Regional Book of Business

How regional contracting maintains in a crowded market place.

The logic for regional and local contracting is unassailable and as old as the proverb, “One in the hand is worth two in the bush.”

“All a supplier wants is volume and commitment,” says Laura Nolan, regional manager of Amerinet. “If a book of business can come their way, they will enhance an existing agreement for [it].” This is the logic that spawned group purchasing decades ago. And it is the logic that continues to propel the market today.

While it’s true that national GPOs collectively can claim almost every IDN in the country as a member, the fact is, contracting at the local and regional level continues to offer opportunities for providers. Whether it is for capital equipment and services, office supplies or spinal implants, clusters of hospitals are making offers that vendors simply can’t refuse. And it’s a formula that feeds on itself.

“If a group is able to … follow through on commitment and deliver volume, other suppliers will approach the group [with a desire] to work with them, either recognizing them as an IDN or affiliate of a national group, or offering to create a new tier to an existing national contract,” says Nolan.

Although a handful of IDNs have indeed severed their ties with national GPOs, most maintain a productive relationship with them. “There are circumstances that dictate that [contracting] locally may be appropriate,” says Richard Saccomanno, director of materials, Empire Health Services, Spokane, Wa. “But by and large, we’ve had a really good relationship with Amerinet. Most of our contracting is done through them.”

That begs the question: When is it prudent for an IDN or small cluster of regional facilities to pursue their own contracts rather than rely on the national ones? Answer No. 1: When they can get a better deal on their own. Answer No. 2: When local service is paramount. In either case, there’s one cardinal sin to avoid: “You lose credibility if you overcommit and underdeliver,” says Nolan.

Dependent on service
“GPOs can contract for just about any goods or services,” says Greg Weeks, director of materials management, Willis-Knighton Health System, Shreveport, La. Willis-Knight is a Novation member, and comprises three acute-care facilities in Louisiana, an extended care center, close to 100 physicians’ clinics and five fitness centers.

“However, those services and products that require a great deal of ‘people involvement’ [or] skilled tradesmen, such as plumbers, electricians and locksmiths, and construction and landscaping services, have an advantage with local providers.” Services such as these, as well as the tabletop delivery of office supplies, copier services and even med/surg distribution, are highly dependent on the quality of the people who deliver them, says Weeks. That’s what makes them ideal candidates for local contracting.

Grabbing suppliers’ attention
In addition to her duties with Amerinet, Nolan is a key liaison with the Western Alliance of Healthcare Resources (WAHR). Formed in 1999, Reno, Nev.-based WAHR is a non-profit corporation comprised of unrelated Amerinet-member facilities. It includes approximately 50 hospitals, surgery centers and clinics in Nevada and California. Its goal is simple: To save its members money.

Regardless of whether a regional group comprises two members or 50, if they can move market share to or from a supplier’s product, they can grab suppliers’ attention,” says Amerinet Chief Contracting Officer Allen Dunehew. “To the extent that you can foster a relationship among a group of facilities that are not under common ownership, make decisions on product categories and get fairly wide support — that will still draw the attention of suppliers.”

WAHR facilitates regular meetings of six departmental groups: materials management and purchasing, pharmacy, diagnostic imaging, dietary and nutrition, non-acute care and lab. They meet for networking, education and to discuss contracting opportunities.

Many times, WAHR leverages its commitment to gain an additional tier of savings from Amerinet contract vendors. In rare other cases, WAHR pursues contracts on its own, independent of Amerinet. If it is successful, the group shares its contracts with the rest of WAHR’s Amerinet’s members.

To date, WAHR has focused many of its efforts on commodities rather than clinician-sensitive products, largely because coordinating clinical reviews across 50 facilities is a difficult task. It enjoyed success with a hospital-bed contract by assembling a $13 million group buy of Hill-Rom beds. The organization has also been successful in signing a favorable contract for rental equipment with Universal Hospital Service, Edina, Minn. “They’re thrilled with … what the WAHR group has been able to deliver,” says Nolan.

WAHR has also signed a “preferred distribution agreement” with some med/surg, pharmacy and lab suppliers, piggybacking on Amerinet’s national contracts. And while the group has attempted to sign different agreements with local suppliers, it has faced some difficulty doing so. Referring to a small instrument repair company with whom WAHR was in discussions, Nolan says, “Trying to bring him into the fold [was difficult]. He was such a small business, he couldn’t cover the entire region.”

Capital equipment
Like WAHR, some IDNs have found success contracting on their own for capital equipment, either building on contracts negotiated by their national GPO or striking out on their own. An example is Empire Health Services, another Amerinet affiliate.

Empire has found that capital equipment contracts are often best negotiated locally, says Vern Arneson, purchasing manager. True, national GPOs can put together some attractive group buys, he says. But an IDN knows exactly what it needs, when it needs it. That’s hard for a vendor to pass up. Again, it’s all about volume.

“It’s difficult for manufacturers to offer their very best discounts to GPOs unless the GPO can direct volume through the contract,” says Arneson.

Empire has also found success contracting for physician-preference items, a fact that Arneson attributes to “the dynamics of those items and the relationships of vendors with physicians and other regional players.” Empire has met with success in cardiology products. “Now we’re looking at orthopedics and spinal,” says Saccomanno. And although the cardiology contract ended up being a local agreement, Amerinet played an important role in making it happen, he says. Sometimes the GPO is involved in these negotiations; in others, it is not.

Conventional wisdom has it that services are often best contracted for locally. And indeed, that often is the case for Empire, which has a locally negotiated contract with Aramark for dietary services. The IDN has also inked its own deals for laundry services, energy and natural gas.

Even so, “while there is some regional contracting, it’s really the exception to the rule,” says Arneson. “There’s very little we do regionally, except capital and service on equipment, and some physician-preference items.”

Like WAHR, Empire attempts to offer a fair and equal opportunity for local, minority-owned and small businesses to compete for its business. Often, however, such companies can’t compete with national contracts, or they lack the ability to supply what Empire needs.

Three options
While some IDNs have their choice of contracting on their own or using the contracts of a national GPO, others, such as Tucson, Ariz.-based Carondelet Health Network, have one more choice. Comprising four acute-care hospitals (including Tucson Heart Hospital, in which Carondelet recently purchased a majority interest and for which it serves as managing partner) as well as a number of primary care and imaging sites, Carondelet belongs to St. Louis-based Ascension Health, which in turn (as of Oct. 1) is a member of Dallas-based Broadlane.

“We look at several different layers of contracting opportunities,” says Purchasing Manager Marcia Steiner, who has been with Carondelet for more than 18 years. The primary layer is Ascension contracts, which tend to focus on high-volume commodities. Through the involvement of key Carondelet staff members and department heads, “We have a lot of input and involvement with Ascension contracts,” says Steiner, who expects Ascension to get more involved in capital equipment contracting in the near future.

The next layer are contracts negotiated by the national GPO (which until Oct. 1 was Consorta), followed by locally negotiated agreements. “Those local agreements are reviewed and approved by Ascension,” Steiner points out. And, when those contracts might benefit other Ascension ministries, Carondelet shares them with the others.

Examples of Carondelet-negotiated contracts include orthopedic and spinal implants, dialysis catheters and vascular grafts. Others include facility services (such as painting, electrical and architectural services), modular installations (for Herman Miller furniture), and cleaning and printing services.

Supporting minority-owned and local small businesses is critical to Carondelet, not only because doing so is socially responsible, but because it makes good business sense. “Just last year, Carondelet built a $10.8 million emergency center, entirely from locally donated money,” says Steiner. “If you asked local people to donate, we knew we needed to offer opportunities for business back into the community.” Local firms might not be able to supply high-volume commodities, such as masks, gowns or bedpans. But they can provide services, she says.

“There will always be room for local or regional contracting, because [these contracts are] much more reflective of the services that are offered in the area,” says Steiner. Even if an IDN contracts with a national service company, such as a Morrison Healthcare Food Services or Sodexho, it still must work with vendors in the local marketplace for goods and services provided at that level.

About the Author

Mark Thill
Mark Thill is the Editor of The Journal of Healthcare Contracting and has been reporting on healthcare supply chain issues since 1985. He is a graduate of Dominican University in River Forest, Ill., and he received a master's degree in journalism from Northwestern University in Evanston, Ill.