GPO's Top Challenges

Edition: May 2003 - Vol 11 Number 05
Article#: 1543
Author: Lynn James Everard, C.P.M., CBM

In order for GPOs to continue their claim that they produce economic value for hospitals, they must overcome some serious challenges.

Challenge No. 1: Providing value to their members. While itís clear that GPOs have played a role in driving down commodity pricing, most of that work is done and they will need something else to convince members of their value. In some ways, The New York Times articles and the Senate Judiciary Committee hearings simply underscored what is becoming a crisis of confidence among GPO members.

The value of the GPO is becoming less and less accepted by hospitals, and the desperation of financial reality is causing more than a handful of hospitals to question just what their GPO is doing for them. At a time when GPOs need the trust of their members more than ever, they appear to be having difficulty holding the attention of their members. If the value does not come from price, then from where will it come?

Some GPOs have created enormous value-added programs that offer services that use up some of the money that would otherwise go back to the hospitals in the form of rebates. While many of these programs have some merit, their value can never truly be known unless they are presented to hospitals as programs they can choose to pay for or not receive. The GPOs claim these programs have value, but fear putting them to the real value test of customer willingness to pay. Because the hospitals never see the money these programs consume, they are less likely to miss the money. To survive, GPOs must refocus on their original mission and use that to identify value to their members.

Challenge No. 2: GPOsí questionable ability to assist their members in generating second-dollar savings. First-dollar savings are price-based. If the price of a line item is reduced, the difference in price is a first-dollar savings. Second-dollar savings are more complicated. They are savings that are produced in the relationship with the supplier beyond the price point. An example would be a relationship in which a supplier agrees to provide services (that the hospital formerly provided for itself) at no cost to the hospital, resulting in savings to the hospital.

Second-dollar savings require a stronger relationship between the supplier and the hospital. They likely will also require a pricing relationship that is longer than one that would normally be desired by the GPO. When a supplier has that longer relationship, it provides a unique opportunity for supplier and hospital to become strategic partners, an arrangement that is much too rare in this industry. By controlling relationships between suppliers and hospitals, the GPO preempts real supply chain progress between a hospital and one of its key suppliers.

The direct hospital-supplier relationship challenges the power of the GPO to arbitrarily set bid schedules according to its own needs Ö and essentially makes the GPO an outsider. Second-dollar savings represent enormous, but largely untapped opportunities. And itís doubtful that many hospitals can capitalize on them as long as GPOs stand between them and their suppliers. Some GPOs might argue that they offer customized contracting, but the real goal of such an approach seems to be to ensure that fee opportunities arenít lost. The reality is that itís enormously difficult for a hospital to extract second-dollar savings from a supplier if the hospital lacks full ownership of the contract relationship.

Challenge No. 3: GPOsí belief that without their intercession, prices would go up. The opposite, however, may be true. If earlier remarks related to market competition are accurate, the GPO contract may actually act as a dam that prevents the rushing waters of open competition from changing the landscape of the supply chain. Certainly, the arrival of Pacific Rim-based medical products into the market place would cause name-brand manufacturers to rethink their pricing strategies in order to retain market share. But if the differences in price were large, significant amounts of business would likely be moved offshore.

Most of the studies that suggest that hospitalsí cost of doing business would rise dramatically if the role of GPOs were reduced, assume that hospitals would be forced to operate the same way a GPO does. However, if hospitals were able to act strategically, such an argument fails. Hospitals would not, in fact, have to suddenly add large numbers of staff, because they would not have to immediately negotiate every contract. To protect their commodity pricing, they would only need to solidify a distributor relationship or temporarily opt to use any GPO to maintain that pricing. Neither the GPO nor the hospital can control pricing on new patented, sole-source products. So rather than focus attention on negotiating a better price, hospitals would focus their resources on controlling utilization through cooperative efforts with their clinical staff.

The most significant area of opportunity for hospitals is in the middle product group. That is, those products that were at one time sole-source, but which now have multiple suppliers, or whose patent protection is about to expire. The use of strategic sourcing techniques would effectively address this area. And since no hospital uses every GPO contract, each hospital would have a significant number of contracts that it would not have to even handle. The real issue here is not the quantity of resources, as the GPOs submit, but rather the quality of the resources.

Itís true that hospitals may need to spend more initially on moving to a self-contracting model. But over time, the increase in cost would be minimal. The issue for hospitals is how they deal with the fact that they have so severely under-funded their supply chain interests. This concept isnít a pipe dream. Already a number of hospitals have successfully taken this approach. Among them are Virtua Health in New Jersey, LeeSar in Florida and Iowa Health. The Orlando Regional Health System recently announced that it will be joining that number.

Challenge No. 4: GPOsí historical reliance on exclusive agreements and their sudden willingness to back away from them. There is, in fact, nothing wrong with exclusive agreements. If an individual hospital is to succeed in managing its own contracting, exclusive agreements must play a major role. The challenge for GPOs is that when they control such a large block of business and trade on higher purchase volumes, they actually shrink the market into a smaller number of large contracting blocks. This creates the appearance of anticompetitive or monopolistic behavior. And although there may be hundreds of GPO-type organizations, the vast majority serve as marketing organizations for the handful of GPOs that actually are in the contracting business.

Backing away from exclusive agreements may solve the problem for the ethicist, but it canít possibly help the member hospitals from a pricing perspective. If a supplier yesterday enjoyed an exclusive agreement at a certain price and today must share that agreement with one or more other suppliers, would it not be justified in increasing its pricing to accommodate the loss of volume? In a truly competitive market, this is exactly what one would expect. If this is not whatís happening in the cases where contracts are being opened to multiple suppliers, then one would be tempted to speculate on how open this market actually is. But if this is happening, and hospitals are seeing their prices increased, one would logically expect some form of uproar over the increases. Yet so far such uproar has not surfaced.

Challenge No. 5: The notion of some GPOs that they are involved in the promotion of safety and quality care. GPOs might want to give this notion a second thought. If a GPO is acting as a contracting agent for hospitals and is involved in making buying decisions regarding product, and it selects one product over another (perhaps more suitable) product, resulting in the injury of a number of patients, wouldnít the GPO be a legitimate target of a lawsuit, along with the hospital, the physician and the productís manufacturer? And shouldnít it be subject to some kind of oversight and accreditation by JCAHO and other regulatory agencies?

Clearly, hospitals and their medical staffs must be the ultimate bearers of the responsibility for quality. This raises a serious question about the joint ownership or control of a GPO. At what point, if any, can a hospital delegate any of its responsibility for quality to a purchasing agent that it may own or control on paper, but which it cannot or does not effectively manage?

Check out the other 10 challenges by obtaining your own copy of the white paper, "The Impact of Group Purchasing on the Financial Prospects of Health Systems." E-mail Lynn Everard at Everard regularly writes the "Drive Time" column in the Bellwether section of First Moves magazine, a sister publication to Repertoire.