Looking back to where GPO Inc. may be heading

Rekindling memories of those GPO days of yore within the minds of veteran group purchasing and supply chain executives elicits chuckles and smiles, but polished tales of behind-closed-doors-negotiations — the kind that fake news publications tout with salacious headlines that blare “alternative facts” to turn your head.

Except these are real — and can’t (more likely shouldn’t) be printed in a professional business news/trade magazine.

Over the years, observers and pundits, strategists and watchful-wishful thinkers have placed GPOs proverbially “on notice,” predicting a demise as premature as the obituary they would write about it.

After all, 107 years following its official debut, group purchasing continues — even if Hospital Bureau Inc., its founding organization, faded away during Healthcare Purchasing News’ childhood years. Many remember those years gone by — as competitive even before information technology and seemingly ubiquitous online access surfaced. They look back with a degree of fondness, maturity and respect.

“GPOs in the ’70s were member-driven,” Anderson reminisced with HPN. “Each hospital had a vote and participated in monthly (usually) meetings for med/surg, pharmacy and food.  Members supported the agreements because they had ownership in them.  Many supply agreements were a two-step process.  First, you selected the manufacturer. The manufacturer would provide the GPO prices to their distributors, and a second award was made. So hospitals bought from several distributors.  Also, the administrative fees were collected on just the contracted items.”

While working at Council Shared Services in Los Angeles, the shared services division of the Hospital Council of Southern California, Anderson recounted those early competitive days and a key turning point.

“We charged a fee for our services and demanded a high rate of compliance,” Anderson told HPN. “We successfully offered our contract portfolio to other state and metropolitan hospital associations that benefited from our aggressive prices.” By the late 1970s and early 1980s as administrative fee-based GPOs entered CSS’ market service area offering group contracts for “free,” the game changed.

“With this competition, we could not increase our service fees to offset our growing contract portfolio and staff, so we went to our membership to ask whether they would support regular dues increases or wished to explore administrative fees,” Anderson said. “They chose the administrative fee approach. We then surveyed our suppliers and found that a 2 percent administrative fee would not increase our prices.” He posited that the administrative fee model led to the concept of tiered contracts provided to member facilities with pricing aligned to product volume purchased and compliance as well as other demographic factors.

CSS later would become Purchase Connection and then represent the nascent group purchasing operation of a company initially known as MedAssets Exchange in the late 1990s.

Favorable intentions

During the last four decades, each GPO has tried to do its best for its members, help them save money and offer value-added services, admitted John Strong, Principal, John Strong LLC, and a key executive at Greenhealth Exchange. “How they have gone about it has varied — but I think that generally the GPOs and their staff are serious about doing the best for their members,” he said.

Strong began his career as a supply chain executive for a number of hospitals, followed by senior executive posts at Premier Health Alliance and Premier Inc. and later President and CEO of Consorta Inc. He also served in executive consulting roles at Nexera Inc. and Greater New York Hospital Association.

With his extensive background in supply chain and group purchasing Strong sees and understands current GPO struggles.

“GPOs are more sales-focused to snag new members today, and their members are less loyal than they were 30 years ago,” Strong noted. “I also feel that 30 years ago GPOs represented a very good value for manufacturers because they would help convert and sell their products to their members. Again, with the exception of HealthTrust, the largest GPOs struggle with selling contracted products to their members. Thirty years ago GPOs worked with members to standardize product, convert new business to new, contracted manufacturers and provide other valuable services to suppliers. They also helped launch new products. You see less of that today. Now, with much more multi-source contracting going on, I think it’s a lot harder for some of the GPOs to sell the notion of standardization of products to their contracts, have committed, sole-source supplier relationships and actually provide that value for suppliers. As a result, over the past five years you have heard many suppliers complain about the value they get back for the fees they provide.”

As HealthTrust’s key executive responsible for membership growth and retention, customer service and marketing initiatives, Doug Swanson recognizes some of the same GPO challenges, hurdles and roadblocks.

“The early GPO premise of applying scale and leverage around commodities and pharmacy for the benefit of all mutual participants has largely eroded over the years,” observed Swanson, HealthTrust’s Senior Vice President, Sales and Marketing. “Group purchasing only works where scale is aligned in both decision-making and contract adoption. What we see as material changes over the last few decades are many large players trying to get back to the roots of committed scale and purchasing. Having maintained our committed model, we’ve been the exception and have evolved by broadening into dimensions, such as subject matter expertise to guide facilities on total spend management in support of a consistent underlying CQO agenda.

“We have seen providers form regional purchasing coalitions to solve their lack of committed model support,” Swanson continued. “We have also witnessed large consolidations, IPOs and the building of huge technology enterprises that are not the principal charter of GPOs, and in some cases, conflict with what should be a more altruistic mission. Where GPOs succeed is when they are aligned, and where they fail is when they don’t deliver and the stakeholders do not honor the contracts.”

Back in the 1970s, GPOs functioned largely as a “basic health industry tool to control product prices through aggregation as providers faced growing financial pressures,” recalled Al LoBiondo, Managing Principal, MedGap Solutions LLC, and President, A.J. LoBiondo Associates LLC. LoBiondo spent much of the 1980s as corporate director, materials management at Sisters of Charity Health Care, and then the next 20 years in the GPO industry with GNYHA Services and Premier and with an energy solutions company.

“The health provider market was not concentrated, purchasing management unsophisticated and an industry in need of a counterbalance to supplier concentration and disproportionate market power,” LoBiondo said. “GPOs evolved to level the playing field between the larger and more sophisticated supplier sector and the providers in general as well as create some relief for smaller providers that were most disadvantaged.”

Service vs. business

Ash Chawla, RPh, Chairman & CEO, PDM Healthcare, attributed the popularity and growth of GPOs in the 1970s and 1980s to governmental regulations around reimbursement, starting with Medicare and Medicaid in the mid-1960s through managed care in the early 1980s.

“At this time, because of the limits and constraints on reimbursement received by hospitals, their main goal in using GPOs was simply price and cost containment,” Chawla said. “Today, all classes of trade use GPOs and depend on them for immediate access to emerging products/markets, data utilization, benchmarking, and operational efficiency. GPOs are instrumental in creating more transparency in the healthcare industry by providing members with key and accurate information regarding pricing and supply chain distribution.”

Facing competition as well as threatened oversight of procurement practices by the federal government in the years prior to the prospective payment system’s debut certainly shifted the personality and philosophy of group purchasing operations, according to former hospital supply chain executives-turned-industry-consultants Jamie Kowalski and Patrick Carroll.

“[GPOs] were linked by geography or interest,” said Kowalski, CEO, Jamie C. Kowalski Consulting LLC. “Hospitals came together over some commonality, common characteristics and overall objectives for the enterprise. Members were more collaborative with GPOs and formed something of a common bond. Today, it’s more of a price and business play.”

Carroll, President, Patrick E. Carroll & Associates, agreed. “Back then group purchasing was viewed as more of a service offering,” he said. “Today’s it’s viewed more as a business.”

Glenn Sherman fondly recalled his first exposure to GPOs in the 1980s when he served as Director of Materials Management at Beth Israel Medical Center in New York. The hospital had signed on to be a shareholder in Premier Health Alliance (now part of Premier Inc.). Sherman found it “exciting and rewarding” to serve on a GPO purchasing committee, choosing “which manufacturers would be awarded significant contracts for medical and surgical products to be used in large volumes by member hospitals.”

Beth Israel’s first product conversion resulted in an annual savings of $250,000, which was a big deal back then, Sherman continued, and further cemented the facility’s commitment to GPO participation.

“The GPO was primarily concerned with establishing agreements with suppliers and creating substantial volume with their member hospitals on these agreements to generate administrative fees,” Sherman shared. “These administrative fees paid by the suppliers would sustain the GPOs.  Back then, the practice of sharing a portion of administrative fees with hospitals that were not founding members or owners of the GPO was not common.  Many hospitals received no share-back of administrative fees.”

Sherman spent the next several decades as a supply chain executive for various hospitals, consulting firms and finally a regional vice president for GPO MedAssets before its acquisition by Vizient.

Rand Ballard, Chief Customer Officer, Vizient Inc., recalled a spirited business atmosphere in the past.

“In the 1970s, it was collegial, like-minded, hospital systems getting together to drive price concessions from suppliers,” Ballard remembered. “Today, the collegiality and likeminded health systems still exist. However, we are more collaborative with suppliers, not only driving price, but driving total economic value for the providers across the care continuum.”

Ballard started his healthcare career in the early 1980s as a regional sales executive with distributor American Hospital Supply Co., progressively working through the executive ranks as AHS became part of Baxter Healthcare Corp., then part of Cardinal Health Inc. Ballard joined GPO MedAssets in 1999 as Executive Vice President and Chief Customer Officer.

Game elevated

“Current GPOs are mature and sophisticated organizations challenged with providing value to an increasingly concentrated and more savvy integrated provider base,” LoBiondo said. “GPOs maintain an advantage in access to capital and resources to develop commercial-type sourcing platforms, business and clinical analytics and decision support databases to elevate the performance of their client base. Time will tell whether this advantage can be sustained or if providers will develop their own capabilities, or if other disruptors will invade this space.”

LoBiondo forecast that “the future of GPOs will depend on how well they can evolve their sourcing — not just aggregation, but total supply chain, from direct and indexed commodity contracting through logistics and utilization management — and how they can improve and help their clients manage value-based purchasing scenarios across a care continuum.”

He added that “the GPO client is larger and more sophisticated, requiring GPOs to elevate their game.”

Sherman concurred. “Today, GPOs are under great pressure to reinvent themselves and add other services to maintain their relevance in the healthcare landscape,” he said. “Administrative fees are routinely being shared with their hospital members at much higher percentages than years past, thus reducing revenue to the GPO.  You will find that agreements between hospitals and GPOs differ widely across the spectrum with regard to administrative fees.”

New revenue streams may be necessary, Sherman continued. “GPOs will continue to place a major emphasis in increasing the amount of consulting services offered to compensate for the reduction in administrative fees being received,” he said. “These consulting engagements include many areas that the hospital community needs assistance with, including supply chain outsourcing and assessments, expense reduction, revenue enhancement, population health, lean management, equipment planning and strategic positioning just to mention a few.”

Kowalski noted that historically GPOs have become more “homogenous” in terms of offering similar portfolios of products and services. “Over time, it seems to me that many of the GPOs are within 3 percent of one another in terms of pricing,” he added. Competition from regional and local consolidated service center models operated by HealthTrust and a number of integrated delivery networks, as well “custom contracting,” is paving the way to the next market shift, he added.

Accountability represents another key theme as compliance to committed contracts for favorable pricing must be demonstrated through applicable data science to provide an accurate transactional record between providers and suppliers.

When managed care and the prospective payment system replaced cost-based reimbursement in the 1980s, shifting market power and influence to payers, providers strove to cost-justify purchasing and consumption patterns.

“In the late 1980s it was hard and costly for hospitals and GPOs to track this data,” Kowalski said. “They relied on manufacturers and distributors sales reports. Today, it’s a little easier.”

Back in the 1980s, Strong noted that Premier Health Alliance provided a “value index” to show members the “rate of return” the group was delivering. In the 1990s, Consorta tracked hospital transactions with member hospital CEO support. “We then would match purchasing results reported by hospitals with what sales were reported by suppliers to make sure hospitals were receiving their proper rebates,” he said.

Fundamentally, accountability will be a routine tentpole tactic going forward as volume performance will determine the sustainability of contract price concessions, something Strong stressed during his GPO career. Essentially, GPOs negotiate a price with a supplier based on expected volume purchased during the duration of a contract, and if that number isn’t achieved the new contract price changes. “Hospitals and GPOs were motivated to deliver because they wanted to avoid negotiating for a price increase during the next contract term to make up any difference,” he said.

For many providers, product pricing still attracts interest in GPOs, according to Doug Heywood, Managing Partner, Ron Denton & Associates LLC. Before entering the consulting world, Heywood had been a hospital supply chain executive.

“Hospitals continue to look to GPOs for best pricing on commodity products,” Heywood said. “Currently, there is still very little value for hospitals to spend time negotiating these product groups. At the present time, price points within commodity portfolio continue to be a deciding factor for determining the best GPO partner. However, more and more attention is being directed by GPOs to maximize value in specialty products and physician preference items, and in the category of purchased services.”

Even as GPOs and distributors consolidate, Heywood said he believes opportunities exist for “alternative group contracting models to arise,” particularly among heightened provider interest in self-contracting and self-distribution models, into which GPOs could tap.

Clincal, data themes

Data demands are driving GPO pursuits today and moving them to the next level, according to Greg Firestone, Chief Customer Officer, ROi.

“GPOs have slowly transformed from being group contracting companies to supply chain and clinical management companies,” Firestone said. “What has not changed is healthcare providers needing a reliable source offering a competitive contract portfolio of products and services to assist with controlling operational expenses. What has changed is healthcare providers needing access to supply and clinical data that offers greater visibility to deliver ongoing clinical, operational and financial improvements. These needs are mostly universal among healthcare providers. However, the solutions offered by GPOs vary, and therefore allow for various GPO models to be accepted, depending of the specific needs of the healthcare provider.”

GPOs have become more strategic entities today than the transactional organizations they were in the late 1970s, indicated Jody Hatcher, President, Sourcing and Collaboration Services, Vizient Inc.

“One of the biggest changes [involves] a reliance on data and analytics,” Hatcher said. “Transparency and consumerism have grown exponentially. And the strategic importance of supply chain has risen to the highest levels of the nation’s healthcare systems. What hasn’t changed [is] lowering costs remains a constant throughout. But notably, earlier it was really just about price. Today, however, the focus is on total cost management. In other words, today the role of supply chain is critical to not only lower cost, but also to reduce clinical variation and improve clinical outcomes.

Changing reimbursement policies and the role of the hospital supply chain both define the GPO’s evolution in the healthcare industry, according to Christopher O’Connor, President, Nexera Inc. and GNYHA Services. As a result, GPOs share best practice supply chain solutions so that providers can enhance their clinical and financial performance, he insisted.

“Historically, the role of GPOs has been to help providers lower the cost of doing business so that they can focus on providing quality patient care,” O’Connor said. “However, in today’s payment environment, business costs and care quality are intertwined. The hospital supply chain must evolve in order to play a more strategic role, working with hospital end-users to understand purchasing needs, analyze outcomes data, and make evidence-based purchasing decisions that take into account the long-term cost of a device based on an episode of care. In turn, while the goal of GPOs remains the same, the services they provide have expanded to meet the changing needs of their customers.”

But O’Connor acknowledged that every provider’s requirements and preferences are different and that proactively prompts a customer-centric response.

“The GPO marketplace continues to offer a variety of service models that cater to provider choice,” he continued. “Regardless of the policy changes that may come out of Washington, the necessity for providers to cut costs in order to remain financially viable is not going away. The services that GPOs provide are needed now more than ever before. As history shows, they will continue to evolve with the needs of the provider community.”

Part of that evolution calls for evidence-based value justification, according to Ted Almon, Chairman, Claflin Co., a leading regional distributor.

Models have changed over the decades, he acknowledged, but fundamentally, the volume of transactions, fees, share-backs and influence that GPOs exert on the medical supply chain continue.

“What were incipient cooperatives of providers have become mega corporate entities, many for-profit, and some even publicly traded, but all still operating under the protection of a regulatory loophole, or safe harbor, granted to encourage cost savings by hospitals an entire generation ago,” he said.

GPOs can and will continue to play a useful industry role, Almon noted, “which could certainly enhance the efficiency of the healthcare value chain by consolidating contracting activity and standardizing processes among hospitals, networks and other providers.  It remains uncertain whether progress toward these goals is being made, or even if it is still an appropriate aim of the new GPO industry.”

Almon suggested that an independent third-party organization should develop “empirical and quantifiable” evidence of GPO-contributed value to reinforce their contributions.

“We are yet unable to quantify, or even define precisely what we mean by cost savings or measure success or failure in achieving it, thus thwarting any meaningful cost/benefit analysis of the activity of group purchasing as we know it today,” he added.

Todd Ebert, RPh, President and CEO, Healthcare Supply Chain Association (HSCA), who served as the last CEO of Amerinet before it became Intalere, promoted the continuing role and ongoing value of group purchasing.

“GPOs continue to enhance and grow the services and programs they provide customers,” he said. “Customers have asked much more of GPOs, and GPOs have responded.  In my early tenure in the GPO arena, to a large degree you were a price in a catalog. Now, based on technology, healthcare demands, [in terms of] value and patient care focus and customer needs, GPOs are defining themselves much more broadly — beyond a GPO.  GPOs are also working with their customers in a symbiotic relationship to customize solutions and services for systems and organizations that are seeking additional, specific, enhanced value. They each have understood that they can work successfully together to provide high-quality patient care.”

Story 1: GPO Inc. demonstrates heavy, but precious mettle

Storty 2: Looking back to where GPO Inc. may be heading

Sidebars:
GPO Evolution and Progress, 2007-2017
GPO Evolution and Progress, 1997-2007
GPO Evolution and Progress, 1987-1997
GPO Evolution and Progress, 1977-1987