Strength in Numbers

Smaller hospitals and IDNs find market strength by forming coalitions

When it comes to driving market share, small players are discovering new ways to take control of the wheel. In the last couple of years, small to mid-size hospitals and IDNs, which traditionally have maintained low tier standing on national GPO contracts, are joining forces and working as a single purchasing system.

Generally, the members share a common locality, such as a state or region, and all belong to the same GPO. In fact, GPOs not only support this activity, they help facilitate it. The regional, aggregation groups, or custom supply chain networks, work together to optimize their GPO contract portfolio. Their goal is to obtain better pricing from their manufacturer partners. In return, they can provide their suppliers with a substantially larger market share and create a win-win relationship where little or none existed before.

“Purchasing coalitions [form] to maximize their buying power,” says LeAnn Born, vice president, custom contracting, Novation. Because the pricing structure on Novation’s national contracts generally provides better incentives for hospital systems with a larger volume of commitment, it makes sense for the GPO to help its smaller members come together and share volume and behaviors that attract suppliers, she points out. “We help the coalitions identify good product categories. We evaluate their data and find their commonalities and differences. These differences [often] are opportunities for suppliers to provide new business. We also help them standardize on products.” Born estimates that as much as 20 percent of dollars flowing through Novation agreements are through aggregate purchasing coalitions.

Mark Grove, associate executive director, supply chain and alliance services, Scott and White Healthcare System (Temple, Texas), helps represent his hospital system in the Texas Purchasing Coalition (TPC). Scott and White is a three-hospital system, which manages two other hospitals and nearly 30 regional health clinics. “The Texas Purchasing Coalition is an alliance of VHA Texas members who voluntarily joined together with the purpose and intent of behaving as a single purchasing system and entity,” he says. “Our group formed primarily to be able to go to market with a committed volume. All of our 13 members (some of which are independent hospitals and some of which are IDNs) are independent of one another.”

The coalition was started in the summer of 2007 and currently commits to about $580 million in annual spend, according to Grove. “To date, we are under $6 million in savings, but we would like to save $20 million by the end of 2008.” The group is open to accepting new members in order to make this happen. “Because our strategy is to commit greater volume, we are open to new members,” says Grove. In fact, he is open to the idea of his TPC joining forces with another VHA regional purchasing coalition, he adds.

Group dynamics
Each aggregate network may be organized somewhat differently and governed by a different set of guidelines. But, for any coalition to work, members must be committed to working together as a cohesive purchasing unit. Born identifies three factors that contribute to successful aggregate contracting:

Governance. Purchasing coalitions need executive support (e.g., hospital CEO, CFO or COO) to ensure they follow through on purchasing activities.
Commitment. The group must be committed to its members’ needs, and the individual members must be committed to the group.
Process. Group members must select product categories and determine how decisions will be made.

“Each hospital must send supply chain leaders to group meetings to [help shape] this process,” she says. “Then, either quarterly or annually, each hospital’s CEO should evaluate the process for how well it is working. When Novation is asked to play a role, [representatives from the GPO] attend the coalition’s meetings and provide input on negotiating with suppliers.”

The Texas Purchasing Coalition is governed by the TPC council, which includes supply chain executives and clinical resource representatives from each hospital, says Grove. The TPC council is, in turn, overseen by an executive oversight committee made up of CFOs and COOs who are responsible for driving opportunity within each of their hospitals and obtaining buy-in. In addition, a board of directors exists, which includes CEOs from each member hospital.

When it comes to contracting for physician preference items, the purchasing coalition relies on a clinical resource subcommittee to review products. “We have developed an evaluation and standardization tool, which the committee employs to make their recommendations to the TPC council,” says Grove. “Then, we hold a voting process.”

“Physician preference is difficult [to manage] even within a single hospital,” says Born. That said, if a particular CEO or other stakeholder is not happy, he or she should “step out” to enable committed members to offer suppliers a stronger market share, she adds.

When is big ‘too big?’
Indeed, a coalition with a greater level of commitment generally can drive greater market share. But can group purchasing coalitions ever become too large to get members to work cohesively and make timely decisions that will move market share forward?

“Once [our coalitions] grow beyond 20 members, they can become too large to [facilitate] effective decision making,” says Sue Casey, vice president sourcing, Premier. Casey and her colleague, Krista Marshall, director of Premier’s regional collaborative program, help the GPO’s members join together to form aggregate purchasing coalitions. Marshall’s job is to advise coalitions on opportunities and challenges they may face and share results other coalitions have achieved.

Purchasing coalitions face similar challenges as Premier does at the national level, says Marshall. “When the group pulls together data, it must do so in a timely manner. It must demonstrate to suppliers its value to them.” And, members must work cohesively, she adds. “If the members standardize on one or two suppliers, those suppliers will be more interested in doing business with them.”

Sometimes, purchasing coalitions defy conventional wisdom. Some have managed to think big (e.g., attract 50 or more members), work cohesively and, in doing so, wield greater market share than smaller coalitions. Take WNC Health Network in North Carolina, for example. With a dedicated group for decision making, the coalition, which is comprised of 47 IDNs (or a total of 53 hospitals), for the most part runs smoothly and meets its contracting goals.

WNC Health Network has “never said ‘no’ to potential new members,” says Tim Bugg, vice president healthcare relations, WNC Health Network. “We are happy with our current size, but we are always willing to see if new hospitals can commit and help us move market share.” The network, which formed in 1994 and added group purchasing in 2000, has been around longer than most purchasing coalitions. It has saved $33 million since its inception and $13.5 million in 2007 alone, according to Bugg.

Still, it faces the age-old issue of getting members to agree on products. On one hand, “we represent 10,000 hospital beds, which helps us move market share,” says Bugg. “But, if we want to single source a product, it can be tough to get 53 hospitals to agree.

“We can tell vendors that we are 53 hospitals strong, but without member consensus, we really don’t have that pull,” he continues. So, we reach out to [our] hospitals to find out what is realistic [for them to] standardize on. Smaller hospitals that only do 10 or 20 heart implants each year are the ones that really can benefit from aggregate contracting. “So, we have to consider whether [our decisions] will benefit all or some of our members.” Through benchmarking, the network looks forward to providing its members with more data and solutions that will benefit all of them. “We are looking at the market more broadly to find new ways to help all of our hospital members reduce cost,” he adds.

The network’s decisions are member-driven, according to Bugg. “We have 11 different work groups, seven of which do group purchasing,” he says. “These include pharmacy, lab, business office, food [services], foundation directors, CFO and materials management. The majority of our contracts fall within the materials management work group. We present data to our hospital representatives [at quarterly or bimonthly meetings] and the members make [purchasing] decisions then and there.”

Today, the 16 founding members each hold a board seat, and some of the network’s activities involve only them, explains Bugg. For example, they oversee the group’s active regional health informational organizations, which enable hospital members to share patient care information with one another and ultimately provide better patient care.

Can’t get no respect
Getting member buy-in and implementing contracts are particularly important in earning supplier respect. “Because we are large and [have the potential to] move market share successfully – or take it away – our vendors have approached us proactively about contracts,” says Bugg. “I think aggregate purchasing groups originally hit suppliers by surprise. But, now they are starting to respond to them and build this [concept] into their sales practices.” Still, on occasion, vendors have pointed out that “they expected 85 percent of our members to be on the program, and they need to see this commitment,” he says.

“In the beginning, suppliers weren’t sure how to respond to aggregate groups,” says Casey. “But, I think they have gained the respect of vendors. The supplier base is beginning to see aggregate groups as a way for them to gain business.” The hospitals, in turn, expect top tier.

“It’s a give and take [relationship],” says Bugg. “At the end of the day, we are partnering with our suppliers.”

“As our [organization] continues to grow, this is built-in growth for our vendors,” adds Grove. “We are taking our existing [GPO] contracts and pushing them, stressing to vendors that we can deliver commitment and move market share. Commitment is a very powerful tool in the market place.”

About Laura Thill

Laura Thill is a contributing editor for The Journal of Healthcare Contracting.

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