Contracts a la Carte
Edition: February 2003 - Vol 11 Number 02
Some IDN materials managers may believe they have just two choices when it comes to contracting for med/surg supplies and devices: Use a GPO or do it themselves. But that’s not necessarily true. Some have found a third way, which, they say, combines the best of both worlds. They are using their GPO to negotiate IDN-specific contracts on their behalf.
Ever since IDNs began to grow in stature 10 years ago, group-purchasing organizations have viewed them both as potentially valuable members as well as potential competitors. The GPOs welcomed the additional volume in the group program, but they also recognized that a well-organized IDN could negotiate contracts that could compete with the best that the GPOs had to offer.
Meanwhile, manufacturers were (and still are) waiting in line to sign contracts with IDNs, seeing them as the “great white hope” that could deliver them from the GPOs’ grasp.
Recognizing that they could either strengthen their bonds with IDNs or watch their membership base erode, GPOs such as MedEcon Services (now Managed Health Care Associates, Florham Park, N.J.) and AmeriNet introduced custom contracting programs. They allocated resources to specific IDNs, and helped them sign contracts to supplement – and in some cases supercede – those negotiated by the GPO for its broader membership. Consorta is one of the latest to adopt the custom contracting approach.
To date, the Rolling Meadows, Ill.-based group has signed custom agreements with three of its shareholders: Trinity Health (Novi, Mich.), Ascension Health (St. Louis); and most recently, Catholic Health Initiatives.
“Consorta has done a good job of going after [clinician-sensitive] product areas,” says Phil Mears, vice president of supply chain management for Catholic Health Initiatives (CHI), a Consorta shareholder in Denver. “But it’s tough. With our size, we really need to help our facilities feel a part of the vendor selection process.” Consorta’s custom contracting model accomplishes just that, says Mears.
In December, the IDN signed an agreement with Consorta that calls for Consorta to develop certain purchasing agreements for the exclusive use of Catholic Health Initiatives facilities. The agreement also extends CHI’s ownership in Consorta for three years. In addition, Catholic Health Initiatives will continue to use Consorta’s regular portfolio of purchasing agreements for supplies, pharmaceuticals, equipment and services as well as the organization’s consultation, education and resource management services.
Catholic Health Initiatives is a national not-for-profit healthcare organization comprised of 63 hospitals and 45 long-term care, assisted and independent living and residential facilities located in 19 states. With $5.5 billion annual operating revenues, it is one of the largest Catholic health systems in the United States.
From a materials management/purchasing perspective, the IDN faces formidable challenges. For one, it lacks a common information system for purchasing or inventory management, says Mears. The central office has relatively little information on which to base its contracting decisions.
Mears calculates that roughly one-third of CHI’s supply budget is spent using Consorta contracts, covering primarily commodity-type items, the kind that most easily lend themselves to GPO contracting. But two-thirds of CHI’s budget – much of it clinician- and physician-sensitive items – has been untouched by those in the contracting process, says Mears. That’s where the custom contracting program kicks in.
“I see this as being 180 degrees from the traditional group purchasing approach,” says Mears. Traditionally, he says, group purchasing organizations approach manufacturers with this proposition: “We’re bringing you this volume; what kind of deal can we get?” That works well for commodities, but not for clinician-sensitive items, he says. The hospital or IDN materials manager is left trying to persuade the clinicians to accept the GPO contract. Not an easy task.
But because the custom contracting approach involves just one IDN, clinicians have plenty of opportunities to get more deeply involved in evaluations, vendor qualifications, etc.
“So we’ve created our model to allow us to do a lot of that work at the facility level,” says Mears. “We can get to the point of saying, ‘We have three or four vendors who could meet our needs.’ Then we can sign a contract, not necessarily pre-committing. As we communicate and share information, we can migrate our people to it.”
How It Works
Catholic Health Initiatives is split into five contracting regions. Within each one, clinical decision-makers gather twice a year, with Consorta staff, to identify product areas they want to pursue.
“I’m sure there will be some overlap,” says Mears. “Region 3 might want to [pursue the same contracts as] Region 5. But we won’t require everybody to move at the same pace.” That’s a key difference between this approach and traditional group purchasing, he points out.
Consorta will hire “as many or as few” contracting people dedicated solely to CHI as the IDN wants, says Consorta COO Darrel Weatherford.
Why has CHI pursued this course? “What we elected to do was to partner with Consorta in ramping up our national contracting efforts,” says Mears. “We determined to do it in conjunction with Consorta as opposed to building a very strong CHI contracting piece on our own.”
The savings can be substantial, according to Weatherford.
“There are economies of scale,” he says. “If an IDN wanted to do its own contracting, it would have to set up a contracting staff, an office, a computer system, accounting, finance. There are a ton of infrastructure costs.
“At Consorta, we have a lot of that covered. We don’t have to replicate an IT or finance department. All of our infrastructure is already being used by Consorta and its custom units.”
While Consorta negotiates custom contracts on behalf of the IDN, it continues to supply the IDN with a portfolio of contracts for commodity-type items, thus saving both the IDN and Consorta money, says Weatherford.
Before Consorta goes to market to seek a traditional contract, it finds out whether its custom contracting clients want to be part of the process, or whether they will have their own initiative. This way, prospective suppliers (and other Consorta members) know up front how many hospitals will play ball and how many won’t.
For Weatherford, the bottom line is this: “We’re trying to satisfy the needs of our shareholders. They’ve expressed an interest in us [signing] contracts that are customized for them in certain areas, where they believe they can drive additional value.
“This approach has created a win-win, best-practice situation. They can still benefit from all the things that caused them to join Consorta. Yet they can use us to help meet their specific needs. They don’t want to go to the trouble and long-term cost of building a [contracting] infrastructure.”
Attacking Non-GPO Spending
Adds Consorta President and CEO John Strong: “One of the benefits of the custom contracting unit is its ability to help the shareholder look at the non-GPO spend, which could be 35 or 40 percent of its total. We can help them identify and create contracts to help them reduce it. We have helped a number of shareholders identify areas of opportunity.
“It gets to the concept of strategic sourcing,” continues Strong. Individual facilities within a single IDN may be buying the same product or service from multiple vendors. “We can aggregate the volume much faster than if the IDN tried to do so themselves,” he says.
Consorta executives predict that its largest shareholders will probably be the first to take advantage of the custom contracting program.
“You have to be a certain size IDN or system before it makes sense economically,” says Weatherford. “The larger systems tend to be the ones who want to do it. The smaller ones might decide it’s not the best approach for them.”