IDNs Look to LLCs As an Alternative

If you’re an IDN executive, Perry Miller is just the guy you want to work with your tough-minded clinicians to reduce supply costs. Being a former director of cardiac surgery at a New Jersey hospital, Miller can walk their talk. And having been the cardiac specialist for a national group purchasing organization, he knows how to mix it up with vendors of clinical-preference items. What’s more, having worked in the IDN for two and a half years, he knows all the players.

And indeed, Miller does all three, everyday, as he walks the halls and meets with the players at AtlantiCare Health System in Atlantic City, N.J.; William B. Kessler Memorial Hospital in Hammonton, N.J.; and Betty Bacharach Rehab Center in Pomona, N.J.

Ironically, one of Miller’s strongest credentials is that he is not an employee of the IDN. Rather, he is paid by a limited liability company (LLC), in which AtlantiCare, William B. Kessler and Betty Bacharach Rehab Center participate. As such, the clinicians and department heads perceive him as an unbiased resource, rather than a shill for administration.

Miller, an employee of the New York-based Joint Purchasing Corp. (JPC), is director of regional networks for Cooperative Healthcare Services of South Jersey LLC, a company formed by AtlantiCare and the other two providers in conjunction with JPC. It is one of three limited liability companies in which JPC is involved. (JPC is the managing member of all three of them.) The other two are Coastal Cooperative, formed by JPC and Meridian Health of Neptune, N.J., and Cardinal Health Initiatives, formed by JPC and Cardinal Health System of Muncie, Ind.) JPC hopes more will follow.

The three companies constitute what JPC calls its Strategic IDN $olutions Network Model. Launched two years ago, Strategic IDN $olutions is the purchasing group’s attempt to prove that good things come in small packages.

The program allows IDNs to form limited liability companies with JPC, so that they can (with full-time assistance from an onsite director of network operations, such as Perry Miller) develop contracts for their own use and collect the administrative fees that otherwise would have gone to a GPO (and in accordance with government regulations).

JPC believes the LLC model offers an IDN the best of both worlds: The IDN benefits from the GPO’s contracting expertise, yet it gets to contract with suppliers of its own choosing, rather than those selected by a product evaluation committee representing a national GPO.

Regain Control
Strategic IDN $olutions actually dates back six years. At that time, Atlanticare President George Lynn and former JPC President Ralph Dean decided that IDNs needed to regain control of deciding which vendors they contract with, says JPC Vice President of Corporate Sales Ed McManus. Lynn and Dean were betting that an aggressive IDN could offer greater commitment to vendors and hence get better prices, especially for clinical-preference items. “These are the kinds of things that can make a major difference in supply chain costs,” says McManus.

Providers and vendors initially greeted the concept with skepticism, notes McManus. Like it or not, they were comfortable with their existing GPO relationships. Yet suppliers were frustrated at the lack of compliance to their contracts, while providers felt they weren’t getting the prices and other financial incentives they should.

“But once we demonstrated we could move market share, the process heated up,” says McManus. Today, JPC boasts that its LLCs enjoy average savings of 15 percent, when compared with national GPO contracts.

The LLCs save money the old-fashioned way – through hard work, says McManus. In fact, their success hinges on five factors:

  • The active participation of those in the IDN’s “C” suite.
  • Careful planning as to which product areas to attack.
  • The buy-in and ongoing participation of the clinical staff.
  • Vigorous, daily effort on the part of the LLC to keep all the players engaged in evaluating and selecting products.
  • Deft negotiating with vendors.

The “C” Suite
The sell cycle for the LLCs can be long, says McManus. One reason is that the decision to form an LLC occurs at the highest levels of the IDN – that is, with the CEO, CFO and COO, he says. Typically, hospital and IDN chief executive officers have focused their attention on just about everything but supply chain expenses. But that’s changing.

“Healthcare costs are going up around the country, and we’re not immune to it,” says Robert Curtis, CEO of Cardinal Health System in Muncie, Ind., and chairman of Cardinal Health Initiatives LLC. The IDN comprises four hospitals (the primary one being 400-bed Ball Memorial in Muncie), 60 owned and operated physicians’ practices, a regional rehabilitation organization, satellite pharmacies, a home healthcare organization, a variety of ambulatory centers and a captive insurance company.

“The purchasing of supplies is a major part of our expenses, so we have to pay attention to getting the best value for the products we buy,” says Curtis.

Although just launched in September 2003, CHI has already addressed cardiology products, wound care supplies, patient furnishings and other product areas. “We’re looking at urologicals, IVs and pharmaceuticals,” says Curtis. “On virtually every product line we’ve evaluated, we have realized significant savings.”

As chairman of the board of Cardinal Health Initiatives, Curtis is intimately involved with the planning and execution of the LLC’s duties. “The product development committee submits recommendations quarterly to the board,” he says. “JPC is at that table, and I am at that table.” So are other key stakeholders. Indeed, it is the participation of so many key players that has made the program a success, says Curtis. “We have been overwhelmed with the response and the enthusiasm of the entire organization.”

Planning Is Key
To each of the LLCs, JPC brings its expertise in identifying cost-drivers and developing plans to attack them, says McManus.

“JPC’s team does due diligence before the LLC ever enters into an agreement,” he says. “They identify the cost-drivers, they identify market prices and they see where the opportunities are. Then they lay out those opportunities [for the IDN] and determine from a clinical standpoint what should be put on the annual business plan.”

The team initially identifies products that represent the most attractive savings opportunities, or low-hanging fruit, says McManus. “But as the health system embraces the business plan, we go after more challenging opportunities, such as physician-preference items.”

The LLCs spend plenty of time qualifying suppliers before ever sending out the contract proposals, says McManus. “We don’t want to go to market and withdraw our commitment after the business plan has been finalized.”

Quarterly business plans keep everyone on track. Success is measured simply: by savings off invoice, as well as other financial incentives.

The Linchpin
Success hinges on the buy-in and participation of the IDN’s clinical and administrative staff.

“We wanted to empower our employees and physicians in terms of product decision-making,” says Curtis. “As our organization becomes more complex – given our physician practices, affiliated hospitals and joint ventures – we have to get commitment and accountability from our employees. But to do that, we need to give them the tools they need to make those kinds of decisions.”

That’s where the LLC director of network operations steps in. “They are the conduits, the facilitators,” says McManus. “They are very important people for the success of the LLC’s performance.”

Take Perry Miller, for example. He’s a full-timer at the Cooperative, spending time at each of the LLC’s three main facilities. (Part of his role is to facilitate standardization on key items by clinicians across all the hospitals.) He works closely with the executive director and meets with clinicians, attends value analysis meetings, reviews product utilization, prepares RFPs and, of course, negotiates contracts with potential vendors. (He only gets involved in contracts for the entire Cooperative, not those for its individual facilities.)

Miller helps prepare the Cooperative’s quarterly and annual business plans, based on input from the administrative and clinical staff.

“The first step in the process is meeting with the department heads and getting their input into the business plan,” says Miller. “After all, they make it up.” After a product line has been identified, clinical evaluations are conducted. The final step is to get the departments to sign off that they will, indeed, participate in the agreement once it is signed.

The key target areas are high-volume, high-expense clinical-preference items. And although Miller would prefer to strike a deal with just one vendor for such items, he’s happy contracting with more than one, if by doing so, he can involve more users.

“In my role, probably the greatest key to success is getting integrated into the culture of the organization,” notes Miller. “I’m perceived as being a bit more objective than a corporate materials management director would be. A physician may believe that a materials manager is only aligned with the goals of administration, whereas in my position, I can – through my access to JPC – benchmark what other institutions are doing in other cooperatives or networks. So I can take an objective view and present information much more objectively than if I worked for the IDN.

“For [the IDN], it’s like having an in-house consultant, or at least, having someone who has access to consultants for different specialty areas,” says Miller.

To date, Miller and the LLC have been successful in reducing costs on some major cardiology product lines. In 2004, they will turn their attention to drug-eluting stents and orthopedic implants. A major medical-surgical distribution agreement is coming up this year as well. In all, Miller and the LLC will tackle approximately 30 major contract initiatives this year.

“You would think that after five years of doing this, the [Cooperative’s] opportunities for product conversions would become stale,” says Miller. “But that’s not the case at all.” Rather, because of the buy-in from clinicians and administrators, the Cooperative is still able to attract better pricing than ever. “Last year, we were able to get another 9 percent additional impact to our supply chain costs,” he says.

Payoff for Contract Vendors
Some vendors love working with the LLC, says Miller. They prefer its rough-and-tumble, close-to-the-edge, free-market environment. But others prefer the relative comfort and predictability of national contracts.

“What we do is bring a new dynamic into the process,” says Miller. “We guarantee commitment, using competitive forces in the market. But some people don’t want to play that game,” he says, adding that national GPO agreements can actually set a pricing floor with which vendors can get quite comfortable.

According to McManus, vendors working with the LLC can keep word of their best pricing off the street by offering the LLC such things as performance rebates – something that’s more difficult to do in national GPO agreements.

Lori Fitzgerald, account therapy specialist for Batesville, Ind.-based Hill-Rom, has worked with the Coastal Cooperative LLC for five years. The LLC was formed by JPC and Meridian Health, which comprises of Jersey Shore University Medical Center, Ocean Medical Center and Riverview Medical Center, all in New Jersey (as well as a variety of long-term care, ambulatory care and home care subsidiaries).

A registered nurse, Fitzgerald works with the Cooperative’s caregivers to manage their usage of therapy beds. “Because [Coastal Cooperative] is smaller than a GPO, it’s a much more personal relationship,” says Fitzgerald. “That means I can customize my sales efforts and partnership offerings to this particular system.” She adds that the nature of the LLC encourages “a strategic alliance vs. a traditional vendor/provider relationship.”

Payoff for Providers
Providers participating in the LLCs like the money they get back in the form of rebates, which otherwise would have gone to their GPOs, says McManus. They can – and do – use that money to fund such things as improvements in information technology, capital equipment and infrastructure, he says.

In some cases, the LLC can – with knowledge of the contract vendor – pass its pricing on to the physicians for use in their offices, adds McManus. In fact, one of JPC’s LLCs recently helped its physicians save 20 percent on the cost of flu vaccine. “That just gave them a 20 percent advantage on their cost of goods,” he says.

Once an LLC helps out the physician in his or her own office, then that physician or surgeon is more open to discussing product conversion or standardization in the hospital, adds McManus.

The LLC structure pays dividends far greater than simply lower purchase prices on products, says Curtis. “We found that using larger GPOs was almost like outsourcing our purchasing,” he says. “There was no sense of accountability or responsibility. But when we took that back and began looking at and evaluating products, we found we could develop closer relationships with our physicians.”

Today, Curtis uses words like “excitement” and “enthusiasm” to describe the attitude of the IDN’s physicians and employees toward product evaluation and selection. And with JPC taking care of things like managing contracts, soliciting bids and negotiating contracts, Cardinal is freed up to hone its supply chain skills even more, he says. Not a bad deal.

That’s why, for Cardinal Health System and others, it just might be true that good things do indeed come in small packages.

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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