IDN-owned GPOs: A time and a place

Group purchasing organizations – like the supply chain executives who belong to them – have learned how to adapt to changing markets over the years. Starting out as metropolitan or state hospital councils, they evolved into regional and then national organizations.

Underneath those big national branches then sprouted IDNs and later, regional purchasing coalitions, many of whom pursued their own contracts. However, relatively few of those IDNs or RPCs have gone through the process of seeking a green light from the Office of the Inspector General of the U.S. Department of Health and Human Services to operate as GPOs.

That green light, in the form of an OIG advisory opinion, allows an entity, such as a GPO, to collect administrative fees from contract vendors without running afoul of the anti-kickback statute. The statute makes it a criminal offense to knowingly and willfully offer, pay, solicit, or receive any remuneration to induce or reward referrals of items or services reimbursable by a federal healthcare program. (In short, no bribes.)

Given the legalities, as well as the expense of setting up a GPO, it’s not likely that many IDNs will set up formal GPOs. That said, the industry can expect many hybrid approaches to group purchasing to appear in the future, according to those with whom the Journal of Healthcare Contracting spoke.

Admin fees
Tomorrow’s GPOs will come in many forms, “from full-blown, self-contracting entities like [St. Louis, Mo.-based] Resource Optimization & Innovation (ROi) or [Fort Myers, Fla.-based] LeeSar, to hybrids, which use their major GPO partner to help create a quasi-GPO for certain categories,” predicts Ken Kuiper, partner, Medical Strategies International, a national accounts consulting firm. Another possibility are joint ventures, such as Excelerate, which includes Cleveland Clinic, Vizient Inc. and OhioHealth.

There are many reasons why forming a GPO may be an attractive option for an IDN. After all, who wouldn’t want to convert a cost center (i.e., supply chain) into a profit center?

“I think many of the IDN-owned GPOs are coming about as an overall strategy by the organization to gain control over as much of their supply chain and purchased services as possible,” says Kuiper. “The more you control, the more you can set up your information systems to help with compliance, standardization and utilization information.

“Also, utilizing their own GPO brings all of the administration fees directly to the IDN, instead of them getting a ‘share’ of them based on compliance to their GPO contracts. This adds up to some substantial revenues that can be used for the needs of the organization. It also allows for these self-contracting organizations to focus on categories that are important to them at the time they are important. They don’t have to follow their national GPO’s bid calendar.”

IDNs operating their own GPOs can contract for products in areas in which they want to – and are able to – drive compliance, Kuiper continues. IDN-owned GPOs “are also more flexible in their operation and structures, and may be able to look at new technologies and ideas quicker than a national group can.”

IDNs or hospital groups that have set up a self-distribution model are probably best-suited to create a GPO, says Kuiper. That’s because, having invested in resources for self-distribution, they can more easily justify the cost of adding a contracting component.

Regional purchasing coalitions are also well-positioned to incorporate a GPO, he says. “They can still leave the distribution choice up to each aggregation member, but they have even more incentive with their own GPO to drive compliance to drive down costs and receive all of the administrative fees.”

Speaking of cost
But the key question, says Kuiper, is whether an IDN can manage a GPO profitably, that is, without eating into all the administrative fees it may collect. After all, the costs associated with operating a GPO – particularly in FTEs and information systems — are sizable, he says.

“It’s not just a matter of having a contract on a product or selection of products. They want to be able to look at data and see what can they do to drive costs down even further,” he says. Information systems can help them identify noncompliance to contracts, or wasteful utilization issues. But identifying and then acting on such information is easier said than done, says Kuiper. “That’s why most IDNs end up using the resources that the group has. Even if the GPO doesn’t have those resources, there are other companies that can provide them.”

Corporate accounts executives treat IDN-owned GPOs just as they do any GPO, says Kuiper. “You try to understand the needs of the GPO and the members involved, as well as their timing for looking at the products or services you represent.

“One thing I like about self-contracting or regional GPOs is [the fact that the vendor] “can more easily figure out the key clinical and supply chain decision-makers within these systems. This in turn allows a supplier’s sales team to be more focused and targeted as they consult within the system on the value of the products and services they provide.”

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ROi: Commitment is the thing

From the beginning in 2002, Mercy intended that its supply chain organization — Resource Optimization & Innovation (ROi) – would include a group purchasing component, says Greg Firestone, vice president, strategic customer relations for ROi.

“Based on Mercy’s success with writing competitive local contracts, we had a good indication that Mercy’s volume and willingness to commit would result in more competitive contracts than a national GPO, and these predictions proved to be true,” he says. In 2011, ROi and Mercy made the decision to commercialize its GPO offering, along with its self-manufactured custom packs and private-label portfolio.

Today, as a provider-owned Accountable Supply Chain Organization™, ROi provides a range of cost management and supply chain services, focusing on all aspects of supply chain, from planning through fulfillment and consumption, according to the organization. ROi serves 240 hospitals and 2,800 non-acute facilities.

ROi has managed to create a successful and profitable supply chain organization because of its size and commitment level, says Firestone. Not every IDN can do the same, though. “Ideally, an IDN’s annual spend volume should be greater than $500 million, and the IDN would need to be in a position to commit and achieve high commitment levels to suppliers,” he says.