Honor Thy GPO Contract
Edition: September 2002 - Vol 10 Number 09
Honor the GPO contract,” says one manufacturer. “Once you have negotiated a GPO contract, it should be something that is honored – not discounted, setting up an unfair market.”
“Manufacturers and suppliers must support their contract with the GPO, and not go out and cut a better deal with a hospital GPO member,” adds one GPO. “This undercuts the leverage the relationship can establish.”
For months, GPOs have been under the gun to substantiate questionable investments and dealings with their hospital members. Last month, Repertoire asked its readers for suggestions for constructing a code of conduct for group purchasing organizations. In this issue, readers help draft a code of conduct for those manufacturers and suppliers that actually have GPO contracts or who want to have GPO contracts.
Honesty and Respect
Many suggestions for a code of conduct are laced with such buzz words as ‘honesty’ and ‘respect.’ “Be honest and keep the information concerning contracts open for all to utilize,” says one manufacturer. Another suggests: “Respect and follow the GPO, whether it is to your advantage or disadvantage. The GPOs and manufacturers have invested a lot of time negotiating these agreements and, in many cases, the manufacturers have given deep discounts in the price of items, anticipating that they will make up the difference in increased market share. What they don’t figure into the equation are side agreements where a company doesn’t have a contract and reps outside of the contract attempt to circumvent the process.”
Another manufacturer adds, “Some companies will say anything to get the business, even if it isn’t true.” Which is why we need an “understanding of – and strict adherence to – contractual guidelines,” says yet another.
Some manufacturers stressed the importance of disclosing the relationship between the GPO and contract bidder. “Some companies may have multiple product lines to sell, and may already have one or two on contract. They might leverage those contracts or offer more of a price discount or rebate based on the success of the other product lines. Also, all and any fees paid to the GPO should be disclosed annually to a governing body, including sponsorships.”
The Beef About Bundling
Stay away from bundling – the feeling is close to unanimous. “Products that make it to a GPO contract because they were bundled with other very popular products might not be the best product at the best price for hospitals. This also gives an unfair advantage to behemoth companies who can force their way into contracts with all of their products, thereby excluding many excellent smaller companies who focus only on one niche product,” according to one manufacturer.
“Everything should have to stand on its own,” says another manufacturer. A third manufacturer offered the following insight: “If a company the size of Johnson & Johnson or Tyco offers a bundled opportunity that requires mandatory compliance in, say, three out of four categories, and a GPO accepts that deal, it puts providers in a confusing and often overly burdensome situation. Not to mention, if a small company with great technology and a fair price in one given product area is blocked out by such a maneuver, it would be easy for them to cry foul – and perhaps restraint of trade.
The single most important item of a code of conduct is “price and service only,” says one manufacturer. “No backside/conversion/graft fees.”
“There should be a clear definition of who is eligible to receive GPO pricing,” adds another manufacturer. “Pricing is designated for different market segments (i.e. hospitals, nursing home chains, physician offices). Each market dictates different price points and should be offered in that respect.”
“Manufacturers should be consistent in their pricing,” notes one manufacturer. “Once they offer a price for the GPO, they should stick to it for all members.”
Some manufacturers allude to the dangers of personal investments. “Eliminate the possibility of anyone within a GPO having personal investments in any manufacturers,” says one manufacturer. “Employees of GPOs should receive financial gain through the efficiency and profitability of the GPO by whom they are employed.”
Finally, one manufacturer believes “there should be a rule for the current supplier to cooperate with the new supplier during the product transition (if a new one is chosen). Many times, the supplier losing the contract will try to sabotage the transition in an attempt to keep the business or shed poor light on the new supplier. The GPO should be able to restrict further bids from any supplier that does not cooperate with the transition.”
Keep It Simple
Distributors have their say, too, and the consensus is to stick to a simple plan. Where rebates are concerned, one distributor reminds manufacturers to “make the process easy and simple for access to lower costs. There should be no more than two tiers of pricing and an easy way to determine when a customer is loaded to the correct level of pricing.”
“Also, have a limited number of contract ID numbers, and update contracts at least one month prior to expiration,” the distributor continues. “Two months are ideal so that new contracts can be loaded and updated by the distributor, and the customer can be advised of price changes. Some contracts are very complicated, and this can cause problems in the rebate process, resulting in extra time and money spent on the part of both the manufacturer and distributor.”
“Manufacturers should extend a certain price to a specific facility and its members, and they should be accountable for any percentage of purchase rebate they offer. If the manufacturer does not have to show proof of the rebate available to the GPO, then there is no reason for either party to be concerned about remaining in compliance with the contract.”
Consistency and Reasonableness
Be consistent, offers one distributor. Do not “give an account that is a member, shareholder or affiliate of the GPO with whom they’re contracting a lower price than that listed on the contract.”
Says another distributor: “We should not get caught up in the price battle to the point of distraction. No one wins. Who can afford to provide service at rock bottom prices with late product/pricing notice and no customer loyalty?” The solution: “Reasonable price concessions, reasonable margins, reasonable service, and reasonable price changes and contract addition/deletion notification timing to end users and dealers.” We also need to see “reasonable customers, reasonable dealers and reasonable manufacturers.” In the end, the goal should be to offer better product and pricing, without sacrificing service for the end user, notes this distributor.
Broad Product Line
In addition to high quality products, manufacturers and suppliers need to offer a broader product line, notes one manufacturer’s rep – “not just cherry picked high volume items. Often, buyers pay very high prices for products included in the manufacturer’s line, but not necessarily in the contract.” Another manufacturer’s rep adds: “Ensure ample supplies of product. Back orders cost good will.”
Quality and availability of products are not the only issues mentioned by the manufacturers’ reps. As one rep points out, “There should be no gifts, food, etc. during evaluations. If there is a need to give [anything] after the product has been selected, it should be in the form of an educational grant to attend a national meeting, a guest speaker for the whole hospital, etc.
Understand My Business
Providers offer a somewhat different perspective. For one, they want manufacturers to understand the nature of the provider’s business when drawing up contracts and agreements. “Manufacturers can’t just sign an agreement and expect that to carry the business,” notes one provider. “Some decision makers are still going to need to be sold on the product. If there is a design problem or a perception of an inferior design, we cannot compromise patient care, just to be compliant. We need to see a rep discuss these concerns.”
The rep also must “obtain, review and adhere to the customer’s protocols for supplier activity when contacting [or visiting] customer representatives,” adds another provider. And, as one provider points out, there must be “pricing integrity to offer the most compliant groups the most competitive pricing.”
We need pricing consistency as well, adds one reader. “Pricing from any manufacturer must always be based upon the quantity ordered for a single shipment to a single location. This is the only fair method to offer consistency in the market place. It eliminates pricing based on promised or accumulated volume across widely scattered locations. It allows the manufacturers to better control their costs. It also enables those purchasing products to know their acquisition costs up front, eliminating the subsidization of one group’s artificially lowered cost by another’s more inflated cost. This levels the playing field and addresses the problem of product diversion off the GPO contract into other areas of the market place.”
Another reader raised the issue of administrative fees. “Limit the amount of money paid for administrative fees. Just as we have pushed for term limits for politicians, it is important to limit the amount or revenue a GPO can receive from a particular supplier. The mount of monies the GPO receives from the larger manufacturers over time has forced them into continuing with their contractual relationship.”
“Many GPOs have developed extensive organizational structures that devour cash,” continues this reader. With over 20 years of experience working for manufacturers, we never would have been allowed to rapidly expand our organizations as many GPOs have. The philosophy of taking one step at a time in order to manage growth has been replaced with sprinting towards an unrealistic goal.”
In the end, readers return to the issue of communication. A lack of information on the part of the manufacturer or distributor and the GPO can inhibit everyone’s ability to evaluate the relationship. Is there a solution? “Perhaps e-commerce, if it ever becomes functional, will provide a common ground for pricing and sales tracking considerations,” offers one reader.