The GPOs Where do they go from here?

Jan 1, 2005 12:00 PM, John Lawn

Contractor program overlaps. Another form of channel conflict arises when GPO members have foodservice departments that are contract-operated. In such cases, management companies are quick to compare GPO programs to their own manufacturer agreements and demand "equal treatment" when they believe unfair discrepancies exist.

All of these situations mirror classic trade issues that have existed for years between manufacturers, distributors and large chain restaurant operators. As in the past, reconciliation will likely be uneasy and driven by market pressures. Stay tuned.

Is growth necessary?

One aspect of the extendability issue can be summed up in a simple question: "Will the largest GPOs and their members benefit from still more volume?" In foodservice, many apparently think so. But with acute care largely saturated, the only growth most can reasonably expect must come either by convincing individual members or IDNs to switch allegiances, or by moving into other segments.

GPO membership has been fairly consistent for years (one distributor executive compares it to a college fraternity "rush" system, saying "It is a comfort level choice, and many times you are in it 'for life.'"). Still, there have been some significant membershift changes recently—Catholic Healthcare East recently left Premier and took its $500 million in purchases to Consorta. And upstart MedAssets says that 17 multi-facility IDNs have left larger groups to join it in the last two years.

"The GPOs have become much more aggressive in the marketing they do to prospective members," says one observer. "Today it is almost bare-knuckle fighting. Also, hospitals themselves are taking a hard look at GPO overhead and asking if all the activities they is paying for are really necessary. And as an older generation of hospital executives approaches retirement, GPO allegiances are being broken. That's another reason for more turnover."

Many GPOs see long-term care as their best opportunity for future growth. These facilities are typically smaller and more fragmented than those in acute care, with smaller drops that make them less profitable to distributors. Such factors are among those that make them a market that is increasingly receptive to GPO membership opportunities. As a result, longterm care will be a GPO membership battleground for the next decade.

The advent of e-commerce

What's ahead? More sophisticated data management, for one thing. It has always been at the core of a GPO's services; no matter how deals are structured, they involve a convoluted process in which individual purchases are tracked, incentives, allowances and rebates are calculated and claimed, and billbacks are reconciled between distributors and manufacturers. The sheer complexity of this job gave a competitive advantage early on to those organizations which invested in specialized systems to manage these data streams.

Those systems have evolved into the e-commerce and e-exchange web sites most major GPOs espouse today. In fact, without them, it would be virtually impossible to bring meaningful order to the GPO pricing landscape. Longer term, they could also potentially address some of the industry's more contentious trade issues, such as double dipping.

With the greater emphasis some groups are now putting on the revenue-enhancement side of operations, another next step could be for GPOs to tap member point-of-sale data to provide new services on that basis.

Still, these systems require very significant investments from the GPO and distributor organizations involved, cumulative investments that are clearly separating organizations into technology camps of "haves" and "have nots." They are also tending to shift more administration costs to distributors, requiring them to document that pricing arrangements are executed properly, that constantly changing program extensions, terminations and renewals are implemented on a timely basis, and so on.

The upshot? In the future, healthcare institutions will become more dependent on GPOs and their data management systems and partners to make far-reaching decisions about not only purchasing but also many other aspects of their operations. The GPOs in turn will become more dependent on sophisticated data-exchange relationships with distributors, manufacturers and their members. Mutual, data sharing inter-dependence will clearly drive the future of the industry.

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."