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."