GPO Evolution and Progress, 1977-1987

As part of Healthcare Purchasing News’ 40^th anniversary celebration, HPN reached out to dozens of veteran healthcare supply chain executives with experiences and expertise in hospitals, group purchasing organizations, suppliers and consulting/service companies that hearken back to the 1960s. That’s at least a decade before HPN-precursor Purchasing Administration landed on their computer-free desks. What follows are their edited insights and recollections about events and milestones from 1977-1987, 1987-1997, 1997-2007 and 2007-2017. Share some of yours by submitting your comments and recollections to [email protected].

“In the 1970s, groups were forming and evolving. Most were part of or sponsored by state and metropolitan hospital associations, and they stayed within their boundaries. Most began with medical supply and pharmacy programs. Capital equipment programs were rare. Few had dietary programs. There were a few for-profit programs available.

“The East Coast groups, and later those in the South and Midwest, collected administrative fees. They may have had an annual membership fee, but the amount wasn’t significant. The for-profit groups and those in the West charged a fee for their services.

“In addition to purchase agreements, these shared service businesses offered a variety of other services, including laundry/linen, collection, blood bank, drug wholesaler, biomedical engineering, energy management, financial computer services and more.

“A professional organization was established the called Group Purchasing Group (GPG) that held annual meetings in tropical locations where they bragged, postured and drank. Participants would share strategies and successes freely with the others since competition wasn’t a concern. They shared successes and reported purchase volume, but these reports were very suspect and unreliable.”

– Jack Anderson, President, Material Resources Inc.,
and former hospital supply chain and GPO executive

“This decade provided several sea changes in the hospital purchasing environment that have evolved into today’s structures. In the late 1970s, the hospital group purchasing market consisted of around 50-75 state or regional GPOs. Most were often aligned with a local or state hospital association, many of which were operated on a contractual basis with the Hospital Bureau. Some privately held regional GPOs, such as Health Services Corporation of America and MedEcon, were also active. The state and regional association GPOs were generally provincial, not wandering beyond their state or regional boundaries, and associating with one another in a collaborative manner rather than an adversarial one. They tended to be member-driven by individual hospital department heads from Purchasing, Pharmacy, Laboratory, Engineering and Food Service. C-Suite involvement was usually limited to endorsement of the hospital’s participation in the programs.

“The earth moved in the early 1980s after the launch of VHA [in 1977] as an association of large, urban teaching hospitals that came together for the CEOs of those organizations to associate with other executives [at facilities] of similar size and complexity. Many of the CEOs were schoolmates at some of the country’s most prestigious universities with MHA programs, and VHA was early on seen as a ‘club’ for those CEOs. They came together largely as a response to the perceived threat posed by the growing influence of for-profit hospital chains, most notably HCA. Key to the formation of VHA was the establishment of a VHA GPO, which would fund the organization through purchasing contract revenues. When a hospital joined VHA, its CEO was expected to direct that all GPO contract activity going forward through VHA, rather than the local or regional GPO. Department heads that had long supported their regional GPOs had no choice but to follow the CEO’s directives. The situation was followed by the emergence of American Healthcare Systems, as a ‘system of systems’ rather than standalone hospitals, but the impact on independent GPOs was the same. [Roughly a decade later] AmHS would later merge with Premier Health Alliance and SunHealth Alliance to form Premier.

“As a result of this enormous shift in contracting power and revenue, state and regional GPOs began to look to other similarly affected organizations to consider mergers and/or alliances to increase their purchasing power and represent more of a national presence. The reaction was the emergence of ‘groups of groups’ like MAGNET and AmeriNet.

“Another event shook the hospital purchasing world in the early 1980s when American Hospital Supply Corp., the largest medical product distributor in the country, agreed to be acquired by HCA. For all the not-for-profit hospitals that used American as their prime vendor of supplies, this was frightening news. Hospitals and GPOs alike were up in arms over the potential acquisition, and American itself became concerned about the potential backlash that was developing from its customers. The situation became more bizarre when Baxter Healthcare Corp. stepped in at the 11^th hour and acquired the much-larger American Hospital Supply through a stock offering. Baxter eventually spun off the old American business as Allegiance, which was then eventually acquired by Cardinal Health as it sits today.”

– Robert “Bud” Bowen, retired CEO, Amerinet Inc.,
and former long-term care supply chain, GPO and distributor executive

“GPOs were hospital-focused only and focused on pharmaceutical price reductions only.”

– Ash Chawla, R.Ph., Chairman & CEO, PDM Healthcare

“The heyday of the GPO industry was in the mid- to late 1970s through the late 1980s. Other than the Hospital Bureau, which was waning at the time, there were no national GPOs. Large regional GPOs included MedEcon, Mid-America Shared Services (later to become Health Services Corporation of America or HSCA,) Shared Services for Southern Hospitals, among others. In 1977, Voluntary Hospitals of America (VHA) launched what would be known as the “super groups,” followed by American Healthcare Systems, the Consortium of Jewish Hospitals (which later became Premier Health Alliance) and MAGNET. Four regional groups – Haricomp, HSCA, Hospital Shared Services of Western Pennsylvania and Intermountain – form AmeriNet.”

– Derwood Dunbar Jr., retired President & CEO, MAGNET Inc.,
and former hospital supply chain and GPO executive

“GPOs primarily focused on volume contracting of widely used medical commodity products and miscellaneous supplies within hospitals. GPO membership was highly voluntary. [GPOs] had limited visibility into their members’ spend, and though pricing was mostly competitive compared to what their members had, the compliance from membership was low-to-moderate. GPOs had limited service offerings outside of group contracting, and therefore had far less costly infrastructures, which allowed for higher margins and more competition.”

– Greg Firestone, Chief Customer Officer,
Resource Optimization & Implementation (ROi)

“This decade was notable for the Medicare Prospective Payment System, the rise of managed care and the coming together of like-minded providers. The Prospective Payment System meant hospitals were reimbursed a fixed rate based on a defined service, rather than the cost to the hospital of providing that service. That was a sea change for the industry and led to significant cost pressures.

“Changes in insurance structures – and struggles with PPO v HMO, etc. – put new pressures on patients and ultimately hospitals. This focus on reimbursement helped reinforce the need for reducing supply costs through aggregation by GPOs.

“Finally, VHA and University HealthSystem Consortium both formed during this era. Like-minded peer hospitals began to see the value in coming together to aggregate purchasing and to share best practices.”

– Jody Hatcher, President, Sourcing and Collaboration Services, Vizient Inc.

“GPO growth begins to accelerate in the acute care sector as cost pressures mount when [CMS-precursor HCFA]  phases out cost-based reimbursement in favor of DRGs. Investor-owned hospital chains aggressively move into key markets and negotiate low-cost supply contracts, causing not-for-profit hospitals to react by banding together. The health industry responds by forming new purchasing cooperatives. Regional GPOs spring up and national alliances begin to form. VHA leads the way. Premier, American Healthcare Systems (AmHS) and others begin to market nationally, and the sector begins to transform from a cottage industry to a larger business.

We are simultaneously experiencing a consolidation of medical suppliers, which contributes to the need for aggregation on the part of providers. The GPO focus is limited to pure price on supply items.”

– Al LoBiondo, Managing Principal, MedGap Solutions LLC, and President, A.J. LoBiondo Associates LLC, and a former hospital supply chain and group purchasing executive

“In the past, hospitals were reimbursed for the actual cost of goods and services. It was an open-ended reimbursement system in which providers had no incentive to manage costs. The hospital supply chain was essentially a paper pusher primarily concerned with transactional metrics, such as fill rates, product orders, and the timeliness of shipments. GPOs, in turn, were focused strictly on group contracting for medical supplies.”

– Christopher O’Connor, President, Nexera Inc. and GNYHA Services

“Purchasing groups were largely regional in nature with a great deal of member involvement in contracting work and decision making. At this same time manufacturers and distributors were developing national account-type programs that may or may not provide value to local/regional purchasing groups. This era also appreciated a greater level of cooperation by and between individual healthcare facilities. Also, regional group portfolios included many product and service offerings with more local and regional suppliers. This was also the era of TEFRA*, which impacted tax exempt facilities and had the reverse effect in the TEFRA base year of driving up healthcare costs with the longer term goal of cost reduction. And there was still a few healthcare construction projects from the Hill-Burton** days.”

* Tax Equity and Fiscal Responsibility Act of 1982
** Hospital Survey and Construction (or Hill-Burton) Act of 1946

– Mike Reid, Vice President of Construction, Capital and Facility Contracting, Intalere, and unofficial, but widely acknowledged, resident historian within Intalere

“The idea of healthcare group purchasing really took off with the formation of VHA in 1977, and involved large organizations – the pre-cursors to some of the largest health systems we see today – in a much bigger way for the first time. This was a formative time for other nascent organizations such as The Consortium of Jewish Hospitals,* run by Alan Weinstein. Much of the work done during this time often involved paper catalogs for the contracts, versus ‘electronic’ anything. Someone was assigned to insert new contracts and updates to contracts in one of eight or nine large binders kept in purchasing. There were a number of smaller GPO organizations around, contracting on a local or regional basis. Group Purchasing Group (GPG)** was in its heyday. Entrepreneurs like Bill Wooldridge [MedEcon] and Earl Norman [Mid-America Shared Services, which became Health Services Corporation of America] actually owned their GPOs, which became very popular — and profitable for them. Contract Administrative Fees (CAF) was still a somewhat novel idea…and many supply chain executives at providers were barely aware they existed.”

* The Consortium of Jewish Hospitals was a forerunner of Premier.
** GPG served as a non-lobbying forerunner to Health Industry Group Purchasing Association (HIGPA), which became the Healthcare Supply Chain Association (HSCA).

– John Strong, Principal, John Strong LLC,
and a former hospital supply chain and group purchasing executive

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