Want to know one question about the GPOs—Group Purchasing Organizations—that no one can really answer? Try asking how many of them are actually out there!

Even if you limit the GPO universe to those active in healthcare, not even the General Accounting Office tries to put an actual number on it, noting only that the industry trade group, HIGPA, says that hundreds exist in one form or another. In foodservice, perhaps only a dozen of these are highly visible. But if you consider the fragmented nature of long term care facility ownership, as well as the prevalence of regional co-ops, the picture gets muddier.

Such groups have existed for years, not only among operators but also for groups like independent distributors. Yet it has been in healthcare that the term "GPO" has risen to prominence and taken on an identity of its own.

Much of their growth has been in response to intense cost-containment pressures exerted by managed care plans and the government, via Medicare and Medicaid. As a result, group purchasing arrangements have become almost universal in acute care and have spread rapidly in the long term care segment.

For self-operated foodservice departments, GPOs are often seen as essential to efforts to remain independent in the face of aggressive sales efforts targeted at hospital administrations by foodservice contractors.

Consolidation, too, has raised the stakes. Today the seven largest GPOs account for more than 85 percent of all hospital purchases nationwide, with a combined volume of over $60 billion. And the two largest organizations—Novation and Premier— account for more than half of all GPO volume.

Mines in the safe harbor

GPO contracts cover everything from ballpoint pens to CAT scanners, carpeting to syringes. Foodservice, which typically represents less than six percent of an acute care facility's expenditures, is not considered a primary driver when hospitals determine the GPO to which they will belong.

Still, GPOs do seek to drive member compliance within the full portfolio of their programs, and in that way have become a major factor in foodservice. As they penetrate long term care, where food expenditures often represent 50 percent or more of a facility's total, they may prove even more significant.

Finally, the influence GPOs wield is not without controversy. Their business models have long raised antitrust questions (see sidebar, p. 64), especially since so-called "safe harbor" provisions in federal law exempt them from some anti-trust rules. And recent moves by some to carry healthcare foodservice programs into other segments have raised class-of-trade and other channel concerns for manufacturers.

In this article, we'll take a brief look at these issues and also profile some of the more significant groups active in foodservice. But first, it's worth reviewing how the GPOs grew into the major force they are today.

Looking back

Students of the industry trace the origin of GPOs to the turn of the century, when local hospitals occasionally banded together to demand better utility rates from steam or power suppliers. But "most of the GPOs we know today had their roots in large metropolitan-area hospital associations," says Tom Wessling, vice president of nutrition and facility services at St. Louis-based Amerinet.

"They came together for advocacy, to deal with Blue Cross and Blue Shield, and then looked at purchasing. In the 1970s, med/surg supplies, lab services and IV solutions represented the big dollars in purchasing budgets and that's where they focused initially."

Food was eventually added to the list. Many original programs were little more than "market basket" spreadsheets, circulated to local distributors for price bids, then turned over to member hospitals.

The formation of VHA (Volunteer Hospitals of America) in 1977 was an early milestone, representing an effort to bring big hospital purchasing "clout" to the many community hospitals in its membership. Other GPO consolidation followed.

Premier as we know it today was formed in 1996, a merger of Premier Health Alliance, Sun Health and American Health Systems (AMHS). Novation followed two years later, a joint venture of VHAand UHC (the University Health Consortium).

On the distribution side, a ground-breaking move occurred in 1989 when Kraft Foodservice (one of the predecessors of US Foodservice) allied itself with Baxter, a leading healthcare supply organization. That eventually gave the distributor a dedicated field sales organization, and clearly positioned it as a healthcare specialist. It became the basis for the division known as Dietary Products and eventually paved the way for US Foodservice's unique position today as sole-source provider to both Premier and Novation.

A big change came for operators in the 80s with the advent of DRGs (Diagnostic Related Groups) and the "flat fees" they entailed.

"Hospitals were no longer automatically reimbursed for their costs," Wessling says. "Cost management began to receive much more attention. At the same time, outsourcing became a buzzword. If you weren't doing a good job managing your costs, your job could go away. That idea brought a lot of focus to the issue."

The Shift in Power

As GPOs grew larger, another change began to take place. Until then, most purchasing contracts were cost-plus arrangements with distributors, often hard to audit, with distributors negotiating their own pricing and allowances separately with manufacturers.

When GPOs only obtained rebates from manufacturers, they were tracked and redeemed separately. But as they grew more powerful, they began negotiating directly with manufacturers for the delivered price of goods, giving them a stronger basis for cost-plus distribution contracts with the distributors. That was a major shift in the power balance.

Despite such changes, all parties gained in many respects. While manufacturers had to make pricing concessions, they found in GPOs a reliable way to sell a difficult segment and a tool to drive regional distribution. Also, the GPOs gave them data on product movement that distributors had been reluctant to provide.

Distributors were forced to share the marketing allowance pie with GPOs, but they also got a long sought goal. As GPOs began to require prime distributor agreements, they gained the larger drops and committed customer relationships they wanted.