Purchasing
New survey finds hospitals are generally happy with their arrangements, but cite certain limitations
During troubling economic times, cost control is crucial in the health care arena. Because supplies make up the second-highest expense in most hospitals, materials management has moved to the forefront of health care strategy. And the spotlight will shine even brighter as health reform encourages providers to rein in expenses across the care continuum. So it's no wonder that hospital chief executives and chief financial officers are paying much closer attention to supply chain issues.
For decades, most hospitals and health systems have strategically managed their supply chains through their use of group purchasing organizations, or GPOs. These shared-service purchasing entities obtain volume discounts by combining the negotiating power of several hundred hospitals.
In recent years, GPOs have expanded beyond their traditional roles to provide benchmarking data, consulting services and quality monitoring.
Hospital executives have long acknowledged that their GPO relationships bear value. But how much value is still open for debate. To examine this, Hospitals & Health Networks and the Association for Healthcare Resource & Materials Management recently conducted a nationwide survey of materials managers to ask how hospitals monitor the value of their GPO relationships.
When leveraged right, GPO-led cost cutting can have a major impact on hospitals' bottom lines. More than 70 percent of survey respondents reported GPO-attributed savings of 5 percent or more on their supply purchases, while 25 percent reported savings of more than 11 percent.
"As far as GPOs go, any help I can get in taking cost out of the system is a safety net I can't afford not to have," says Ray Moore, board president and system contract manager at PeaceHealth in Bellevue, Wash. "If something is 20 percent of your total operating cost, you'd better have a strategic imperative for making sure you have some direction."
Beyond negotiating better prices for supplies, GPOs add value by allowing hospitals to use a Lean staffing model for contracting. Moore estimates that most integrated delivery networks would require a 6-to-1 personnel increase if they shifted from GPOs to self-contracting. At the same time, contract negotiators at a GPO have a breadth of market information that individual hospitals could never obtain.
"In an IDN, you're a jack of many trades, but GPO contract managers are very focused on one specific area," Moore says. "They know the industry at a national level, they know what fair pricing should be. That's an economy of scale for knowledge that GPOs have that even the largest hospital systems are hard-pressed to duplicate."
The survey also found that GPO relationships tend to last. More than 53 percent of respondents either hadn't switched their primary GPO for over 10 years or had never changed their primary GPO. This might be surprising since GPOs seem like a commodity-type service with value based solely on price, which would imply frequent switching. But it's not surprising at all to hospital executives who manage the GPO relationship.
"All GPOs are doing basically the same thing as far as getting good discounts," says Gerry DeSilva, director of facilities and materials management at Cedars-Sinai Medical Center in Los Angeles, which uses Novation as its primary GPO. "We've had a good relationship for over 30 years, so I don't see any advantage to changing to another GPO."
Many larger hospitals and health systems are also partial owners of their GPOs, which further tends to solidify the relationship. "As a shareholder, providers have a vested interest in the GPO," Moore says. "That vested interest also enables more influence in the GPO's strategic initiatives and direction."
Hospitals should be careful, however, to make sure stability doesn't lead to stagnation.
"I'm a believer that if you have a good relationship, you want to maintain it and nurture it, but shouldn't it be formally evaluated once in a while?" asks Jamie Kowalski, a Milwaukee-based consultant who helped develop the questions for the survey.
"Think of your own plumber, bank, attorney or general contractor—it's great to have one you can count on, but every couple of years you'll want to check for what rates are being charged, what services are available," Kowalski says. "You have to do due diligence, at least periodically, even if it's a great relationship that you've had over a long time."
Another survey question focused on how hospitals monitor different aspects of the GPO relationship. More than 85 percent of respondents said that they monitor adherence to GPO contracts, product- or initiative-based cost savings, and supply standardization within their institutions. These monitoring initiatives can be difficult to establish initially, but can lead to major cost savings if implemented properly.
For example, at Valley View Hospital in Glenwood Springs, Colo., materials managers weren't taking advantage of the discounts that their GPO, HealthTrust Purchasing Group, had already negotiated on their behalf. In July 2008, only 66 percent of the supplies that Valley View used were purchased via GPO contracts.
"We belonged to a great national GPO, but it was pretty clear that we weren't using that to the best of our abilities," says Marc Lillis, Valley View's director of materials management.
For the following year, Valley View examined all of the hospital's off-contract purchases. The materials managers worked with the products committee and re-educated the clinical side to increase contract compliance. The result was an increase in compliance from 66 percent to 91 percent, leading to cost savings of $274,000.
"That comes out to about 10 percent of my supply budget, and an increase of close to 30 percent to contribution margin," Lillis says. "It took a lot of legwork and a lot of grinding, but ultimately we got a lot of bang for our buck."
Beyond cost savings and contract management services, GPOs now offer many "extras" such as consulting services, quality initiatives, education and benchmarking tools. Not all hospitals place high value on these.
While more than 90 percent of survey respondents rated consulting services for contracting as "important," fewer than 50 percent gave the clinical consulting categories an "important" rating.
"Some GPOs try to be all things to their customers, and I'm not sure that's a good thing," says Terry Cox of Texas Children's. "They should spend 80 to 90 percent of their time on contracts and on negotiating lower prices. I like some of the 'extras' like spend analytics, but I'm not too interested in the fluffy things."
Benchmarking is a service provided by most national GPOs that compares actual spending with industry norms and targets areas for cost savings. Eighty-six percent of respondents rated benchmarking of the supply chain as an "important" feature of their GPOs. More than 80 percent of respondents said they either have implemented benchmarking or are planning to within the next 24 months.
At Cedars-Sinai, these types of benchmarking tools provided by their GPO have led to identifiable savings.
"We see what our peer hospitals are paying, then we go back to our suppliers and show them the benchmark," says DeSilva of Cedars-Sinai. "That helps in negotiations, and that cost avoidance is real savings."
Those services have led to a $2.5 million annual supply savings in the operating room and $2 million in savings in the cath lab. "Each year we've brought down the price of those products simply by knowing what the market pricing is," DeSilva says.
Despite the advantages of using GPOs for contracting and negotiated discounts, more than 60 percent of survey respondents do at least some self-contracting. Hospitals reported less "bang for their buck" when they negotiated terms themselves. While 70 percent of hospitals attributed more than 5 percent supply savings to GPO contracts, only 52 percent were able to achieve similar savings outside of their GPO contracts.
Typically, self-contracting works best when it uses contracts that are previously negotiated by GPOs as a starting point. Texas Children's Hospital used self-contracting to create $30 million in supply expense savings over 39 months by piggybacking off of prices that were negotiated by its GPO, Premier.
Cox and his staff began their efforts by targeting areas where, even with GPO-negotiated discounts, expenses were high.
"We looked at large-spend categories from gloves to printer cartridges to preprinted forms, we looked at capital equipment," Cox says. "We used the GPO price as a starting point and negotiated from there." Cox estimates that the self-contracting initiatives have saved nearly 10 percent of the hospital's total supply budget.
In general, hospitals seem happy with their GPO relationships. Overall, 90 percent of respondents said they were satisfied or very satisfied with their primary GPO. In individual service areas, GPOs received the highest satisfaction scores for pricing, savings and customer service.
Even if GPOs are doing a great job, the optimistic tone of the survey could hinder further improvement, according to Kowalski. He notes that many areas where hospitals reported savings, improvement and satisfaction are really based on estimates and perceptions, rather than hard data.
"I'm not suggesting that a survey needs to find the 'dirt' on GPOs, but rarely do you find any situation for which a group of people state that everything is beautiful," Kowalski says. "There must be aspects that are either not so good, or where it's pretty hard to know whether it's as good as it appears. Can we put mechanisms in place to be more confident and have better data, or at least do better than just our 'best estimate'?"
AHRMM's Moore is less skeptical, but would similarly like to see more precision and better data-capture tools on the supply side.
"What takes 30 seconds in the pharmacy might take 48 hours on the med-surg side, and I'm still not sure how thorough it is," Moore says. "Data tools have definitely improved, but we can go a lot further. In another five years, the monitoring will be as seamless on the med-surg side as it is on the pharmacy side."
One survey question asked about the federal investigation of GPOs' relationship with their suppliers and whether they save hospitals sufficient money. More than 40 percent of respondents said the investigation is not warranted, 28.5 percent said it is and 30.4 percent said they did not know enough about it to answer one way or the other.
Despite these current limitations, many hospitals see their GPOs as indispensable partners. By doing the "dirty work" of negotiating prices and contracts, GPOs free up supply chain managers to focus on other tasks that are better handled locally.
"Managing supplies at the local level is hard [using] a shared service, while contracting is much better suited to leveraging a national shared-service model," Moore says. "I'm a big fan of allocating local resources more toward activities that directly impact delivery of quality care and an exceptional patient experience. What we do is all about the patient in the end."
Chris Serb is a freelance writer in Chicago.
Hospitals & Health Networks and the Association for Healthcare Resource & Materials Management (AHRMM) teamed up to conduct the 2010 Hospital GPO Use Survey. A random sample of 6,568 hospital vice presidents and directors of materials management and chief financial officers were contacted in April to find out how hospitals monitor the value of their GPO relationships, which GPO services hospitals value most highly, and the total value of goods and services hospitals purchase through their GPOs. The survey response rate was 11.9 percent or 779 completed surveys. Hospitals & Health Networks thanks the sponsors of this survey, HealthTrust Purchasing Group, HLS MedFreight® and Premier Inc., for underwriting this research.
This article 1st appeared in the July 2010 issue of HHN Magazine.
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