The many faces of regional purchasing coalitions
Editor’s Note: The participation of those in the following article does not constitute an endorsement of the sponsor’s products or services.
ATLANTA, GA–They may be located close to each other, but then again, they might not. They might comprise just a handful of hospitals or IDNs, or they might encompass dozens … or hundreds. They might stick to contracting for commodity items, but they might go straight for physician preference items and purchased services. They might swear allegiance to a national GPO, but they might go it on their own. They might focus on contracting for supplies and services, but then again, they might set up reference labs or blood banks. They might be set up as a legal corporation, or they might be very informal, whose only foundation is a firm handshake.
Get the point?
The fact is, regional purchasing cooperatives are a difficult species to pin down. They’re even difficult to name. Some call them national purchasing coalitions, others independent regional networks. But they’re out there, and it would behoove contracting executives as well as manufacturers and distributors to learn as much as they can about them. Shedding light on RPCs was the intent of the recent 2010 Hospital Purchasing Coalition Seminar in Atlanta, Ga., hosted by the Journal of Healthcare Contracting.
“We weren’t trying to answer every question that providers and suppliers have about regional purchasing coalitions,” says JHC Publisher John Pritchard.
“There are too many variables. But we did raise issues, and we gave everyone who attended the tools they need to start exploring and participating in this growing segment of the market.”
And the segment is indeed growing. JHC data shows that as many as 125 regional purchasing coalitions exist in the United States today. Eighty-six are closely aligned with a national group purchasing organization, while the rest are largely independent.
“Years ago, IDNs found that the ability to move the business was more powerful than the huge aggregated volume of the national GPOs,” said Pritchard, in his remarks to the audience. “Regional purchasing cooperatives began to form to emulate the IDNs’ success, but on a regional collaborative basis.
“My prediction is that they will be sustainable and successful only if they can maintain the same kind of loyalty – and contract compliance – that the early purchasing groups had.”
The following pages include highlights from this first-ever event focusing on regional purchasing cooperatives.
RPCs: Back to the Future
Today’s regional purchasing coalitions may look like new players in the supply chain, but they bear a striking resemblance to the local and regional group purchasing organizations of the 1960s and 1970s, according to GPO and national accounts consultant Bud Bowen, former president and CEO of Amerinet. In fact, he titled his remarks “Back to the Future.”
As late as the early 1960s, hospitals were primarily community-based, independent, stand-alone entities, Bowen pointed out. Purchasing agents were less concerned about cost and more concerned about getting products to the doctor when he (and most were male) wanted them. “Purchasing agents rarely got fired for failing to get a good price, but they did get fired for not getting product to the doctor when the doctor wanted it,” said Bowen, who at one time was director of a Rhode Island-based purchasing group called Haricomp.
In the 1960s and 1970s, many state and metropolitan hospital associations created group purchasing programs, said Bowen. These groups not only yielded better pricing than the hospitals could get on their own, but they also provided forums for local purchasing professionals to get together and talk about products, taking care not to violate antitrust rules. Back then, hospitals didn’t compete with one another, so these sharing sessions were wide open, said Bowen.
A New York-based organization called the Hospital Bureau created a template for state/regional purchasing groups, and contracted with many to organize and run their programs. Two things emerged, said Bowen. The first was the concept of committed-volume contracting. The second? Administrative fees.
In these early days, participating hospitals viewed these local programs as theirs, said Bowen. They were loyal to the group, and in fact, they felt pressure from their peers to support it. “They realized that if they banded together and acted as a single entity, they could do great things,” he said. “When suppliers would occasionally try to break things up or drive a wedge between them, they were not successful.” When these groups were performing well, they moved business.
But two things occurred in the mid-1980s that changed the face of group purchasing. In 1983, DRGs were introduced, and hospitals gained a new awareness that “maybe we ought to pay a little more attention to what we’re paying for products,” said Bowen. The second – and perhaps even more critical – event was the creation by VHA of the VHA Supply Company, a national purchasing program that also incorporated authorized distributors and what was a then-unheard of “cost plus 7” distribution contract.
Bowen recalled the day when his boss took a phone call in which he learned that Haricomp’s biggest member – Rhode Island Hospital – had just joined VHA. “He turned white,” Bowen said. “Rhode Island just told us they’re going to pull all their purchasing out of our group and go to VHA,’” he told Bowen. “It was 40 percent of our volume. And this decision came up from up top, not from the purchasing people.”
The hospitals that joined VHA felt they had more in common with each other – despite the fact that they were located in different parts of the country – than they had with the hospitals in their own cities or states, pointed out Bowen. And VHA also got pricing that was 20 to 30 percent lower than what the local groups were getting in some product areas. “We were stunned,” recalled Bowen. “So overnight, the business went away. All the regional and state groups got hit the same way.”
From the mid-1980s through 2000, other national groups emerged, including American Healthcare Systems, MedEcon Services, Amerinet, Consorta and others. Big for-profit groups followed. And, realizing they couldn’t compete with these giants, the local and regional groups either disbanded or, more commonly, affiliated with one of the nationals.
But a strange – if predictable – dynamic occurred. As the national groups got bigger and bigger, local purchasing people came to feel less and less of an integral part of them. “They became disenfranchised,” said Bowen, despite the national groups’ efforts to involve local people in contracting decisions. “There was a loss of local group pride and loyalty,” he said. As a result, many purchasing professionals came to view their national GPO as just another vendor.
Retrenchment
Now for the “back to the future” part of the story: In the early 2000s, sensing that the big GPOs were relying on sheer numbers rather than the ability to move business as a way to get better pricing, IDNs sensed an opportunity, said Bowen. They felt that they could outperform national GPO contracts based on their ability to move market share. “It took awhile for national GPOs to accept this phenomenon, but it was foolish to force our members not to contract on their own,” he said. Amerinet was the first GPO to create a program to accommodate IDNs.
Regional purchasing coalitions are the next step in the evolutionary process, said Bowen. “If the large IDN in town can get better pricing, why can’t we as 10 hospitals [in an RPC] do the same thing?” he said.
“Will they last?” he asked. “It all depends on whether they move the business.” RPCs will face a tough battle, because GPOs and IDNs have spent a decade or two whittling suppliers’ margins. “There’s not as much to play with,” said Bowen. And suppliers may resist yet another player asking for a favored pricing tier. “Suppliers are ‘to here’ with being hit up for better pricing,” said Bowen. Only if RPCs can demonstrate “legitimate incremental value” will suppliers respond with price cuts. And that value can only come in the form of market share shifts.
The jury may be out as to whether RPCs can garner better pricing. But there’s little doubt that they will re-engage purchasing professionals, who once again have the chance to sit around a table with peers, feel loyalty to a program, and come away with the feeling, “This is our program; we want to make it work,” said Bowen.
Healthcare Purchasing Alliance: A class of its own
Healthcare Purchasing Alliance is in a class of its own. A non-profit cooperative serving facilities in central Florida, HPA comprises Orlando Health (a seven-hospital IDN whose flagship is Orlando Regional Medical Center) and two hospitals that are not part of the IDN.
What makes HPA somewhat unique is that it is not owned or tied to a national GPO, said Rosaline Parson, corporate director of supply chain services for Orlando Health. “We are a true self-contracting arm.” In addition, the group is self-distributing, and it is not afraid to tackle physician preference items.
“We drive compliance,” said Parson. “We’re small, so we can do that. If one hospital decides it wants a particular piece of equipment, we get all facilities to agree on that. So when [suppliers] contract with us, we let [them] know upfront who will participate.”
The fact that Orlando Health self-distributes “lends itself to the compliance picture,” she said. That’s because the IDN has a need to minimize the number of SKUs in its warehouse. “You won’t see two or three items on our shelves that do the exact same thing,” she said. To minimize SKUs, Orlando Health tries to ensure that the same products are used in all care settings – acute-care beds, physician practices, ambulatory care centers, clinics, etc. “That will drive compliance,” said Parson. “But standardization is a dirty word for most clinicians, so we look at it as proper utilization. Are they truly using what the particular care environment requires?”
“The strength of our model is that we can leverage our internal technology,” she continued. “We have one item master, meaning we can control product entry into the system. And we’re 95 percent automated with EDI transactions.” HPA is flexible when negotiating with suppliers. “But on the other hand, what we’re saying [to suppliers] is, ‘If we can drive compliance, what’s that worth to you?’”
Because many members of HPA’s contracting team have clinical backgrounds, the RPC isn’t afraid to tackle clinical product areas, said Parson. “That’s where a small co-op like us really excels,” she said. Where possible, the group rewards departments for using contracted items by giving back to them vendor rebates or other growth incentives. “It helps them understand that contracting is not a ‘them against us’ thing. It builds a bridge between the clinical and business environment.”
One final note to vendors: HPA holds them accountable for claims that a product yields superior clinical outcomes. “The days of suppliers telling us their product deserves an upcharge because it affects patient outcomes are over,” she said. “Now, you need to prove it.” In fact, HPA has begun revisiting products three to six months after contracts are signed in order to determine whether in fact they have helped clinicians achieve the outcomes that had been promised. Vendor scorecards – which are shared with contract vendors – note how HPA members view the product and vendor’s customer service offering.
WNC Health Network: A GPO married to a GPO
WNC Health Network in Asheville, N.C., represents 50 healthcare systems with a collective annual budget of about $1.2 billion. The RPC was created in 1995 to explore collaborative opportunities among the hospitals of western North Carolina. Today, it not only has a contract portfolio, but some shared initiatives, such as the WNC Data Link, which allows authorized physicians and clinicians to view a patient’s electronic records across all WNC hospital systems.
“We call ourselves an IRN – independent regional network,” said Robin Lincoln, director of group purchasing. “Our Premier relationship is critical,” she said. “We’re a GPO married to a GPO.”
A 501(c)(3) corporation, WNC has negotiated contracts for commodities, capital equipment and physician-preference items. Most of those contracts are multisource. “When representing 50 systems, the opportunities to go to single-source are few and far between,” she said.
At press time, WNC was investigating pharmacy and lab contracting, in addition to contracting for such services as banking and human-resources benefits. “We also see potential in the continuum-of-care market,” said Lincoln.
“We realize that there’s no cookie cutter approach to contracting,” she said. “Each category carries its own ‘DNA.’ We try to be versatile. Our focus is on our hospitals’ needs, and they’re constantly changing.”
Although low prices are important, WNC recognizes “a great deal of opportunity in utilization and best practices,” said Lincoln. “We have learned that data is critical, and that it must be accurate and complete,” she added. “It’s also important to have a knowledgeable staff to interpret that data.”
Colonial Regional Alliance: Knowledge leader
Colonial Regional Alliance has a simple value proposition for suppliers: “In a group of organizations, the volume doesn’t matter as much as the commitment,” said Executive Director Steve Carpenter. “The more committed we are to you, the more we expect from you.”
Colonial was formed as an LLC in 2006, but its roots lie in the informal networking of a group of like-minded materials executives, explained Carpenter.
“We’re one of the smaller alliances,” he said. “And that’s by design, at least at this point. Our board sees value in getting all eight owners around the table and moving forward on something, together.”
Like many regional purchasing coalitions, Colonial has focused on driving down prices, leveraging its ability to drive market share to obtain better pricing on (primarily) Premier contracts, said Carpenter. And the RPC will continue along that vein, with renewed energy. “The economy has been a great motivator,” he said. “Things that were off the table a few years ago are now open, including a regional reference lab.”
But Colonial is looking at the next phase of its development. Key questions include, “How do we maintain relevance and value to our members?” and “How do we create size and scale in ways other than purchasing?” The answers, said Carpenter, lie in using the expertise of its vendors, Premier and its own members to develop best practices. “We’ll always have the economic mission, to help our members get greater value working as a group,” he said. “But the new statement of value for us [lies] around knowledge and best practices.”
One possibility is working as a group on clinical trials. The regional reference lab is another. And Carpenter is creating an HR committee to explore best practices in human resources. “So we’re trying to think about how we can be more holistic in what we do.”
South Florida Regional Coalition: Aggregation at the local level
With $240 million in annual spending for supplies, Baptist Health South Florida is the largest non-profit organization in Miami/Dade County. With five acute-care hospitals and a sixth under construction, Baptist is a loyal Premier shareholder. It is also part of a loosely organized RPC called the South Florida Regional Coalition, comprised of Premier owners and affiliates in South Florida.
“We take our stewardship role of Premier very seriously,” said Frank Fernandez assistant vice president materials management, Baptist Health South Florida. “So we see our regional coalition as an extension of the GPO. It’s not an adversarial relationship, but rather, an extension of the GPO to drive additional value for our members, and our suppliers and manufacturers.” It’s all about aggregation at the local level, he said.
Located within a 50-mile radius, the South Florida coalition is a “very nimble organization,” said Fernandez. “We look at aggregating volume and increasing [suppliers’] market share.” The coalition deals primarily with existing Premier contract vendors, but only those who can clearly present the value they can bring in exchange for high levels of participation and compliance.
The coalition has two Premier employees, whose salaries are funded by the members of the coalition. One focuses on clinical products, the other on construction. “We have a strong facilities program,” said Fernandez. “Our hospitals are constantly being upgraded; construction is always going on.”
“They do the heavy lifting,” said Fernandez, referring to the Premier employees. They do the research and facilitate committee meetings, two tasks that are an integral part of the contracting function.
Important to South Florida’s program are the business reviews it conducts with its contract vendors. During these sessions – which are called for at the time the contract is signed – the vendor and provider sit down to review the performance of the contract as well as opportunities for further product introductions.
Non-Premier contract vendors have opportunities with South Florida as well, said Fernandez. And if South Florida realizes value from such vendors, it will bring the technology to the attention of Premier, so it can consider writing a national GPO contract. “This has changed the dynamics of how we deal with suppliers,” he said.
Despite its successes and the fact that the South Florida consortium is a relatively compact organization, with a great deal of camaraderie, it does face challenges in writing contracts for all its members, said Fernandez. The biggest challenge is presented by the misalignment of contract start-and-stop dates.
“We have a lot of legacy agreements in place,” he said. “Sometimes it’s difficult to make a decision to implement a contract if my expiration date is 18 months from now, whereas somebody else’s is six months.”
ROi: All about control
ROi’s supply chain strategy is simple: It’s all about control. Control of contracting, control of distribution, and even control of the sourcing of goods. It’s that desire for control that has made ROi (whose full name is Resource Optimization & Innovation) the eighth largest GPO in the country, with 400 contracts, said Vice President Larry Dooley. Is ROi a regional purchasing cooperative? It’s more than that, said Dooley.
ROi is an operating division of the Sisters of Mercy, a healthcare system headquartered in St. Louis, Mo. Sisters of Mercy has 26 hospitals in four states – Missouri, Oklahoma, Kansas and Arkansas. Supply chain is part of the IDN’s culture, said Dooley, as witnessed by the fact that Lynn Britton, once a materials management director for the IDN in Oklahoma City, is now president and CEO of the entire Mercy system.
ROi sources products internationally, and has even created its own private label brand, called Regard. It sponsors “group buys” across multiple categories, and it is the largest provider-owned manufacturer of custom procedure trays, according to Dooley. That means ROi is interested in buying bulk nonsterile goods as well. “We’re a distributor, a pharmaceutical wholesaler, and we’re in the transportation business,” he added, noting that ROi trucks backhaul products for other firms, some not even in the healthcare business. “We’re a provider, and we have our own insurance company. So we go way beyond contracting.”
But contracting is an important part of the picture, and ROi believes it has a lot to offer vendors – market share. Having a single master item file helps. “Any non-contract pricing quickly becomes visible to everybody,” said Dooley. What’s more, ROi offers a single point of negotiation to vendors. “We negotiate once, not again.” ROi offers vendors one set of terms and conditions and one single authority for letters of commitment. “When we make a decision, all of our stakeholders are involved. We get complete support.”
ROi tries to go beyond contracting for lowest price, said Dooley. “We want to be the lowest-cost customer,” he said, speaking to suppliers. “We want to talk to your finance people, operations people, manufacturing people. We want to think outside the box about how we can help you lower your costs, and share in some of the savings. And we want to challenge you to think out of the box. We’re open to behavior modification. We want to know what we need to do [to be the low-cost customer]. We don’t want to pay for other people’s inefficiencies.”
Nor does ROi want to subsidize suppliers’ inefficiencies, said Dooley. He questioned why – after ROi has signed a big contract with many dollars on the line and is delivering market share – some vendors still must place scores of salespeople in Mercy facilities. “I’m not saying sales folks aren’t needed,” he said. “But in our model, we need more clinical folks.” Dooley suggested that vendors train Mercy clinicians to do some of the training needed for more clinically oriented products. If vendors are not willing to do so, the question remains, Are all those sales reps in place to upsell Mercy clinicians? “Is that good for [suppliers]? Yes. But is it good for us?”
Yankee Alliance: A sense of camaraderie
Yankee Alliance is a family of three companies. One is focused on transformational learning (sharing of best practices, performance improvement, etc.); the second is focused on providing group purchasing and supply chain management services to more than 40 acute-care hospitals; and the third provides supply chain management services to non-acute-care facilities, including imaging centers, long-term-care facilities, assisted living centers, etc.
Yankee Alliance is a Premier member with 5,500 acute-care and non-acute-care members, representing $1.6 billion in purchasing volume. The majority of its acute-care hospitals are in the New England and the Mid-Atlantic states. Yankee also has field staff in various locations around the country.
“Education is important to us,” said President and CEO Jim Oliver. In fact, Yankee offered more than 100 educational sessions last year, mostly through the Web. The organization is also strong in labor benchmarking; and it collects purchasing data from many of its members for comparative analysis. In addition, Yankee is “very involved in utilization,” added Oliver. Members come together to share how they use various products, in an effort to optimize utilization and reduce waste. In one project, Yankee members looked at their usage of IV administration sets.
Whenever possible, Yankee Alliance’s contracting executives try to aggregate volume across all classes of trade. The organization presented $65 million in savings opportunities to its members last year. And it is unique in that few of its members compete with each other. “That makes for great sharing,” Oliver said. “There’s a real sense of camaraderie in our organization.”
Although Yankee does have the ability to go off contract, it prefers not to, said Oliver. “We want to ‘stay on the reservation,’” he said. In other words, Yankee prefers to use Premier contracts whenever possible.
Altus Management: Much more than a GPO
Altus Management LLC – formerly Western New York Purchasing Alliance – has taken a different course from other regional purchasing coalitions. A relatively compact RPC, 90 percent of its volume lies within a 20-mile radius.
Six years ago, Western New York got its start with a team of Premier employees, using Premier as its national GPO. “We started amalgamating volume in the Buffalo region, driving better prices, predominantly on physician preference items,” explained CEO Kevin Connor. But as the RPC grew, its founders grew to believe that its interests would be best served if the team were independent, not employees of the national GPO. So five years ago, the organization became independent.
Soon after being launched, the RPC started tackling big projects, such as orthopedics and cardiac rhythm management products. But that was only the beginning. “Our board said, ‘We like the purchasing you’re doing, but we want to see what you can do beyond that to drive value for our hospitals and the community,’” explained Connor. And the demands were bold. “They wanted us to build a regional laundry,” he said. So, Altus consolidated its members’ laundries in a building in Buffalo, bringing 140 jobs to that community. “A hundred and forty jobs is a big deal for Buffalo,” he said. Next was a blood bank. In fact, Altus recently celebrated the third anniversary of the operation, which collects 67,000 units of blood for its hospitals, saving them much money in the process. “So what started out as just a group purchasing organization quickly became more,” said Connor.
And it didn’t stop there. Altus’s members directed the management team to look into nuclear medicine and radiopharmaceuticals. So Altus acquired a nuclear pharmacy from the University of Buffalo, which Altus manages. And it started a vendor credentialing company called VeriREP. As if these endeavors weren’t radical enough, Altus is 100 percent funded through the revenues generated by the companies it has formed, not administrative fees.
Catholic Contracting Group: National in scope
Catholic Contracting Group differs from most RPCs in that it is not regional at all, but national. “We go as far west as California, as far east as Maryland, as far north as St. Louis and as far south as Paducah, Ky.,” said Calvin Wright, vice president, supply chain, Catholic Healthcare Partners, one of CCG’s members. “I would consider us a national purchasing collaborative.”
CCG comprises five of Premier’s largest Catholic health system members: Bon Secours Health System, Catholic Healthcare West, PeaceHealth, SSM Health Care and Catholic Healthcare Partners. Including their affiliates, that is about 200 hospitals. Together, they represent about 10 percent of Premier’s purchasing volume, spending about $2 billion in supplies every year. One thing that binds them is their Catholic identity. “We have the same mission and values – providing services to underserved communities,” said Wright.
Invoking a theme of importance to RPCs, Wright said that each of CCG’s participating members has consolidated their supply chains from an information-systems point of view. “We can consolidate data quickly, and we can make decisions based on that data very quickly,” he said. “We can measure our contract performance and compliance, and we’re able to give the supplier real-time results. We believe we can move the business quickly, and we’re empowered by our CEOs to make decisions on behalf of our organizations.”
Favorable pricing is just one value that CCG brings it members, said Wright. The other is what he called “shared learning.” If one member explores a certain supply-chain-related area – for example, purchased services – others may learn from them. The result can be more efficient contracting, perhaps even a CCG contract.
Formed five years ago, CCG has written contracts for many commodities, “but we’re starting to move into some controversial areas,” Wright said. At press time, CCG was looking into pursuing contracts for purchased services, including staffing, temporary labor, environmental services and food service. Its goal is that in three years, 25 percent of its purchases will be using CCG contracts. “Some physician-preference areas will be difficult,” he acknowledged. “But we’ve seen significant value in the contracts we’ve been able to do together.”
“Premier has been very supportive,” said Wright. In fact, CCG Executive Director Mike Maguire is a Premier employee. Premier provides a lot of analytical work, which allows CCG to evaluate contract opportunities, he added. In turn, CCG is very supportive of Premier. “We know the problems [we can cause] Premier by going off and doing our own thing.”
Wellmont Health System: Advice to suppliers
The supply chain has typically been defined as a tactical function in hospitals and IDNs. But today, providers need to consider it a strategic weapon. And vendors can make a huge difference in making that happen, according to Brent Petty, corporate director, supply chain, Wellmont Health System, Kingsport, Tenn., an IDN spanning northeastern Tennessee and southwestern Virginia.
For starters, suppliers need to help contracting executives understand exactly what their product or service does, and they should do so in simple language, said Petty. “Data is key,” he said. “It has to be simple, measurable and repeatable.”
Second, suppliers can help providers in the charge capture process by providing data to support charges for the supply or process in question, said Petty. “Do you talk [to the provider] about your products and how they’re reflected in [the provider’s] reimbursement?” he asked the suppliers attending the RPC conference. “Are you helping your hospitals get paid? Are you paying attention to their revenue cycle?”
Third, suppliers should help providers tackle utilization issues. “Utilization is our next biggest key to driving cost out of the process,” said Petty. For example, vendors should stand shoulder to shoulder with contracting executives while the latter navigate these difficult waters with their clinicians. “We’re talking to our orthopedic surgeons about bone cement,” he said. The tough question is, Why do some surgeons use more cement in their cases than others? “You should be helping us with that [discussion],” said Petty, speaking to the suppliers. “Price is still huge,” he said. “But we also need to be focusing on product and process utilization.”
Fourth, suppliers should be sharing industrywide best practices with their customers. Why? Because suppliers have a broad view of how different facilities and clinicians practice medicine. “When you find a best practice, you need to share it with us,” said Petty. It helps if the supplier can pair up customers with institutions with similar characteristics, even if they are in different parts of the country.
Fifth, suppliers need to work with their customers to align their processes, so they’re not working against each other, said Petty. For example, rather than working around the contracting team in an effort to get a new technology into the IDN or RPC, the supplier should check in with the supply chain team, and together, they can work with physicians and other clinicians on getting new products evaluated.
Sixth, suppliers should work with their customers to measure compliance to a contract, said Petty. “One big element of the contracting piece is to finish strong,” he said. Many vendors and customers are proficient in implementing new contracts. “But I don’t see a lot of ways they are ensuring sustainability in them,” he said. “Are you coming back eight months after the contract has been signed to see if it has been eroded by your competitors? Do you know if it’s been picked apart? And what is the hospital, GPO or RPC doing to defend your business? Do I have a reason to defend your business?”