Why Can’t We Be Friends?
Edition: November 2009 - Vol 17 Number 11
The fact that Irving, Texas-based VHA exhibited at the recent Health Industry Distributors Association conference in suburban Washington, D.C., served as a signal that the once contentious relationship between GPOs and non-acute-care distributors might be entering a new phase.
Indeed, GPOs have always recognized that they need distributor sales reps to reach the thousands of physician offices, clinics, surgery centers and other non-acute-care facilities spread across the country. Witness the exclusive, 20-year deal Premier Inc. signed with McKesson General Medical (now McKesson Medical-Surgical) in 1998.
But not all distributors have felt a similar need for GPOs. In fact, to many, the word “GPO” has meant one thing – slimmer margins.
However, circumstances are changing. Non-acute-care providers appear to be more aware of and interested in group purchasing than ever before. And GPOs are forcing the issue. As a result, more distributors are concluding that they need a GPO portfolioto open doors and to compete with other distributors, particularly the largest distributors.
Access to contracts
“Independent distributors, specifically those in the non-acute-care marketplace, are becoming more educated on how to work with GPOs,” says Suzanne Lord, NDC’s vice president, sales administration. NDC entered the GPO waters in August 2005, when it signed an agreement with St. Louis-based Amerinet. In 2007, it signed an agreement with VHA; and in 2008, it signed another one with Alpharetta, Ga.-based MedAssets. All three relationships remain in place today. “Participation is steadily growing,” she adds.
“NDC realized we had a responsibility to our members to gain access to GPO contracts,” says Lord. “We believed it would give them an opportunity to offer competitive pricing in line with the national distributors. In addition, we understood that access to GPO contracts would give our members the opportunity to identify new business targets in the non-acute-care marketplace.”
Even skeptical distributors are climbing onboard, though tentatively. “In situations where a GPO affiliation can deliver clear benefits to our customers, we are marketing the programs while educating the customers on how GPOs work,” says Alan Grogan, president, Grogan’s Healthcare Supply, Lexington, Ky. “Generally, our customers trust us to make good recommendations and are willing to try new things to reduce their costs, whether those are products or programs.”
Grogan’s relationship with GPOs has been strained, to say the least. In 2003, he and a group of independent med/surg distributors commissioned a White Paper and sought a legal opinion, in the belief that GPOs relationships with “authorized distributors” put non-authorized distributors at a competitive disadvantage. The situation has improved, he says, but still is not ideal.
“We expect that in relatively short order, the non-acute markets will look much like acute care in terms of broad GPO membership,” Grogan continues. “That we are not as frequently locked out of an account arbitrarily is certainly a good thing for us,” he says, referring to the fact that GPOs are authorizing more distributors to market their contract portfolios than ever before. “Sometimes it makes sense to neglect the philosophical in favor of the practical, but that doesn’t change the underlying opinion.”
Growth in the industry
There’s no doubt that GPOs have a growing interest in the non-acute-care market. “As technology improves and procedures move out of hospital settings into outpatient settings, the need for these facilities to reduce costs has continued to increase dramatically,” said Premier Purchasing Partners President Mike Alkire in September.
There’s another reason GPOs are aggressively pursuing the market. For them, the acute-care market has become a zero-sum game, says one GPO executive. In other words, GPO No. 1 steals a hospital or IDN from GPO No. 2, who in turn snags a member from No. 1. In contrast, the non-acute-care market is virgin territory.
Here’s an update on where some of the big GPOs stand:
• Premier’s Continuum of Care (non-acute-care) division added 9,500 members to its rolls in fiscal year 2009, bringing the total number of non-acute-care members to 61,000. Continuum of Care represents $5.3 billion in annual purchases. (Premier’s total annual volume is around $33 billion.)
• More than 25,000 providers now participate in VHA Non-Acute-Care Services. Collectively they spend about $3 billion annually. In the past three or four years, membership has grown 65 percent, and VHA now has about 50 people – including 14 field reps – focused exclusively on the non-acute-care market. What’s more, although many of its non-acute-care members are owned or managed by a VHA member healthcare system, VHA’s newer members are just as likely not to have such affiliations.
• Approximately 20 percent of the 13,500 members of the Medical Group Management Association now participate in a group purchasing program with Amerinet. (MGMA and Amerinet signed their first agreement 21 years ago.)
In an effort to broaden their appeal to non-acute-care providers, many GPOs are broadening their offerings, according to those with whom Repertoire spoke. Not only are med/surg products in the portfolio, but so are contracts for cell phone service (for providers’ businesses and even their families), revenue-cycle-management services, laundry service, food service, office supplies and elevator service.
What’s more, over the past year, non-acute-care providers’ usage of GPO contracts to acquire capital equipment has been on the rise, says Glen Papantonio, affinity relations manager for the Medical Group Management Association. Physician practices are also using GPOs to acquire technology solutions in conjunction with electronic-medical-records systems, he adds.
Selling the programs
As attractive as these offerings are, GPO programs don’t sell themselves. VHA has had a sales force in place since its non-acute-care program began in 1996, says Richard Peters, senior director non-acute operations. Since he came onboard in 2006, however, the organization has beefed up its selling efforts. While the number of field reps has remained steady at 14, the organization has added an inside sales team, national account executives and others. Consequently, sales have increased from $2 billion a few years ago to about $3 billion today.
The role of field reps has changed over the years as well, says Peters. “Our field team used to be jack-of-all-trades,” he says. They would sign new members, work existing accounts, etc. Today, the field force – in partnership with distributor reps – focuses on new member acquisition, while the inside team helps the existing base of customers gain access to the contract portfolio and maximize the benefits from it. “We think we have a well-rounded story.”
Indeed, recruiting new members is a joint distributor/GPO task, adds Steve Tackett, senior director of non-acute-care sales for VHA, who himself used to sell contrast media to hospitals and clinics prior to joining VHA about 13 years ago. “The people who own the bulk of the relationship in healthcare practices today are the distributor reps. Those guys are going in [to their accounts] every day. So I would say that a lot of the word-of-mouth about us gets to the customer through our distributor partners.”
In many ways, the relationship between the GPO sales rep and the distributor rep parallels that between the rep for a medical products manufacturer and the distributor. “The best-case scenario, where we’re very strong, is when there is open communication between our field people and the distributor rep,” adds Tackett. “They can sit down and say to each other, ‘We both have to grow our business; where can we find opportunities?’
“[Distributors] are in the same challenging position as we are. They have to be somewhat GPO-neutral. And we have to be distributor-neutral. The way people work well together is to build their relationship, and figure out how they can help each other grow their businesses, but at the same time not damage the relationships they already have.”
Effect on margins
One message that GPOs are urgently trying to get across to distributors is that providers’ participation in a GPO can actually enhance the distributor’s margins.
“With the right mix, the distributor can save the member a significant amount of dollars but still maintain and in some cases increase their margins,” says Peters. Adds Tackett, “We can lower that true acquisition cost to the customer, which allows the rep more flexibility in margins, so they can ultimately make more money.”
Not everyone is convinced, however. “The problem becomes how to deal with the particular combination of lower prices, reduced margin and higher costs that GPO programs can bring,” says Grogan. One factor to consider is the cost of contract administration, which can be particularly onerous for small, independent distributors, he says.
If one figures the total compensation of a qualified contract administrator to be $45,000, contract administration expenses could climb to more than 9 percent of the cost of goods, according to Grogan. “Such an expense level would consume between 30 percent and 65 percent (based on typical alternate-site cost-plus ranges) of available gross margin, just to load the pricing, but before any sales, warehousing, picking, packing, delivery, billing and collection expenses were incurred. Clearly, that is a huge problem if not a disaster in the making.
“The greater the contract sales base over which to spread contract administration expenses (which are neither purely variable or fixed, but some of both), the lower the relative contract administration expense,” Grogan continues. “Thus the advantage for the national distributors.
“Can the contract administration expenses be brought down? Sure, but not without considerable cooperation, standardization, and serious discussion about best practices and appropriate policies.”
Getting out the message
“The importance of us being at HIDA is this,” says Peters. “We realize distributors are a key partner in getting our members to understand the value of our portfolio. We want to make sure distributors understand that value proposition as well. It is a huge task, the reason being, we haven’t been able to find a great venue to do the education that’s necessary to help distributor reps understand what our story is.” Repertoire readers should expect GPOs such as VHA to be seeking those venues in the months and years to come.