Publisher’s Letter Summer 2004

Who Owns Who?

In its August 16, 2004 issue, Modern Healthcare published a GPO survey. Many important aspects of the group-purchasing world were explored, measured and contrasted against its last survey in 1999. I think the article emphasized two very important issues.

  • Modern Healthcare points out what I have contended for years, and that is that despite the Senate Judiciary Subcommittee hearings, the GPO Òindustry as a whole appears to be gaining ground in spite of a fixed pool of hospital customers.Ó This has been demonstrated by continual year over year growth. Today, more than $65 billion of purchases are made through GPO contracts every year.
  • The magazine also points out that the two areas in which GPOs have really changed in the last four years are 1) an emphasis on technology and 2) the acquisition of alternate site members. I think this is obviously driven by IDNs and their components striving to conduct care in a more consolidated manner. Health systems and their facilities are streamlining and aggregating efficiencies everywhere they can, including purchasing, information and services.

While in agreement on these points, one concept often missed is the fact that GPOs, hospitals and IDNs are closely related and oftentimes share ownership. When you consider a GPO is owned by many health systems it is unreasonable to try and separate the GPO from its consuming customers and/or owners, the IDNs and Hospitals. I think it is also unreasonable to compare the operating margins of hospitals with GPOs, as they are different business types delivering different services.

GPOs often have many shareholders, each of whom should benefit from the GPOÕs contract portfolio and a share of its financial success. Very often the high-margin GPOs pass down their profits to their owners Ð the IDNs and health systems. At the end of the day, the IDNs, hospitals and providers make the decisions about where, how and from whom to buy. And every year more of those purchases go through GPOs. When the systems and hospitals no longer feel their return is high enough or the value provided by the GPO is substantial enough their purchasing behaviors will change.

The industry needs to take seriously the concern that smaller and niche companies with innovative products could be squeezed out of the market. These companies ensure that new technology and new miracles are available to patients. GPOs should never squelch this opportunity. Rather, they should find a way to help companies with these infant products flourish and succeed.

Hopefully IDNs, facilities and providers will continue to enjoy the savings and fees that GPOs can create, so that they can work hard on important initiatives, such as providing high-quality patient care, developing best practices of physician/clinician care, mitigating lifestyle disease, and taking good care of their communities.

About the Author

John Pritchard

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