Two IDNs Part Ways With GPOs – Part Ways

Edition: September 2001 - Vol 9 Number 09
Article#: 1059
Author: Repertoire

DENVER--For five years or more, suppliers have been waiting for IDNs to toss aside their group purchasing organizations and negotiate contracts on their own. But they have been disappointed, for few IDNs have actually done it.

So, it was no doubt with some anticipation that suppliers attending the recent Annual Conference of the Association for Healthcare Resource & Materials Management filed into a session called ''Independent Contracting: The Future State of Healthcare.'' Given the title, they might have been thinking that the presenters would proclaim that IDNs had at last taken over the world of contracting, thus opening up opportunities for hundreds if not thousands of hungry suppliers.

What actually transpired for the next 1 1/2 hours was a little different. For starters, attendees learned that the self-contracting model under discussion still draws upon the contracting expertise of a major GPO (New York-based JPC Corp.). Worse (at least for suppliers), they found out that the model retains administrative fees, except that instead of flowing to a national GPO, they flow to the networks.

The session was delivered by two materials managers: Mel Meck, corporate director of materials management for Atlanticare Health System, Pleasantville, NJ; and B. Mark Terranova, corporate director of materials management for Meridian Health System, Point Pleasant, NJ. Both are veterans of the materials wars, and both wield plenty of clout, in terms of purchasing dollars.

Atlanticare's group – Cooperative Healthcare Services of South Jersey LLC – represents 811 acute-care beds, a surgery center and a long-term-care facility, and a contract portfolio of 35 contracts valued at more than $10 million. Meridian's group – Coastal Cooperative of New Jersey LLC. – has a portfolio of 50 contracts valued at $32 million dollars to service 1,291 acute-care beds, 304 long-term-care and rehab beds, three surgery centers and more.

Cure for Some Ills

Prior to starting their respective co-ops, the two IDNs had a few things in common, said Meck and Terranova:

•Each participated in several GPOs.

•Each focused on price, not the ''continuum of cost.''

•Each frequently ran over budget on supplies.

•Each relinquished control of contracting decisions to their GPOs.

•Each had few direct manufacturer relationships.

But self-contracting has changed a lot of things, they added, including:

•Returned control of contract timing to the IDN.

•Brought higher compliance rates.

•Helped the IDNs build direct supplier relationships.

•Elevated the status of materials management in their IDNs.

Fed Up

The two began investigating self-contracting because they got fed up with conventional group purchasing, they explained. For example, because of group purchasing, vendors create what Meck and Terranova called a glass floor – prices under which vendors will not go for fear of opening up the pricing floodgates. But what really galled the two about traditional GPOs is that they tend to shove providers to the bottom of the supply food chain. The really big dollars flow between suppliers and GPOs in the form of administrative fees. GPO gets administrative fees from suppliers for their members' business, they said. And that's not fair.

After considerable legal review, Atlanticare and Meridian set up their co-ops as LLC corporations, each with a board of directors comprising IDN administrators and others. Meck and Terranova are executive directors of their respective co-ops.

Perhaps the greatest thing about the co-op model is that it places the IDN at the center of everything, said the speakers. In other words, fees flow from suppliers to the network, not the GPO (though a percentage goes to JPC for its assistance with contracting).But the benefits flow both ways, said Meck and Terranova. Vendors benefit from the co-op model because they get long-term commitment, a highly confidential bidding environment and new opportunities to get their products into non-GPO hospitals.

Together, the New Jersey co-ops figure they save about $7 million a year through self-contracting. And, because they have outsourced contracting to JPC, their materials managers are free to focus on what Meck and Terranova called ''true cost reduction,'' such as utilization and standardization.