Publisher’s Letter April 2011

The shot heard ’round the world

Our Editor Mark Thill has it right in this month’s cover story (Line in the Sand) – Medtronic’s recent cancelling of some GPO contracts is the supply chain’s equivalent to the “shot heard ’round the world.”

Yet the battle it has caused in the court of public opinion is still surprising.

So many people have asked me “Is this a watershed moment for suppliers not happy with the amount of GPO fees they are paying?” It is not an easy question to answer. Truthfully, no one knows.

Many suppliers feel the fees they pay to GPOs are too high in proportion to the value the GPOs provide them. When suppliers started paying contract administration fees on a lesser amount of sales, 2 to 3 percent seemed reasonable. But today, 10 to 15 years later, when the same suppliers are paying 2 to 3 percent on the majority of their revenue, it’s harder to understand the value. In Medtronic’s case I have read estimates they were paying fees of $40 to $60 million per year.

GPOs redistribute a lot of the fees collected to their members and owners, but does $40 to $60 million have to flow through the GPOs to handle the cost to administer these contracts?

Pricing transparency is also a tricky subject. Isn’t it acceptable to have different prices for different customers? Don’t customers have different costs of doing business with them? You know the old saying: “All customers are created equal, some are just more equal than others.”

The consensus of a lot of people we spoke to is that high Physician Preference Items (PPI) are not a great fit for national GPO contracts. But when you look at who owns and steers the national GPOs, I think it is smart to keep in mind they are working at the behest of our nation’s hospitals. So if the hospitals ask for help with PPIs from the GPOs, it might be wise to listen.

As more and more purchasing volume goes through GPOs, it is increasingly difficult to separate hospitals from GPOs and GPOs from hospitals. Many are so intertwined that I find it nearly impossible that a supplier could have a sales strategy that focuses just locally or just on national contracting. But Medtronic may know something I don’t!

About the Author

John Pritchard
John Pritchard is the publisher of The Journal of Healthcare Contracting.