Hospital laboratories may find GPOs respond by contracting with more vendors to expand choices of products
Major changes are unfolding in the world of group purchasing organizations (GPOs). As healthcare’s transformation shifts the clinical and financial emphasis of hospitals, health systems, and other providers, these institutions are changing their relationship with GPOs.
In turn, such trends mean changes in the GPO contracts available to hospital laboratories. In the United States, every hospital and health system is typically a member of at least two GPOs. Thus, the clinical laboratories of these hospitals must also participate in the national contracting programs operated by the GPOs.
One new trend unfolding in the GPO sector is that hospitals and health systems—under intense pressure to eke out more cost savings—are shopping around for the best deals with GPOs. That can mean dropping membership in one GPO and becoming a member of another GPO. Some hospitals are even forming their own GPOs.
That’s the case with Ascension Health, based in St. Louis, Missouri. In a press release issued on March 16, it announced the formation of a GPO that will operate as a wholly owned subsidiary of the Ascension Health Alliance, the health system’s newly-formed parent company. Resource and Supply Management Group, the supply-chain operation for Ascension Health, will offer the new GPO as a service. Ascension Health operates 66 hospitals in 19 states and the District of Columbia.
There’s clear evidence that hospitals and health systems are shopping around for GPOs that can offer them the best deals. A recent article in Modern Healthcare profiled several health systems that changed GPO membership specifically to realize significant savings.
For example, when the Robert Wood Johnson University Hospital (RWJU) jumped ship from GNYHA Ventures to HealthTrust Purchasing Group in 2008, it gained first-year savings of $6.5 million. William Stitt, Vice President of Materials Management at RWJU Hospital, confirmed that the goal of switching was to cut costs. He stated, “One of the primary objectives was: How do we reduce our spend?”
With many hospitals struggling to cut operating costs just to keep their heads above water, hospital CEOs are putting the squeeze on GPOs to provide a source of lower pricing. Jody Hatcher, President and CEO of Novation, said, “The hospitals in this country have placed an additional set of pressures on the GPOs they work with in terms of how they perform.” Not only do hospitals want GPOs to deliver price deals on medical supplies, but they want them to offer services and results. Those services include data analysis and supply-chain management services.
Todd Ebert, President and CEO of Amerinet, a GPO in St. Louis, commented that, “Data and analytics are extremely important to identify opportunities, not only to make sure that the customer is receiving the correct price, but to identify potential duplications and to identify therapeutic alternatives all the way to utilization and consumption.”
Congress Held Hearings about GPOs and Healthcare Innovation
GPOs are middlemen, and their relationship with health systems and government oversight is at times contentious. Congress scrutinized GPOs in 2002, raising questions about the potentially anticompetitive business practices of GPOs, such as col
lecting extremely high contract administrative fees. The Government Accountability Office (GAO) reviewed revised GPO codes of conduct and found that, for the most part, GPOs had improved transparency regarding contracting practices, but concerns remained about kickback oversight and other issues.
GPOs have substantial influence and market clout. According to the GAO study published in 2010, GPO contracts, on average, accounted for about 73% of non-labor purchases that hospitals made in 2009. There is also a concentration of power in the GPO industry. Although there are more than 600 GPOs in the United States, almost 90% of all hospital purchases made nationwide through GPO contracts in 2007 were handled by the six largest national GPOs, as ranked by purchasing volume.
The Health Industry Group Purchasing Association estimates that 98% of U.S. hospitals use GPOs to purchase products. It also notes that the average hospital that participates is a member of two to four GPOs.
More recent surveys suggest the same thing, with MedAssets, Premier, Novation, HealthTrust Purchasing Group, GNYHA Ventures, and Amerinet accounting for a cumulative purchasing volume of $724 billion serving 13,889 hospitals.
|Six Largest Group Purchasing Organizations (GPO)s in the United States|
|Rank by $s GPOs||Purchasing Vol.||Cum Purchasing Vol.||Hospital Memb.||Other Providers|
|MedAssets||$45 billion||$45 billion||4,000||90,000|
|Premier||$43 billion||$88 billion||2,500||76,000|
|Novation||$40 billion||$128 billion||2,835||53,032|
|HealthTrust Purchasing Grp.||$18 billion||$18 billion||1,482||8,422|
|GNYHA Ventures||$9 billion||$155 billion||250||16,000|
|Amerinet||$7 billion||$162 billion||2,822||53,078|
|Source of data: Published sources and Modern Healthcare|
Do GPOs Limit Ability of Clinical Laboratories to Choose Products and Vendors?
Because GPOs have contract relationships with specific vendors, it is argued that hospitals—and their clinical laboratories—are confined and limited by these GPO contracts. This can make it more difficult for hospital laboratories to test and invest in new technologies and competitive vendors. The GAO made this point when it pushed GPOs to set up a code of conduct.
In the 2010 GAO report, the authors wrote, “The six GPOs in our review reported their codes of conduct have resulted in the GPOs developing mechanisms to support the inclusion of innovative products on contract.” In response, some GPOs established forums so members could learn about new and innovative products. Another strategy was for GPOs to add provisions in vendor contracts that allow the addition of “innovative products when they become available.” The GAO report also indicated that, despite concerns about these issues, “GPOs’ provisions for adding innovative technology products are rarely used and have not had an impact on the inclusion of innovative products on GPO contracts.”
The important insight about the shifts underway in the GPO sector of healthcare is that GPOs are under pressure to deliver more value to their member hospitals and health systems. Over time, clinical laboratory managers and pathologists may learn that GPOs are willing to widen the number of national contracts they offer for laboratory analyzers, automated systems, and other lab supplies, for example.
At a minimum, GPOs are being forced to respond to the changing expectations of their member hospitals and health systems. That is why GPO executives are acknowledging the need for their organizations to deliver more value and service. It may also mean that GPOs will expand the number of products and vendors covered by national contracts as a way to offer expanded choices to their members.
—By Mark Terry