Executive Interview: Two-Tiered Approach to Contracting

Regional contracting is good for hospitals and good for vendors, says one contracting executive

More and more IDNs are joining purchasing coali-tions as a means of locally aggregating volume and leveraging contracting at higher tiers. But why, and how? The Journal of Healthcare Contracting recently spoke about it with Frank Fernandez, assistant vice president of supply chain services for Baptist Health South Florida (Coral Gables, Fla.), a non-profit health system that includes Baptist, Baptist Children’s, Doctors, Mariners, Homestead and South Miami Hospitals, as well as Baptist Cardiac & Vascular Institute, Baptist Outpatient Services and Baptist Health Enterprises.

The Journal of Healthcare Contracting: When did your hospital system join a regional purchasing coalition? What was your primary objective(s) for doing so?

Frank Fernandez: We joined the South Florida Regional Coalition about three years ago with the objective of enhancing the savings we were obtaining through Premier’s contracts.

JHC: Why do you think so many hospital systems are joining purchasing coalitions?

Fernandez: Systems are joining coalitions to further aggregate volume to a local/regional level or based on affinity, to provide greater contracting leverage and to partner with vendors at higher tiers for lower prices. Vendors are embracing this strategy because it gives them further opportunities to shore up volume commitments and potentially expand sales at the local level.

JHC: Do you feel you are achieving your objectives and goals through your membership in the purchasing coalition?

Fernandez: We are achieving our goals through demonstrated highest discounted tiers tied to the aggregated volume of the local coalition, as well as the coalition’s ability to standardize on a vendor at the local level. This is not possible to do all the time, but when it is possible we have demonstrated outstanding results in lower prices for med/surg supplies, office supplies, equipment rental services and construction/plant operations equipment and supplies.

JHC: How large is your network? Are there restrictions as to how many more hospitals can join? Must all of the hospitals/IDNs within the network be located within certain proximity of one another?

Fernandez: Our group consists of three IDNs, one stand-alone hospital, and a large institution of higher learning. All are within a 50-mile radius and all are affiliated with the Premier GPO.

JHC: What have been the greatest contracting issues/challenges for Baptist Health South Florida since joining the purchasing coalition? What has been the greatest contracting challenge for the network as a whole?

Fernandez: The greatest contracting issues have had to do with the timing of various legacy agreements that the members have had in place and the ability for any one member of the coalition to convert to a new agreement at any given time. We have had challenges in coordinating the group’s activities with the [value analysis] processes occurring at the various hospitals. However, these challenges have been largely overcome.

JHC: How much has your hospital system saved since joining the coalition? Can you provide some examples of the types of savings you have experienced? For example, what product categories did you save on and how did you identify these categories?

Fernandez: The coalition’s total savings since its inception is nearly $30 million. We have seen significant savings in office supplies, various patient care device categories, construction equipment and supplies, equipment rental services and more.

JHC: How have you worked with your national GPO to accomplish your network’s goals and objectives? Has your GPO contributed resources to the network?

Fernandez: Our local coalition is an extension of our GPO. It is staffed and supported by GPO personnel. A member must be affiliated with the GPO in order to participate.

JHC: Do you have full-time people managing the network or directing its activities?

Fernandez: We have dedicated resources that support the coalition. Two Premier employees serve as dedicated contract managers for the coalition. Their job is to oversee our agenda and schedule meetings. One of the contract managers focuses on construction, MRO, facilities, engineering and housekeeping. The other is dedicated to clinical products. The coalition members and the GPO share in the costs of their salary.

JHC: How is contracting at a regional level different from working through a national GPO? What are the pros and cons of each approach? When do you work through your network vs. the national GPO?

Fernandez: It is not much different. Since the coalition is really an extension of our GPO, there are no issues regarding whether or not to work through the GPO or through the local network. The pros of the coalition have to do with the local collaboration, our ability to aggregate volume at the local level and then commit that volume to a particular business partner. Our vendors see this as a great opportunity. We have waiting lists of suppliers who want to present to us various ways they can bring additional volume though further aggregation.

JHC: Who in your network makes contracting decisions? How do you decide which vendors will receive contract awards?

Fernandez: The national GPO awards the base contracts, while the members of the local group decide which vendors will receive coalition agreements. These local coalition agreements are embraced by the national GPO, and constitute locally negotiated tiers of pricing.

JHC: What “rules” govern the network?

Fernandez: Although we are not a legal entity, vendors recognize us as an aggregate group. As such, we have a set of rules that are extensions of normal business conduct and ethics at our facilities, and we expect vendors to bring concrete ideas and proposals for lowering costs for the members. When multiple vendors are awarded Premier contracts, the coalition entertains all of them.

JHC: How is the issue of physician preference items handled within your network? Have you tackled such items?

Fernandez: We have been successful in getting some vendors to aggregate certain categories of physician preference items by recognizing existing volumes and aggregating them into a separate tier, resulting in lower pricing. These models offer additional discounts in exchange for further market share commitments, which give the members incentives to further standardize.

JHC: How do you perceive the role of regional purchasing coalitions in providers’ contracting efforts?

Fernandez: Premier is launching a program called SEEDS, which is designed to bring in more diverse vendors. This will be a good opportunity for small diversity players, such as women- or minority-owned vendors, to work with Premier members such as our purchasing coalition. And, we look forward to pursuing some local contracts once SEEDS takes off at our local level.