Working Together

The proliferation of group purchasing organizations is considered one of the most dynamic changes over the past several years resulting from cost cutting measures in the health care industry. Buying groups focus on reducing the acquisition cost of products, thereby enhancing the ability of their members to compete with larger players. Some groups focus equally on purchasing and marketing.

GPOs negotiate contracts on behalf of their members -- typically hospital coalitions, but also smaller, regional groups -- for medical supplies, drugs, equipment and other goods and services, according to Frank Gillespie, director of distribution and alternate care solutions for Health Services Corporation of America in Bridgeton, Mo. HSCA is a leading group purchasing organization, founded in 1969, dedicated to improving purchasing to improve health care by providing solutions, services and support to its members through its purchasing agreements, consulting and information services and field staff. HSCA's more than 2,000 members include hospitals, health systems, integrated delivery networks and other health care facilities across the United States.

All For One: The Increasing Use of GPOs

Buying groups are becoming more common and widely accepted in product distribution industries as well as in some service industries.

A growing portion of the home care, long-term care, ambulatory care and physician practice markets are using group purchasing to help lower costs and improve efficiency, according to the Health Industry Group Purchasing Association, a national chartered trade association. Comprising approximately 150 health care purchasing and supply chain organizations, HIGPA serves nearly 75 percent of the U.S. acute care hospitals as well as most of the long-term care, home care and medical group practice markets.

GPOs are one of the most effective ways to reduce cost per unit.

Like these markets, GPOs vary greatly in size, in the type of ownership -- some are owned by hospitals, some by corporations -- and in the services they offer their members. Some GPOs specialize in certain types of health care, such as long-term care. There are more than 600 GPOs in the United States; about 30 of these negotiate sizable contracts for their members. The remaining GPOs offer their members access to larger groups' contracts and negotiate agreements with regional vendors.

All types of health care organizations use group purchasing services. While the first GPOs were primarily focused on cost containment, GPOs now offer a wide range of products and services to their members. GPO contracts are used to obtain goods and services for medical/surgical supplies, pharmaceuticals, distribution, equipment maintenance, waste management, energy/utilities, physician preference items, microfilming, strategic planning, claims processing, access to capital, collections, insurance, allied professional recruitment, telecommunications, data processing, laundry, management consulting, market research, quality assurance and risk management services.

Because GPOs represent many health care facilities, they can promise a large volume of sales to manufacturers in exchange for a discount.

"GPOs are companies that come together and buy in bulk to save on overhead and per-unit costs," said Randy Killian, director of the American Association of Integrated Healthcare Delivery Systems in Glen Allen, Va. "Integrated delivery networks and integrated delivery systems are the same thing as GPOs. They work on a national level, which is why they can achieve cost savings.

GPOs help home medical equipment and durable medical equipment providers by negotiating contracts with specific providers of products for the HME/DME marketplace.

"A GPO can leverage the volume of its members' buying within the HME/DME classes of trade, to send requests for proposals for particular product categories, to seek contracts that offer better pricing for such products to its members," Gillespie said.

Group purchasing selections are typically made by a committee comprised of clinicians. These committees meet regularly to determine which medical services and supplies are most appropriate for the respective facility's patient mix. Once a decision is made, facilities use one or more GPOs to negotiate contracts with health care manufacturers, distributors and suppliers.

One for All: GPOs Benefit All Stakeholders

"Most facilities can benefit from some aspects of a buying group, as long as the GPO offers a great enough product mix to allow choice as well as savings," Gillespie said.

"GPOs are one of the most effective ways to reduce cost per unit," Killian confirmed.

GPOs not only save money for their members, they also benefit health care manufacturers and distributors by allowing them to avoid the costs they would have incurred for marketing and delivering health care products to each hospital individually.

A growing portion of the home care, long-term care, ambulatory care and physician practice markets are using gorup puchasing to help lower costs and improve efficiency.

"Whatever its mission, a well-run GPO creates efficiencies of scale which not only benefit its members, but also benefit the public by reducing the pressure to increase prices, and, in many instances, result in lowering the prices.

"In some cases, the benefits a member receives from his group can mean the difference between survival or failure," according to Harry Ray, an attorney who has represented buying and marketing groups across a wide range of industries since 1985. (Ray discusses the legal pitfalls that confront buying and marketing groups in a related article on page XX.)

GPOs also benefit suppliers. "Through contracts that make suppliers' products available to their facilities, GPOs have offered suppliers a chance to move their products into new settings without huge additional sales expenses," Gillespie explained. "The supply industry offers a wide variety of choice, and some product categories focus on specific clinical effectiveness. Some products cost more on the front end but can be used longer, while other products cost less on the front end but must be used more regularly."

Killian pointed out that GPOs also reduce transaction costs. Instead of processing five different invoices, for example, a GPO order would include five pieces of equipment on one invoice, significantly reducing the labor needed -- and thereby the costs -- to process the order.

In a fall 1999 study funded by HIGPA, purchasing managers reported that GPOs help hospital staff with product standardization and comparison shopping as well as with streamlining their health care products and services. GPOs also assist hospitals with procurement, storage and transfer of non-labor items, according to the survey, which HIGPA cautions did not comprise a representative sample.

The survey was designed, in part, to verify the accuracy of GPO data extrapolated from a combination of government and private-sector data sources, including the Health Care Financing Administration, the Congressional Budget Office and the American Hospital Association. HIGPA reported GPOs saved hospitals between $12.8 billion and $19.2 billion (10 percent to 15 percent) of the $128 billion in non-labor health care costs that were channeled through GPOs in 1999. The study, conducted by Muse & Associates, a research firm based in Washington, DC, represents the first time a sample of hospital purchasing executives has been queried about how they use group purchasing for non-labor expenditures. HIGPA found approximately 72 percent ($128 billion) of non-labor purchases were obtained using group contracts.

"This study shows that GPOs save hospitals billions of dollars each year by reducing the cost of non-labor expenditures," said HIGPA Executive Director Robert Betz. "It also is evident from the study that GPOs have room to grow in helping hospitals and other providers realize even more savings in their non-labor costs."

Other providers who use GPOs have been studied in depth by Vista Information Group Inc., a Morristown, N.J.-based marketing research and consulting firm serving U.S. and international pharmaceutical manufacturers. Vista has conducted three studies of the impact of GPOs on the pharmaceutical industry; the latest, "A Critical Analysis of the Strategic Outlook for GPOs and Pharmaceuticals," is based primarily on two teleconference focus groups. One group comprised national GPO executives who deal with pharmacy operations -- executives from Novation, Premier and other large pharmaceutical companies; the other group comprised national pharmacy managers from major hospitals which are members of various GPOs around the country.

According to Al Fletcher, president of Vista, these focus groups spoke frankly about the impact and future of GPOs from their perspective. "Both groups were optimistic about the future of GPOs and of their ability to serve their members well. The relationships between hospitals and GPOs are excellent," Fletcher said. "The hospitals recognize that the GPOs are highly sensitive to their needs. Hospitals, hospital chains and health care networks generally are very happy with the services the GPOs are providing them, particular in terms of cost savings."

But not all health care industry experts think GPOs are beneficial.

You Can't Please Everyone

As much good as GPOs do, they have always been viewed with some degree of suspicion by the federal and state agencies charged with enforcing antitrust laws, Ray said. Other industry watchers say the benefits of GPOs don't outweigh their drawbacks.

The National Center of Policy Analysis (NCPA), a Dallas-based nonprofit, nonpartisan public policy research institute, states that health care consumers are being denied lower costs and better care by the actions of GPOs, and that GPOs in effect monopolize supply markets.

GPOs have changed medical practice by offering new opportunities to reduce costs.

While these buying consortiums were originally designed to leverage the purchasing power of hospitals, allowing them to obtain discounts on medical supplies, NCPA critics contend that in reality they restrict open market competition. Because only a handful of GPOs dominate the market, they say, only the largest and best-connected manufacturers of medical supplies thrive.

The two largest GPOs negotiate contracts for critical medical supplies and dominate medical product purchasing at two-thirds of the country's acute care hospitals; GPOs discourage member hospitals from buying from any company not on the prescribed list. By controlling the market in this way, NCPA officials said, GPOs reduce competition and destroy the incentives to bring new products to market.

"There is little danger of purchasing arrangements restricting market conditions, so long as the purchasing arrangement does not represent a large portion of the market share for that particular product or service, and so long as the products or services being purchased through the group do not account for too large of a portion of the total cost of the services provided by the participants in the group," Ray said.

Buyers Beware

NCPA also criticizes GPOs because contracts typically run five years or longer, placing key decisions about health care in the hands of accountants and purchasing agents, not medical professionals. Killian also warns DME/HME professionals about these long-term contracts.

"I recommend starting with a one-year contract to see how the relationship goes Don't get stuck in a long-term agreement you don't like," he said. "Before joining any GPO, you should talk to five or ten people who have participated in a contract; get references -- and not just the five or ten the GPO offers -- ask for 25 references and then randomly select ones to check out," Killian suggests.

"Everything is driven by a contractual relationship," he continued. "Make sure you know what you're signing; if it's not written in the contract -- it doesn't exist. Another question to ask yourself: If you were personally at risk for this contract, would you sign it?"

Another challenge to be aware of when considering joining a GPO, according to Gillespie, is assuring that the GPO will be able to provide cost savings on the particular equipment you need.

"Not every HME/DME within a particular health care system provides the same types of services or necessarily focuses on the same types of products, making it sometimes challenging for the buying group to collect enough usage data information in any one particular product category to effectively negotiate a competitive contract in some product lines," Gillespie explained.

"Standardization is also sometimes challenging for DMEs/HMEs, as they can serve a wide clientele that expects choice in some product areas. If the standardization initiatives of an organization or system the DME/HME belongs to are not started at the acute care levels, they may not interest the HMEs'/DMEs' customers."

In the End

Even considering these concerns, it remains evident GPOs provide a useful service to all parties involved. Experts advise caution, however.

"GPOs have changed medical practice by offering new opportunities to reduce costs," Gillespie said, "but it's up to the organization to determine the most cost-effective approach available in the market that's conducive to the practice path chosen. HSCA offers broad contract coverage that incorporates these different approaches across product lines and within product lines by working with a wide variety of suppliers and distributors."

Although a few industry experts think the proliferation of GPOs is harmful, by far the majority of those involved in medical equipment distribution are happy to have them on their side. The innovative and flexible nature of GPOs help ensure their long-term survival.

"They provide cost reduction and contract management -- both critical in health care today and tomorrow," Gillespie said. "GPOs will continue to evolve and to provide the best service through the best-available mechanism, such as the Internet."

Fletcher said his research shows GPOs have been extending their services during the past several years to other classes of trade, such as nursing homes, in a continued effort to maximize the services they provide to their members in order to provide a wider range of improved services.

This adaptability, according to Gillespie, makes GPOs even more worthwhile.

"As GPOs adapt to new business models and continue to provide cost effective services," he said, "they allow facilities to focus their ever-limited resources on their patient care mission."

Bean is editor of Home Health Products.

This article originally appeared in the October 2000 issue of HME Business.

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