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Who Will Do The Contracting in The Future – National GPOs, Regional Collaboratives, or Hospital Self-Contracting?

June 10, 2015


Over the years, it seems as if medical technology companies in the U.S. have had a love-hate relationship with national group purchasing organizations (GPOs). When a supplier gains a contract position with a major GPO, there’s often an internal celebration and press releases touting the “victory.” At the same time, many suppliers question the value GPOs provide and bitterly complain about the administrative fees.

The suppliers are not alone in their complaints. Many other stakeholders, including the US Congress, have questioned the role, objectivity, and value of GPOs. While GPOs certainly have had a long and controversial role in the healthcare supply chain, many other forces – such as hospital consolidation, maturing of the hospital supply chain, and transparency – are changing the nature of purchasing and the future of buying.

Will the national GPO buying influence decline further? Will regional buying groups and hospital self-contracting become a more powerful force in the healthcare supply chain? What are the implications for suppliers?


Buyer Leverage and GPOs Evolving Role

One of GPOs primary roles had been to aggregate purchasing across thousands of hospitals in order to negotiate better terms with suppliers. The aggregation approach worked well with supplies that were less differentiated, non clinician-preference items. In fact, a recent study indicated that 86% of GPO members use their national GPO contract to purchase 50% or more of commodity items.

While GPOs have been successful at aggregation for commodity items, most GPOs have been less successful with physician-preference items (PPIs), outsourced services, and with new technologies. For example, a survey of GPO members indicated that just 52% believe national GPOs negotiate excellent prices overall for physician preference items, and only 39% of GPO members use GPO contracts for 50% or more of their PPI purchases.

Can nimble regional buying groups and hospital systems have more control of member purchases? Will the maturing of procurement and supply chain capabilities cause hospitals to shun the transactional supplier relationships created by GPOs in favor of more value-creating relationships with suppliers?

Rise of Self-Contracting and Regional Buying

The definition of regional buying seems unclear and can take many forms. It can be an Integrated Delivery Network (IDN) of multiple hospitals and other providers, a joint venture between two or more IDNs, a collection of non-owned or affiliated hospitals – such as a state hospital association, or some other form. What is clear is that a number of forces are coming together to drive the buying through nimble regional purchasing collaboratives and hospital self-contracting. The forces include:

  1. Hospital consolidation: Hospitals and hospital systems continue to consolidate, create joint ventures, and expand across the care continuum.
  2. Drive to standardization: Providers are trying to reduce variation in clinical processes to drive out waste and improve outcomes. Standardizing supply items and reducing the number of suppliers should be a natural output of this effort.
  3. Maturing of hospital procurement/supply chains: As hospitals become more mature in procurement capabilities, expect a greater focus on: supplier-customer joint value creation efforts, a reduction in number of suppliers, and a more strategic approach to sourcing.
  4. Transparency to value: A number of entities are working on providing evidence-based data on the cost and outcomes associated with different supply items.
  5. Change in hospital spending: PPIs, outsourced services, and other supply areas – where national GPOs play less of a role – are becoming a larger portion of overall spend for many hospitals.
  6. Aligned incentives: Bundled payments and other pay-for-performance programs along with physician employment trends make it easier for hospitals to align the interests of physicians with the hospital in order to standardize care and supplies.

Who Will Do The Contracting in The Future?

A study of hospitals’ purchasing by researchers at Wharton might provide some perspective on the trend to regional buying and hospital self-contracting. According to the researchers, hospitals reported routing 70.6% of purchases through national GPOs in 2005. By 2014, purchases routed through national GPOs declined significantly to 55.9%. In 2014, the majority of purchases that did not go through the national GPO agreements were either self-contracted or purchased through regional buying group agreements.

Will national GPOs go away? It’s very unlikely. A number of large GPOs are adapting their business models and developing new services to better support providers as the reimbursement model evolves to value-based purchasing and accountable care. Also, GPOs and others are working on helping make hospital self-contracting more efficient and effective.

Besides, with $2.3 billion in annual fees collected from vendors, in the short-term, the large GPOs have the resources to create their own future. They can acquire businesses, fund new ventures, and otherwise find ways to stay engaged in the healthcare supply chain. Ultimately, GPOs will need to find new ways to create value as the market changes. It’s ironic that the suppliers, who frequently complain about the value of GPOs, are actually funding GPOs pivot to new business models.

The change in hospital contracting and purchasing behavior is definitely an interested trend to watch. For suppliers, carefully navigating this change will be important. With over a hundred regional buying groups in the U.S., many growing hospital systems, and national GPOs, having a clear pricing and contracting strategy is a must for suppliers that want to avoid margin decline, wasted sales resources, and frustrated customers.

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