They know they must do something to maintain their independence, but [wonder] how they can reduce costs.”
“Regional alliances are looking to aggregate their volume and access better GPO tiers,” says Nolan. “I have the ability to bring in products that a group is interested in, and what’s popular in one region may not necessarily work in another.” Nevertheless, in past years, some of the alliances have saved as much as 10 to 15 percent, and this has enabled them to maintain their independence, according to both Nolan and Mullins.
Premier (Charlotte, N.C.), too, has watched its purchasing coalitions take off in recent years. “Over the last five years, the number of Premier-affiliated regional aggregation groups has more than doubled,” says Mike Alkire, president, Premier Purchasing Partners. Today, the GPO has 19 aggregation groups across the country. Although Alkire expects the growth rate may slow down over the next several years, he anticipates “the coverage or complexity of the groups will increase. For example, groups are evaluating how to use the aggregation model to provide additional value for their acute care and non-acute care affiliates, thereby creating layers of aggregation within the group,” he says.
The expansion of Premier’s regional aggregation groups preceded the economic downturn, notes Alkire. “Hospitals saw they could work together, generating savings and sharing knowledge,” he says. “So, to increase value, simplify agreements and learn from one another, independent hospitals formed these groups – virtual IDNs that look and act like IDNs – to take advantage of the added value.” In fiscal year 2009, Premier’s 19 regional aggregation groups saved more than $13 million. “As an example, our South Florida regional coalition [alone] saved over $1 million in fiscal year 2009,” he adds.
The system works equally well for distributors and suppliers, Alkire continues. “One of the biggest challenges small companies face is a lack of feet-on-the-street to tell their story. Regional groups afford these small suppliers the opportunity to [reach] 500 hospitals by making 10 presentations to regional coalitions.”
Why they work
While each purchasing coalition is organized somewhat differently and governed by a different set of guidelines than others, experts agree that for any coalition to work, members must be committed to working together as a cohesive purchasing unit. “The concept of [purchasing coalitions] does work, as well as serves as a great platform for sharing best practices, but members must understand this is commitment on their part,” says Nikiel. “It requires a willingness to make decisions that reflect the good of the network as well as the individual organizations.”
“The difference between national contracting vs. regional collaboration is that regional coalitions are committed to working [as a group] off of the national GPO contract,” says Spindler. “This is how they achieve a better price tier in the current contract portfolio.” He attributes the members’ willingness to commit to the good of the group to the trust they have built among each other. “They have [developed] a history of trust and success among themselves,” he says.
Nikiel agrees that members’ proximity to one another and their history working together has helped increase their commitment to one another. “We see things evolve geographically, because supply chain leaders and chief executive officers [have come to] know each other,” he explains. “The supply networks have provided a springboard for [these relationships].”
Indeed, the structure of purchasing coalitions tends to facilitate “stakeholder buy-in to proposed projects and quick implementation,” according to Alkire. “The coalitions [within Premier] have a group structure that includes two sub-committees and a primary materials management committee,” he says. “The sub-committees [are comprised of] clinical and construction facilities professionals, and they research opportunities in their respective areas and present these to the supply chain executives. [The member hospital committees] are very invested in the analyses they conduct and the decisions they make.”
One step beyond
Regional alliances have advanced beyond merely seeking reductions in commodity costs, notes Mullins. “We are attempting to create a value proposition across all areas within each alliance.” For instance, an alliance may look at revenue cycle management or pharmacy expenses. “We take our direction from our member groups,” adds Nolan. “We take their lead as to what issues they would like to tackle.”
They are also exploring more creative ways for members to connect. Although economy-related pressures are not necessarily driving the growth of Amerinet’s regional alliances, they do impact members’ ability to travel to regional meetings, according to Nolan. “For this reason, we are looking at providing more Webcasts,” she says. “[That way] members can still commit to a regional alliance without actually attending every meeting.” In addition, Nolan and Mullins rely on their Web site to keep members informed.
But, whether members attend every meeting for these coalitions in person or via Webcast, the bottom line to their success is commitment, Mullins points out. “We are asking groups to come together and commit, which [entails] looking at standardization and contract tiers.” In some cases, this is a new mindset for the hospitals, she adds.