What looks like an IDN, acts like an IDN, drives a hard bargain like an IDN, but isn’t an IDN? Colonial Regional Alliance.
It started out with a group of materials managers putting their heads together and figuring out what they could do together to cut costs for their respective facilities. No strings attached. No CFO or CEO involvement. No chain-of-command issues to worry about. Today, the Colonial Regional Alliance is a limited liability corporation with seven independent hospitals in Maryland and northern Virginia, a board of directors, more than $2.5 million in documented savings, and a plan to reap even more savings through joint contracting and shared services.
Circumstances just right
The conditions for the formation of Colonial were near ideal. The materials managers who started it shared a long history by virtue of the fact that all their facilities belonged to Charlotte, N.C.-based SunHealth Alliance (now Premier). As such, they had worked together on a variety of regional projects. Then in 2002, they decided to take their rich history of collaboration to a new level. In the spring of that year, the materials managers from Frederick Memorial Hospital, Western Maryland Health System and Winchester Medical Center (the flagship facility in Valley Health System) all attended the Premier “Breakthroughs Series” conference in Dallas, Texas, explains John Derr, director of materials management, Washington County Health System, Hagerstown, Md. At around that time, Premier was in the process of changing its approach to contracting. It was moving away from long-term, sole-source agreements in favor of multiple-source, short-term agreements, with a system of pricing tiers based on volume and compliance.
While in Dallas, the three materials managers began talking about the new contracting model, and they tossed around the idea of pooling their volume to achieve greater savings. “They called me and said, ‘John, what do you think of this idea?’” recalls Derr. “My response was, ‘We need to get together and flesh this thing out.’” They met for the first time in May 2002.
It made sense, says Derr. With the exception of Winchester Medical Center, all the hospitals involved in the initial discussions (there were four at the time) were sole community providers. Even if each were to deliver high compliance, none could generate the kind of volume that could fetch deep discounts from manufacturers. “But what if the four of us were to shake hands and represent ourselves to these manufacturers as a virtual IDN?” says Derr. They decided to test the idea. Initially, they experienced some resistance from manufacturers, but they pushed ahead, using the principles of the free market to do so. “If Company A didn’t want to work with us, how about B or C?” says Derr. Manufacturers learned that the four materials managers were serious and capable of delivering significant market share.
“This was grass roots,” says Derr. “We didn’t talk to our CFOs or CEOs about what we were doing for [several] years.” Then, in the latter part of 2005, Derr approached his CFO, Raymond Grahe, to tell him what was transpiring. “I told Ray, ‘We have reached a plateau, a wall. We have captured the low-hanging fruit, but there are a lot of things going on in our individual institutions, and we lack the capital and horsepower to do more.’” Derr, Grahe, Bruce Carlson (materials management executive at Winchester Medical Center) and Craig Lewis (Winchester’s CFO) got together in November 2005 to talk about the next step. That led to a meeting of the CEOs of all the participating facilities (the number had grown to seven) the very next month.
At that meeting, Derr and Premier regional director Mike Maguire explained to the CEOs what the materials managers had accomplished on their own since 2002. “We had signed 50 or 55 contracts, and out of all of them, we were unable to make a conversion on only four occasions,” says Derr. “We were able to demonstrate that we had a pretty high compliance rate, and we wanted to tell the manufacturing community about it too,” he says.
After their presentation, Kevin Connor, executive director and CEO of the Western New York Purchasing Alliance, Williamsville, N.Y., got up to talk about the model that those facilities had built in the Buffalo area. Incorporated in November 2004, the Western New York group brought together seven hospitals and health systems to pool volume and achieve better pricing. Like the Colonial Regional Alliance, the Western New York Alliance used Premier as its national contracting engine.
“What we were looking for from the CEOs was either, ‘Yes, this is a good idea,’ or ‘Don’t waste our time,’” says Derr. “We got the thumbs-up. They were all nodding in unison.” Within a month, the group had decided to form a limited liability corporation.
Setting up the LLC was relatively simple, says Derr. But arriving at an operating agreement to which all seven facilities could agree took a bit of work. Such agreements list the ground rules of how an LLC will work, addressing such issues as how members treat each other, how new members are brought in, and what happens if one of the members wants to leave.
“Again, these are seven disparate hospitals; they have no common ownership, and they’re stretched 145 miles apart,” says Derr. By November 2006, the hospitals had come to an agreement on all the major issues. With combined annual supply and pharmaceutical expenditures of $300 million, the hospitals formed the Colonial Regional Alliance, a non-profit LLC based in Hagerstown.
Although the organization had done quite well meeting informally up to that point, the members realized they needed a full-time executive director to move the organization forward. Maguire had been acting as interim executive director, working with the board members to pull together the shell of the operating agreement. (At the time of the founding of the LLC, Premier Region Vice President Greg Tornatore was quoted as saying that Colonial was one of about two dozen similar organizations that Premier had facilitated nationwide.)
“They had gotten to a point where two things happened,” says Steve Carpenter, who ultimately was selected as executive director. “First, each of these materials managers had a job to do on their own in addition to [Colonial Regional Alliance]. Second, they were starting to meet some resistance from the supplier community.” Some suppliers were demanding that the hospitals adopt a more formal structure in return for more favorable pricing. “The formation of an LLC or a corporation gives you the ability to present yourself as an organization with structure, goals and financial backing,” says Carpenter. “Suppliers want to make sure you have skin in the game and the ability to drive behavior, which, to me, is the basic premise of the business model.”
Carpenter came to the Colonial Regional Alliance with 10 years of experience working for VHA, Premier’s competitor. With VHA’s consulting division in Charlotte, N.C., Carpenter had participated in a number of assignments, including physician practice consulting, managing subcontractors and developing spend-analytics programs. Then Carpenter and his family made the decision to move from Charlotte to Hagerstown. There, he saw the posting for the Colonial assignment, interviewed for the job, and reported to work Oct. 13, 2006.
In a sense, Premier is the glue that holds the organization together, says Derr. Indeed, the Colonial board has at times supported non-Premier contract vendors, says Carpenter. “We have been down that path, and we work toward the goals and interests of the members. That’s how the relationship is structured.”
But at the very least, Colonial takes a close look at Premier’s contracts and relies on Maguire to make sure that the LLC is taking full advantage of them. “My philosophy is, we’re members of a GPO for a reason, so we ought to use it,” says Derr, who doubles as chairman of the Alliance’s board of materials managers. “What we’re trying to do – and this is the fundamental reason for CRA – is to maximize the contracts.”
Even the department heads are starting to get more familiar with Colonial Regional Alliance and its potential impact on their product decisions. “When products are brought to me through the value analysis/product committee, [the committee members] will ask, ‘What is CRA doing about this item or space?’” says Derr. He tells the story of an advanced-wound-care contract the group signed several years ago. “We brought all the enterostomal therapists together,” he says. “They knew each other, but had never been in the same room together.” Among the seven ETs, advanced-wound-care products from seven different vendors were in use.
“We had a vendor fair and lunch, and then each vendor made a presentation,” recalls Derr. “We didn’t finish until 5. It was a Friday afternoon. Then we said, ‘Before you leave, we want you to decide on one vendor for … silver dressings and ostomy supplies.’ The entire dynamics of the room changed. They saw this was now serious.” Indeed, before they left, the enterostomal therapists settled on a vendor with whom Premier had a contract.
Capitalizing on that success, the group has brought together pharmacy directors, lab directors, and IT vice presidents and directors. “We’re trying to get our facilities engineers together,” says Derr. “They have their own ideas about elevator maintenance, HVAC systems, etc.”
“The return on our investment is this,” Derr continues. “By being members of Premier, [each hospital] would have gotten a certain discount. But by coming together, there’s an additional cash benefit.” Discounts are greater, so are the dividends that come back to CRA and its members.
Not every facility will convert to the CRA-selected vendor every time, admits Derr. CRA’s members make that clear to each other and to prospective contract vendors upfront. “We’ve never pledged all of us would go with the same manufacturer every single time,” he says. There are always extenuating circumstances – even local politics – that can prevent that from occurring. “But we are honest with each other as we contemplate a move. We’ve found that’s the best way to do business.”
While pooling volume for product-related contracts may be the Colonial Regional Alliance’s roots, it is by no means the end of the road. “When we materials managers first got together, it was all about contracts,” says Derr. “But when we got outside that comfort zone and brought in the CFOs and CEOs, we were asking, ‘What else can be done?’” Ideas started percolating. How about shared laundry services, environmental services, clinical engineering services, education or nutritional services? “You name it, and we’ve thrown the idea out there,” says Derr. “On a conference call one afternoon, we found that among us, we were using four different dairies and five different bakeries,” he continues. “We haven’t pursued that yet, but it is an idea.”
“There’s a whole open environment for us to look at, although for today and the foreseeable future, we’ll look at med/surg contracting,” says Carpenter. “There will always be value there, with new technology and the things people want to buy. We want to expand, but in a healthy, planned fashion.”
An example might be financial services. “One project we’re really excited about is electronic payables, that is, paying suppliers electronically through a credit card platform,” says Carpenter. Not only would such a system increase the efficiency of the facilities’ accounts payable operations, but it would allow them to share with their bank the fees that vendors pay whenever they use their cards. With as much as $150 million in purchases going through the system, the payments could add up, says Carpenter.
What makes it work?
The people at Colonial Regional Alliance agree on one thing: In order for a program such as theirs to work, participating hospitals have to trust each other, implicitly. CRA had the luxury of beginning informally, with a group of materials managers who had worked together for years.
“You have to know who you’re dealing with, with respect to your colleagues,” says Derr. “The thing that created us and has held us together is the fact that we knew each other. The level of trust among us and our willingness to work together [were important factors]. “When you join any group, you give something up, but you also gain. And for the last five years, what we’ve gained far exceeds what we’ve given up.” Not only have the dollar savings been substantial, but the activities of the Alliance have heightened the profile of materials management in each of the participating institutions, says Derr.
“Three core values make CRA work – collaboration, commitment and compromise, and not necessarily in that order,” says Carpenter. “The members are willing in some cases to sacrifice individually for the benefit of the group. Compromise is very important …. There has to be commitment to the enterprise in general, the greater good, and the idea that by working together, you can achieve greater value. And there has to be the willingness to put in sweat equity, both at the materials management level and the board level. It’s very forward-thinking.”
“You need a sense of common purpose,” adds Raymond Grahe, vice president of finance, Washington County Health System, and chairman of the Colonial Regional Alliance board of managers. “Organizations need to agree to come together. If they’re competitive, they need to set that aside in order to form an organization that will be for the benefit of all.”
Indeed, even if the Colonial CEOs compete in other arenas, when they walk through the door into a CRA board meeting, “they are comrades,” says Grahe. “They work together to further the interest of the Alliance.”
Like a new tree or plant, CRA is slowly establishing its roots. With that comes rising expectations. “Now that CRA has greater visibility within their organizations, people have [assigned] goals to CRA,” says Carpenter. “Materials managers are identifying savings target for the year, and they are attributing some of those savings to CRA. It’s no longer, ‘If something comes out of CRA, great.’ Now, people are beginning to say, ‘[CRA] has structure to it, and we’re going to expect value to be generated every year.’”
“After I’ve finished talking about [CRA], about how we got started and everything that has happened since 2002, people say to me, ‘Gee John, you’re really passionate,’” says Derr. “Yeah, I really am. It is something that has really worked for us.”