GPO veteran reflects on some key industry issues, including safe harbors and contract administration fees.
The group purchasing industry turned 100 years old this year. Starting in New York City in 1910, the industry has grown well beyond its humble beginnings in shared laundry services. In addition, this year the Health Industry Group Purchasing Industry (HIGPA) celebrated its 20th anniversary.
It was my great privilege to be on hand to present HIGPA founder Derwood Dunbar Jr. – former president and CEO of MAGNET (now retired) – the industry’s highest achievement award at the recent International Expo in Orlando in front of more than 450 of his friends and colleagues. To commemorate the occasion, we asked Derwood to sit down and reflect on his time in the industry.
HIGPA: Can you talk a little bit about your history in the healthcare group purchasing industry?
Derwood Dunbar: I started in this industry in 1959, at a time when most of the medical products were reusable. It wasn’t until the explosion in disposables that group purchasing really took off. GPOs were able to make “commodities” out of many products, that is, make them biddable and worthy of a GPO contract; that translated into lower costs for all participating hospitals.
I began my career with a GPO and then moved to two positions with what today would be called integrated delivery networks. Then I went back to two GPOs. For the last 21 years of my career, I was president and CEO of MAGNET.
During my career at MAGNET, I had the opportunity to put together what today is HIGPA. In 1990, after three years of discussions, I was selected to bring interested groups together to form a GPO trade association. Fourteen groups anted up $500 apiece and we had the initial funding for HIGPA. I served as the first president; later, I served four years as the board chair. The existence and success of HIGPA rank among the top of my career accomplishments.
HIGPA: In your experience, what is the value of GPOs to the healthcare delivery system in general, and to hospitals specifically?
Dunbar: In two phrases, “cost savings” and “improved efficiency and effectiveness within the facility.” By taking on much of the external price negotiations, GPOs have allowed purchasing and materials management personnel in hospitals to spend more time on policies and procedures within their facilities. It has been said that the cost of the product is only 20 percent of the total cost to use and dispose of the product. GPOs take care of that 20 percent; and by improving internal practices at the healthcare facilities, purchasing and materials managers address the remaining 80 percent.
Many clinicians have been convinced by suppliers, especially those selling “physician preference products,” that what they sell are not “commodities” and thus should not be subject to a GPO contract. In some cases the suppliers are correct; however, in other cases, just a general discussion by healthcare practitioners at the GPO level will remove the panache, and clinicians will agree that several products are, in fact, interchangeable.
HIGPA: What are a few specific ways that GPOs have evolved over the years, either to meet the needs of hospitals, or to address outside concerns?
Dunbar: The GPO industry has evolved along with the entire healthcare delivery system and the new products/procedures available for patient care. Most of the products available under GPO contracts today were not available 20 years ago. GPOs have also expanded their scope of services. Items not considered for potential GPO contracts are now routinely supplied by GPOs. GPOs have also evolved into providing services beyond just group purchasing, i.e., other shared services.
HIGPA: The GPO safe harbor has recently been the subject of some discussion, particularly among medical device manufacturers. As someone familiar with safe harbor and its history, can you please talk a little bit about why Congress enacted it in 1987?
Dunbar: In most of our minds there never was a need for the safe harbor in the first place, because GPOs were clearly not violating existing Medicare/Medicaid regulations. In addition, GPOs were already meeting the standards later codified in the safe harbor.
With the onset of Diagnosis Related Groups (DRGs), however, the Office of Inspector General wanted to ensure that GPO cost savings were not lost with the change in the law. Consequently, because in the 1980s the legal counsel of several groups felt that there was some uncertainty in the verbiage of sections of the Medicare/Medicaid statutes, the safe harbors were sought and gained. Most of the GPOs in existence at that time already had in place everything that was mandated by the safe harbors, i.e., written agreements with healthcare facilities, limits on the amount of fees, and proper reporting systems back to the healthcare facilities.
HIGPA: Has the safe harbor accomplished the goals that Congress intended?
Dunbar: I truly believe that it did. It protected the cost-savings that GPOs provided American hospitals. Interestingly, it was vendors who initiated the idea of contract administration fees (CAFs) to help the GPOs defer the costs of operating their programs. CAFs were already prevalent, as far back as the 1970s, and all the safe harbor did was to:
- Set a limit on the fees, which were rarely exceeded by the GPOs. (After all, too high a fee can cause the vendor to lose the healthcare facility to competition by making the acquisition price too high.
- Make certain that there was proper reporting back to the healthcare facilities, which was already in place with most GPOs.
- Make certain that agreements were in place between the healthcare facility and the GPO that allowed the GPO to collect fees for the purchases.
HIGPA: Are GPOs and hospitals still using the safe harbor in the ways that Congress envisioned in 1987?
Dunbar: Yes, they are. Congress recognized that GPOs produced cost savings, and it intended that the safe harbor would allow GPOs to continue to do so. I believe that there are some who believe in a very narrow definition of “negotiate and administer” contracts. In the world of GPOs, “negotiate and administer” has always meant convening committees of clinical and non-clinical disciplines, thus allowing for an open dialogue between them. Then they 1) decide what products best lend themselves to a competitive bid process, 2) write the specifications for the bid, 3) decide which vendors are qualified to bid, 4) send the bids and receive them back, 5) summarize them, 6) convene another meeting to discuss the award, 7) make the award, and 8) follow up to see if those facilities that said that they were going to support the decision of the GPO actually did so.
During these meetings, other suggestions for improving the operational efficiency of the facility are often also discussed, and the more responsible GPOs follow the directions of their hospitals and provide other services. Those services are always in keeping with the mission of most GPOs, and that is to improve pricing and operational efficiencies of the member hospitals.
HIGPA: What are some common misperceptions about the group purchasing industry?
Dunbar: Probably the most prevalent misperception is the notion that GPOs make decisions for the sake of GPOs, rather than responding to the wishes and needs of their healthcare facilities. Hospital materials resource departments and clinicians within hospitals make their decision to go with a GPO contract or not based on the product and value, not the fact that there is or is not a GPO agreement.
Another misperception is that all GPO decisions are made strictly on an economic basis with no clinical concern or input, and that GPOs only make decisions to increase their bottom line.
When hospitals were retrospectively reimbursed, there was far less emphasis on costs, because they were reimbursed based on what it actually cost them to operate. With the advent of the prospective payment (i.e., DRGs), acquisition price became much more important. If product and labor costs exceed the reimbursement, the hospital loses money and, as in any other industry, will eventually have to either discontinue the services that it offers or in the worst case, close its doors. For years hospital CEOs were happy if they didn’t have any complaints from users, especially clinical areas, about products. Now they use various methods of comparison, to make sure that they keep their clinicians happy while at the same time reducing their total supply spend.
HIGPA: What are some of the challenges you see for the group purchasing industry in the future?
Dunbar: Consolidation within all sectors – healthcare facilities and vendors – is a concern, because consolidation translates into fewer customers and a reduction in the opportunity. GPOs must stay vigilant that they continue to meet the needs of their customers. The value proposition of the GPO must always be met in the eyes of the hospital.