Healthcare group procurement organizations work well, but not for everyone, and not all the time.
By Vishal Patel
If your hospital is relatively small, it will almost certainly save money using the combined buying power of group purchasing organizations, or GPOs. There are approximately 600 GPOs serving the U.S. healthcare industry today1. Their mission is to aggregate product purchases from member healthcare providers and secure lower product prices for them, particularly on commodity-type items, like flu vaccine.
In return for a relatively modest membership fee, which typically ranges from 1 to 3 percent of their negotiated contract size, hospitals and healthcare systems using GPOs save an average of 13.1 percent on most categories of supplies compared to those who don’t2, according to the Healthcare Supply Chain Association. Nationwide, that amounts to an impressive $34.1 billion annually. So it’s no surprise, particularly at a time when hospitals are being squeezed financially, that more than 95 percent of America’s healthcare organizations use them3 with many hospitals belonging to two or more GPOs.
The very first medical GPO was formed in New York City, more than 100 years ago. It proved to be a huge success. Since that time, others have set up shop throughout the country. Both their tools and functions have expanded tremendously. For example, in addition to traditional negotiations with suppliers, many GPOs now use digital technologies to root out inefficiencies, maximize their purchasing power, and optimize logistics. Others have developed specialties in particular geographic regions, or in certain types of health products, such as respiratory care items, imaging devices, or prosthetic limbs.
Beyond that, there are GPOs whose offerings extend way past procurement. It is an evolution prompted by their gradual loss of purchasing volume resulting from increased competition from other GPOs, hospital consolidation, and shifting physician preferences. The traditional GPO business model of aggregating volume for massive purchasing is no longer as powerful as it was in 1910, when there were fewer products to choose from.
In response, some national GPOs have tried to adapt by forming consultancies related to all sorts of healthcare issues like boosting patient-satisfaction scores, eliminating variation, standardizing utilization, and lowering readmissions to capitalize on value-based reimbursement models. Others have created strategic or cost-management consulting businesses as well as informatics subscriptions, and applied science services. A few have even formed private drug labels, where they contract directly with drug maker to produce a generic drug using their own brand name4. And one has launched a cloud-based bartering platform allowing hospitals to exchange medical supplies with one another5. So the age of specialty niche procurement has now arrived in healthcare.
Still, when the GPO system works, everyone either saves or makes money. However, according to a recent article6 in The Atlantic, there can sometimes be a drawback to consortium buying, a loss of agility. The consequences of which can be enhanced in times of crisis. That became particularly clear with the abrupt onset of the coronavirus, where essential supplies such as personal protective equipment suddenly became hard to find. That’s not entirely the fault of GPOs; they’re essentially captives to a global supply chain culture that runs on outsourcing, razor-thin margins, and low inventories based on the practice of just-in-time delivery. That meant when Covid-19 surged, so did demand for PPE both at home and in China, where many of those items are produced. And the federal stockpile of medical supplies, including 13 million N-95 masks, quickly became exhausted7.
One notable outcome of the prevalence of the GPO model in healthcare is a somewhat lower maturity level of many hospital supply chain functions particularly when compared to other sectors, even though there are important distinctions. This is something Baylor Scott & White –
the largest not-for-profit healthcare system in Texas – understood well-. So, the Dallas-based organization embarked on a journey to build up a leading supply chain function in order to reduce the financial burden on its patients. This involved taking more ownership of their supply chain and building self-distribution and self-contracting capabilities. It involved a detailed analysis to understand where it makes sense to use a GPO and where it doesn’t, where there is a need for physician preference items (PPI) and where there isn’t. Baylor developed relationships directly with manufacturers in an effort to standardize across its 48-hospital system. Overall, they were incredibly successful and generated millions in savings through this initiative and improved their margins.
Not surprisingly, contracting directly with manufacturers and suppliers of healthcare items – as with products of just about of any kind – works best for organizations with significant marketplace clout but it also helps them be more agile and responsive to market shifts. A hospital chain as large as Baylor Scott & White can leverage its critical mass to secure favorable pricing and even some degree of product customization, which smaller healthcare organizations simply can’t match. But for it to work on a consistent basis, the health system needs to make a significant investment in the supply chain function, people, processes and technology.
There are some important lessons to be learned from the Baylor Scott & White experience. One, hospitals can in fact build leading supply chain functions and processes allowing them to be more in control as well as nimble and generate significant value. Two, being a little more selective about which products and services may be good candidates for GPOs, self-contracting, self-distribution or truly understanding when PPI is appropriate or not all form the foundation of a more strategic procurement and supply chain organization that ultimately better aligns the supply chain to patient and physician needs.
Vishal Patel is VP of Product Marketing, for Ivalua.