Letter to the Editor

Edition: August 2001 - Vol 9 Number 08
Article#: 1021
Author: Repertoire

To the Editor:

Mark Thill raises an important point in his Second Opinion column ''Wait a Second!'' [June 2001 Repertoire].

Increasingly, acute care customers, especially the larger integrated delivery networks (IDNs) are questioning whether national GPO pricing is really competitive. The fact that it is deeply discounted from what some other buyers pay (e.g. alternate site) is not meaningful if acute care prices are still substantially higher than export prices. Why?

Recently in Maine, in an effort to pare escalating health care costs, the state legislature passed a bill that would allow the state Medicaid program to import U.S. made drugs from neighboring Canada. Now the formidable pharmaceutical industry lobby is putting up a real stink about this in Washington, but their objections beg the question of why domestic buyers pay more. Some, perhaps like Mark's anonymous caller, are speculating that it's because the GPOs protect market-share-leading manufacturers here from the healthy competition that exists in foreign markets. Interesting.

That large IDNs and other aggressive buyers can get pricing below the GPO benchmarks is acknowledged, but is it really the key issue? The fact is that most acute care organizations today lack the staff and appropriate skill mix to attempt self-contracting. The industry has essentially outsourced this capability to the GPOs. Naturally, this means there would be costs and risks associated with a renewed self-contracting effort, which few of these customers (with notable exceptions) seem willing to bear.

If efficiency is the goal, there may be nothing wrong with the GPO model of highly centralized, outsourced contracting. The flaw may be in the economic model. If acute care providers expect to be well served by their GPO contractors, they should pay them for their services. As long as the preponderance of the GPOs' revenue comes from product manufacturers, it will be the manufacturers who are well served.

The domestic/export price disparity that exists in the medical device/supply and drug industries may indicate that the manufacturers and GPOs together wield cartel-like pricing power. Many supply chain participants, notably, distributors, would not consider this statement too far from the facts. To us, this is the IT that THEY don't get.

It will be interesting to see if other voices rise to join Mark Thill in questioning whether the emperor GPO pricing is wearing any clothes.

Ted Almon CEO Claflin Company Providence, RI

Editor's note: We weren't questioning GPOs' sartorial preferences so much as challenging suppliers -- manufacturers and distributors -- to demonstrate that providers have indeed knocked prices as low as they can. After all, conventional wisdom has it that ''margins are as low as they can go'' and that ''the real savings must be realized through supply chain efficiencies.'' We've printed many articles to that effect. But the person who called Repertoire -- who, by the way, carries a lot of clout among hospital buyers -- called that into question when he said that IDNs can still knock 10 percent off purchase price through better negotiating, then added, ''Where else can you get that kind of savings?'' True, it may be simply a ''devil's advocate'' stance on our part. But, as we said at the end of the editorial to which you refer, ''The point is this: We can talk about the huge impact of supply chain efficiencies on providers and suppliers alike. But if we neglect to bring purchase price into the equation, we'll lose credibility. Can we really afford to do that?''

Ted Almon's response to the Editor's note: I don't think I missed the point that you were questioning (on behalf of buyers) whether margins had really gone as low as they could go. I guess I'm saying it depends about whose margins you are speaking. Pricing consists of several margins, most notably one for the manufacturer, one for the GPO, and one for the distributor. I'm comfortable with ours, so draw your own conclusions.