The GPOs: Where do they go from here?

Amerinet
Making Choice a Core Value

Tom Wessling, VP, Nutrition and Facility Services

at a glance Annual Purchasing Volume $6.15 billion (FY 04) Annual Foodservice Volume $525 million (FY 04) $500 million (FY 03) Participating Facilities: 3500 total members 1800 participating in foodservice 225 extended care

Saint Louis-based Amerinet was formed in 1986 with the merger of three purchasing organizations: Intermountain Health Care, the Hospital Council of Western Pennsylvania (now Amerinet Central), and Haricomp (now Vector). They remain its primary shareholders today.We interviewed Tom Wessling, vice president, nutrition and facility services, whose responsibilities include foodservice, environmental services and engineering programs offered by the organization. He also leads its programs for non-acute care.

Membership. "Acute care represents about 40 percent of our foodservice purchased volume, nonacute care about 60 percent. Our typical member has traditionally been a small-to-medium-size facility, 100-400 beds, and today these often are part of an IDN, or Integrated Delivery Network. "

Sole vs. dual sourcing. "The question of sole vs. dual choice is one where there is a major philosophical difference between our group and many others.We believe in giving members a choice from among manufacturers and distributors and our programs are structured that way.

"In distribution, we have traditionally been sole source by region, but not nationally. Our belief is that no distributor is perfect in every region and we rely on members to reach a consensus as to which distributor represents the best regional option.We use about nine distributor companies overall, both nationals and independents, but have more regional contracts than that because a branch in one region may have a somewhat different program than a branch elsewhere.To use our program, members must commit to making 85 percent of their purchases through the regional distributor."

A regional approach to member services. "Our membership tends to coalesce into regions based on geography and common needs. Instead of having a large national meeting annually, we have regional meetings to bring people together for input on contracts and other programs. Our membership benefits go beyond pricing and supply relationships to services that help them obtain education, achieve operational efficiency and improve retail and promotional strategies."

Outsourcing. "It can be a political landmine in terms of independent members to say a GPO has a relationship with an outsourcing company. In the 1980s, we were one of the first to offer negotiated outsourcing contracts to members who wanted them, but today we are one of the few who don't offer them.

"GPOs, management companies and distributors all have their own program relationships with manufacturers. It is extremely difficult to sort out the overlaps that are permitted and not permitted when combining these, and the manufacturer is often forced to do so at the expense of one of the parties. Another issue is that management companies have developed systems based on their own portfolios of products; to achieve results, they may need full access to their own programs.

"While outsourcing is an important option for institutions, our view is it does not necessarily lend itself to taking full advantage of a GPO. But when a member determines it is the best option, we approach it consultatively, helping the member negotiate the best arrangement possible with its chosen provider. Outsourced operations typically do not participate in our foodservice program."

On the impact of IDNs. "The demands of IDNs mirror those of the original groups as they consolidated.As they grew larger, they demanded better pricing from manufacturers, who would then want more proof of compliance in return.As IDNs have formed, they've sought additional leverage beyond the basic GPO program in the same way.

"There are some I refer to as 'quasi-IDNs, groups of facilities that are affiliated but not really integrated.The question is, are you going to consolidate your ordering, payments, drops? If not, you are a system of hospitals, not a ten-hospital system.True IDNs integrate operations; they make decisions that apply to the whole system and drive compliance to support those decisions.

"Our view is that if an IDN can drive more compliance, they deserve special deals, and we develop customized programs based on their needs and efficiencies. For example, there may be two approved suppliers in a category, and one may wish for its own reasons to more deeply penetrate a given region. In such cases, an IDN may work through us to seek a committed deal with that manufacturer over a multi-year period."

Non-traditional business. "Healthcare is our primary market, but for years we've also serviced non-traditional accounts like athletic clubs, ice arenas and private schools.When we identify a non-traditional account that wants to use our programs, we approach suppliers to see if they are interested in the opportunity.They have the option to not extend the traditional program to other segments. It is a collaborative understanding between our group and business partners."

Growth opportunities in long term care. "To a large degree, acute care membership is at a status quo; non-acute is where the growth opportunities are.That is everything from oncology clinics to long term care.Amerinet overall will see its greatest growth in oncology over the next 12 months; but for foodservice, the greatest growth will be in long term care and assisted living facilities.

"These operators are not as affiliated as in acute care but their level of sophistication is increasing.Their needs are changing: in many cases they are looking for higher quality products, menu ideas, more brands. They are looking for help in running their businesses and we are emphasizing programs to help them do so.

General philosophy. "At the end of each month we return all monies to our owners except for operating expenses; they in turn distribute that money to members and affiliates based on participation.The biggest misconception about GPOs is that they add costs to the system. People look at admin fees and say,'If you didn't have GPOs, you'd save two percent.' In fact, you'd have to hire staff to do the work and it would likely cost you more than two percent. Plus, you wouldn't have the negotiating leverage the group has."

Novation, Inc.
Two Cultures with A Common Goal

Nancy Skodack, Director of Contract Management

at a glance Annual Purchasing Volume $26 billion (FY 04, est.) Annual Foodservice Volume $550 million (FY 04, est.) $523 million (FY 03) $498 million (FY 02) No. of Participating Organizations: 2,400 VHA and UHC members

Dallas,TX-based Novation is the "big gorilla" on the GPO block. Formed in 1998 with the alliance of VHA, Inc., and UHC ( University HealthSystem Consortium), it represents a hugely diverse membership. It also caused a significant stir earlier this year when it moved from its traditional dual-source foodservice distribution contracts to a new, single-source agreement with US Foodservice.We interviewed Nancy Skodack, M.S., R.D., L.D., FADA, Novation's director of contract management, for a perspective on how Novation views its position in the foodservice marketplace.

Membership. "One of the biggest misperceptions about Novation is that we have 'members.' In fact, we are a supply organization, formed expressly to serve the alliance of VHA and UHC— they are the ones with the members.We are analagous to the concept of 'Intel Inside'—

Novation is a joint venture, dedicated to meeting the members' combined supply chain service needs. "The two organizations are quite different in their member profiles. UHC is a very homogenous group; it represents large academic medical centers associated with prestigious universities.VHA is more diverse, ranging from not-for-profit community hospitals—over 700 of them with fewer than 100 beds—to very large integrated delivery networks.VHA has a 75 percent ownership equity in Novation and UHC has a 25 percent ownership."

Procurement becomes a boardroom issue. "Throughout healthcare, many of the food operations are now managed by multi-department heads. I think one of the most significant changes over the last two decades was the evolution of the materials management role away from its position in the basement of many organizations to one welcome in the boardroom. Supply purchases make up the second largest item on the average hospital's balance sheet and it has become extremely important as a cost management focus for them."

The value proposition of a GPO. "I think consolidation in the GPO industry has produced several positive outcomes. By increasing aggregated purchasing-volume it has produced cost avoidance for suppliers in terms of sales, marketing and administrative expenses.This reduced manufacturers' need to maintain individual agreements with members and is what ultimately translated into the savings members have realized. GPOs offer a marketing service to manufacturers in that they effectively represent and communicate the value of participating in the national contract agreement to members.

"I think a key misperception is that GPOs generate revenues via fees charged to suppliers. We are actually collecting money on behalf of the members we serve. Critics complain that the GPO model is flawed because they accept fees from suppliers. Yet this business model is common in other industries: credit cards, real estate, even publishing!

"Another misperception is that we make purchasing decisions without member input. We engage our members to the highest extent possible in all contract activities. We only get paid when members utilize the contracts, so we pay very close attention to what they say."

Management company relationships. "Some Novation members do have contracted foodservice arrangements and Novation has professional services agreements with management companies for members who wish to take advantage of them. For example,VHA has a dual award with both Sodexho and Morrisson's.The point is that Novation focuses on procurement only, with a majority of our value driven by off-invoice allowances.There are members who use an outsource provider and also use Novation's procurement. It is a member decision and a contract arrangement, not a matter for Novation's policies."

Distributor relationships. "Formerly, we had a multi-source distribution agreement with Sysco, Shared Service Systems and US Foodservice. Under our new single source agreement, we require that members maintain a prime vendor relationship with US Foodservice for at least 80 percent of their foodservice purchases. That change was the result of an exhaustive and competitive bid process that involved a high degree of member input. The final decision was endorsed by our distribution task force and reflects the belief that the best value to our overall membership was provided by a single award.

"We tried to recognize the reality of the distribution world by designing the terms of the agreement so that a member has recourse if it feels a particular distributor branch is not adequately providing service within those terms. Overall, we think the value proposition of the new contract award will result in fairly aggressive new member signup this year."

The future of e-commerce. "The next major stage in the evolution of GPOs will occur as they help members move to sophisticated e-commerce platforms. Our members now use a single e-commerce exchange—what we call Marketplace@Novation—to access purchasing data in real time and to access analytical tools to evaluate supply chain spending.

"We see our exchange becoming the central point of information exchange between group members and their entire supply community. It will tie together the whole procurement process, beginning with the decision making leading up to initial purchase, tracking orders through the supply chain from warehouse to receiving dock, managing electronic invoicing and payment, and finally, providing reporting and analysis tools to more efficiently manage supply spending."

Consorta, Inc.
Shareholders as Equity Partners

Christopher Mantel, Senior Director, Contracting

at a glance Annual Purchasing Volume $3.6 billion (FY 04) Annual Foodservice Volume $225 million (FY 04) $192 million (FY 03) $160 million (FY 02) No. of Participating Facilities: 491 acute care 225 extended care 1800 non-acute sites

Based in Schaumburg, IL, Consorta Inc., was formed by the 1998 merger of two groups—CMMA (Catholic Materials Management Association) and DHS (Sisters of the Sorrowful Mother Diversified Health Services). It is structured as a cooperative, with 13 shareholder organizations that together operate more than half of all Catholic hospitals in the U.S. Chris Mantel is senior director, contracting, with responsibility for several of the group's procurement specialties, including foodservice.

Consorta's members. "Our typical member is a U.S. Catholic institution.About 80 percent of our purchases are from the acute care side but we are seeing an enormous shift in the market toward long-term care.A few Catholic schools participate, but we do not have any colleges and universities. To be a shareholder, you must be a healthcare system with at least 1500 beds or $500 million in gross patient revenue; more importantly, you have to be willing to commit and to participate. If you want to shop around, Consorta is not for you.We've had a lot of growth in the social service market— our board sees such activities as aligned with its mission. For example, we just signed the National Human Services Assembly, which includes dozens of major, national nonprofits in the field."

On outsourcing. "Perhaps 18 percent of our members outsource their foodservices to management companies—the decision is site specific. If an operation is contracted, it must decide to use either the Consorta purchasing program or the contractor's program—it can't use both."

On compliance. "Our business charter stipulates that members participate only in the Consorta program.We believe that is an advantage to suppliers and a means of leverage in negotiations. To be successful as a GPO, you have to deliver the commitment of members—that is why some ' virtual' GPO models do not have long-term viability. It is not a mattter of saying 'our members represent this much potential purchasing power.' It is looking at the number of and size of the actual transactions in your compliance reports.

"Our members are required to purchase at least 80 percent of their foodservice volume through our program. We have about 220 vendor agreements that cover the top 80 percent of our foodservice volume.

"The questions for many GPOs may be—is compliance sustainable? Will all your members stay with you given your process? We think there will be additional shifts in membership based on the whole package a GPO offers, including issues like ethical standards, the transparency of its organization, adherance to government policies, its operating philosophy and basic business model."

On sole vs dual-source contracts. "Consorta's distribution contract is based on the regional preferences of shareholders; they decided that the best model is multiple-sourced. Our experience has been that sole source distribution agreements are very difficult to manage and that dual source agreements have competition built in.

"Sysco is our national distributor, for those who want a single national agreement. But in most regions, our members also can source product through select independent distributors, including Gordon Foodservice, Shamrock, Food Services of America, Cash-Wa and others.

"In contrast, on the manufacturer side, we have a significant number of sole source agreements. Our owners believe they have the right to sole source product when that is appropriate and that approach delivers value. We probably have 220 contracts with foodservice manufacturers, and about 45 percent of these are sole source in terms of specific categories. "

The impact of IT."Sophisticated information management is critical to the success of our programs—it is no longer just a matter of tracking manufacturer rebates or providing consolidated reports to members.At one time it was common to employ third-party data aggregators, but for organizations like us, that era is drawing to a close with the much more sophisticated systems we have added at headquarters. Our members have extensive online access to their data and contracts as well as to online catalogs listing every product available to them via those contracts.

"Being able to analyze utilization, procurement and compliance data across our membership lets us manage the organization differently.We can deliver clearer, fact-based decisions to the supply chain and work with directors to show them how to take better advantage of our programs, and what the resulting impact will be on their bottom lines."

Long term trends. "There is more concern about the work environment, about improving workplace safety.We are becoming more involved in helping members address HR and labor issues via negotiated contracts with temp agencies, job posting services and so on. We also see more interest among members in finding ways to make their operations environmentally friendly, using sustainable products and reducing packaging waste. Our food and nutrition committee is working on a policy that will address such issues as antibiotics in poultry, the environmental impact of manufacturing processes and appropriate business practices.These kinds of things are becoming more important in our business evaluations."

General philosophy."We do not have any program bundling and in negotiations,'best price' is the key initiative. Back end allowances are accepted, but they are not our preferred approach. Our rate of return to our shareholders is 75 cents on the dollar in terms of administrative fees, with 100 percent of marketing allowances returned to them. Some GPOs invest in insurance and other businesses, but we do not. Our primary business is group purchasing and our sole focus is on removing costs from our members' supply chain activities."

MedAssets
An Alternate GPO Model

Bridget May, Director, Food & Nutrition Services

at a glance Annualized Purchasing Volume $10 billion (FY 04, est.) Annual Foodservice Volume $250+ million (FY 04, est.) $166 million (FY 03) No. of Participating Organizations: 22,000 total (2,000 participate in foodservice) 2,200 acute care hospitals 18,000 alternate care sites

MedAssets is a newcomer to the GPO fold, formed between 2000 and 2002, when as a startup healthcare eprocurement company it purchased first InSource, a West Coast-based GPO, and then St. Louis-based Health Services Corp. of America (HSCA). It has grown rapidly since then, partly because of its lean overhead structure and also because of its somewhat different fee-for-service business model.We asked Bridget May, director of food and nutrition services, to explore some of those differences.

Membership."Our members vary from academic hospitals to small community hospitals, from large retirement centers to small nursing homes.We are almost exclusively in healthcare , although we do have a few correctional facilities as members. Acute care is responsible for about 50 percent of our volume, long term care 30 percent, and the rest miscellaneous types of facilities, like surgery centers and rehab facilities."

Managing revenue as well as costs. "In its basic form a GPO aggregates purchasing power to achieve better pricing for members.We go beyond that model in that while we try to help members improve supply chain costs, we also help them improve the revenue side.We strive to offer a total supply chain and revenue cycle solution from one business partner. Our conversations with hospital executives are often focused on longer-term strategic goals—for example, helping them improve their cash flow on Medicare accounts, or standardize their charge description master so that it can more accurately reflect supply chain costs in real time."

Sourcing contracts. "Sysco is our prime supplier across the country, although we have a few regional players—USF/Allen Foods in St, Louis, FSA in the Northwest, HFM and VIP in Hawaii. Our distribution-contract requires members to purchase at least 85 percent of their volume from the prime distributor.We look to the local distributor to monitor compliance with the program. If a distributor believes a category is not being purchased and the member is not meeting the target, we will investigate the deviation and seek to get it reconciled.

"As a practice, we try to avoid sole source contracts and most of our contracts with manufacturers are multi-source. Some of the large IDNs look for custom contracts that are sole source, and we will structure a program for those needs. It is their decision. When we do, we also customize a local compliance catalog that reflects the unique local agreements those IDNs have.

"We also have a committed manufacturer program called Food and Nutrition SELECT that offers members further discounts if they commit to exclusive category usage with suppliers at a 90 percent compliance level.This is a matter of member choice, but if they choose this program, they have to standardize to gain the program advantage and get the best price on high volume food and nutrition items.

Electronic catalogs. "When MedAssets purchased HSCA, we saw it as a diamond in the rough. It had some pretty sophisticated technology and a lot of our innovation in that area is based on what HSCA laid the groundwork for. Electronic catalogs are a good example.A facility can use our web portal to look up any of the items we have under contract and also use it to set its tier in terms of distribution margins, applying the contract price and distribution costs for a true delivered cost."

Growth opportunities. "We see long term care as a growth opportunity and in most cases have structured our program so as not to distinguish between acute and long term care; we want to give long term care members the same advantages acute care has. We offer specialized products for senior nutrition, Meals on Wheels and congregate feeding programs and look to help those kinds of members address program guidelines and other issues so they qualify for federal funding. We are the only GPO that has been endorsed by the Meals on Wheels program."

Looking ahead. "Procurement is changing in foodservice. Customer want more of the savings on the front end and the days of the back-end rebate approach are ending. The willingness of facilities to standardize products has increased considerably—they have come to understand that by committing to particular manufacturers they can drive more costs out of the system. Financial controls are tighter today than ever before.

"At the same time, members are demanding more customization of their programs.They are also looking to manufacturers and distributors for more help in generating revenue: branding opportunities, marketing, strategies to increase traffic on the retail side of the business and to support innovations like room service on the patient side."

HPSI
Facilitating Buyer and Seller Partnerships

Dean Hansen, Senior VP, Foodservice

at a glance Annual Purchasing Volume $1.2 billion (FY 04) Annual Foodservice Volume $725 million (FY 04) $675 million (FY 03) $590 million (FY 02) No. of Participating Facilities: 5500 long term care 116 CURB members 25,000 hospitality accounts

HPSI was started in Southern California in the early 1960s as the National Purchasing Corporation, focusing on acute care, but by the early 70s was specializng in long term care.As it picked up the endorsement of many state healthcare associations, it moved first into Kentucky and Florida and now operates in almost every state except Maine, New York and Massachusetts. Dean Hansen is HPSI's senior vice president, foodservice, and we spoke to him about the changing nature of HPSI's business model.

Membership."Our typical member is an independently owned and operated long-term care facility; they are both for profit and not-for profit and range from 50 beds to 500 beds. Multi-units make up 55 percent of our nursing home membership and we've had steady growth in the segment: 15 years ago we had 1200 members; three years ago we had about 4000; today we have 5500. Today, our growth objectives are focused more on penetrating these accounts than on the number of members.We also manage a hospitality division as well as the CURB program for colleges/universities."

HPSI's structure." We are a privately-owned, family business. Members pay a monthly fee to participate based on bed population or one that's negotiated with a state association.Allowance revenue is passed directly back to members, although sometimes, as with CURB, we keep a percentage in lieu of a fee. Food is 60 percent of our total sales.

"We have a field network of 50 managers and dietitians who provide customized menu, HACCP and nutritional support to members.We also have a direct sales force and may be the only GPO with one. Manufacturers look to us for target marketing, to help them introduce new, healthcare-specific products, and our sales force offers them a real advantage."

Supplier relationships."We do 80 percent of our business with Sysco and probably use a half dozen other distributors on a regional basis. Traditionally, our programs were based on allowances claimed after the sale, but for the last two years we've moved toward programs with deviated pricing. In the past, we had dual source agreements with most manufacturer partners, although never more than two are approved for a category.Today we offer more committed programs; 30 suppliers now are sole source with us. It is a big philosophy change but it was necessary for us to be competitive."

The nature of the extended care market. The nursing home industry is heavily regulated. One result is that we have to be very careful about how money is accounted for, but regulations can also affect everything from the diets of residents with wounds to packaging. It is also an industry that is much more fragmented than acute care, and a much harder market in which to drive compliance. Programs can be structured to encourage compliance but are difficult to structure to require it. It is a real concern for manufacturers.

On value-added services. "There is a misperception that GPOs are just there to help members obtain lower prices. We bring a lot more than just price. We are a total purchasing service and look to offer management tools and customized programs to help members reach their own objectives, whether it's improving a housekeeping program or driving resident satisfaction."

On the CURB program."We were one of several organizations approached by CURB seven years ago to bid on developing a purchasing program for self-operated college dining departments. They wanted to demonstrate to their administrations that they were maxmizing their buying power. The members did not want distributor contracts negotiated, which is why the program was structured around back-end marketing allowances. CURB members can take part in any of our other contracts on a voluntary basis, whether they are distributor contracts, office supply contracts or whatever with no additional fee.

"After we won the CURB award, we approached our partners looking for those who wanted to participate—we did not simply extend programs that had been developed for healthcare. On thing we found was that even though we thought we knew the college foodservice business, there was a lot to learn. In many cases it uses products that are quite different than those used in other segments.

"There is a misconception that one can participate in another group's program and also take advantage of CURB's program; in fact, our participating manufacturers will not provide allowances on products purchased under another group's deviated pricing program—they see it as double dipping.Also, the technology used by distributors to report program affiliation to manufacturers will typically allow for only one affiliation, so there are practical reasons you can't combine more than one program effectively."

On the move into other foodservice segments. "We've always looked at other classes of trade as a way to expand our business.We began our hospitality division in 1989 to bring better pricing to independent restaurant operators, hotels and public schools, and today have about 2000 facilities participating in it. It is structured separately from our healthcare program. Our philosophy has always been that if we entered another class of trade, we would do so by collaborating with those manufacturer partners of ours who wished to participate. Some have always opted out, and others have wanted to structure the contracts differently. "As long as we as GPOs were all in our own sandboxes, there weren't many problems. But the movement of groups into other segments has created channel and distribution conflicts that are very difficult to resolve.The potential exists to alienate both manufacturers and operators. Philosophically, we see our role as an organization that facilitates partnerships between buyers and sellers—both have to buy in to the programs we negotiate."

GPOS: Under the Regulatory Microscope

Regulatory authorities have always scrutinized GPOs with an eye on both the benefits they bring members and the antitrust implications of their business models. For example, Congress specifically amended the Social Security Act in 1986 with so-called Medicare "safe harbor" provisions to allow for the administrative fees collected from vendors, which might otherwise violate anti-kickback legislation. At the same time, the Federal Trade Commission has issued guidelines that define tests GPOs should meet to not raise antitrust questions.

Recently, Congress has taken a firmer stand on GPO contract practices. In particular, it has investigated the complaints of smaller device manufacturers that some GPO contract terms discourage innovation and are being manipulated by larger vendors to lock out supply chain rivals. Other questionable practices were highlighted in a controversial series of articles titled "Medicine's Middlemen" that appeared in The NewYorkTimes in 2001.A number of probes are ongoing, ranging from investigations by the U.S. Senate and the Department of Justice to some at the state level. Most notably, the Senate Judiciary Committee's Antitrust, Competition and Business and Consumer Rights Subcommittee, has looked into these issues with a series of high-visibility hearings to highlight them.

As a result, both Premier and Novation, the industry's two largest GPOs, agreed to make major changes in their business practices and, given a 90-day deadline by Kohl and DeWine, in 2002 developed voluntary Codes of Conduct that addressed the most significant questions raised in the hearings. Other GPOs were quick to follow, as did HIGPA (the GPO industry's trade group).

Some key responses have been to unbundle medical-surgical contract requirements, to reduce the length of longer-term contracts and to implement other program changes that encourage adoption of new technology-based products.The

groups have also made efforts of varying degrees to make their funding structures more transparent to their members and the public.

Meanwhile, the Subcommittee is concerned that while much voluntary progress has been made, legislation may be needed to institutionalize the reforms. In September, it floated a proposed "Medical Device Competition Act" which would make oversight of GPOs a responsibility of the Health and Human Services Department; it would also amend the Social Security Act to more strictly control their business practices.The proposal has since been aggressively contested by the industry, which opposes any further regulation.

So far, most scrutiny has been reserved for practices that involve so-called "physician preference" items and ignored categories like food and other supplies.At the same time, any regulations to address issues like bundling, sole-source contracts and similar areas could well have implications for the GPOs' food and nutrition divisions.

"For the foodservice professional it is a much different situation that it is for a cardiac specialist," says Bud Bowen, CEO of Amerinet."The regulators do not have the same level of concern as in the medical device marketplace, where they are worried about practices that may stifle the development of new products and other innovations."

"I think the committee will probably back off in terms of limiting sole source contracts.There are some situations where in our view it is a very appropriate strategy and market dynamics almost dictate it if you want to manage costs effectively."

All this scrutiny has had a positive effect on the industry, concludes Novation's Skodack,

"It has caused hospitals to seriously review their GPO relationships and the value GPOs provide," she says."It has encouraged us to create new ways manufacturers can share product innovation information with our members, irrespective of whether or not they hold a Novation contract."