Evaluating group purchasing organizations - Focus Area: Business - Illustration - Industry Overview

Healthcare Financial Management, Jan, 2003 by Dennis C. Kaldor, Jamie C. Kowalski, Mark A. Tankersley

Group purchasing organizations "are at the nerve center of our healthcare system. Because they determine what products are in our hospitals, they directly affect patient health and safety. Because they control more than $34 billion in healthcare purchases, they impact the cost we all pay for our health system. Because they represent more than 75 percent of the nation's hospital beds, they are a powerful gatekeeper who can cut off competition and squeeze out innovation," Sen. Herb Kohl (D-Wis.), chairman, Subcommittee on Antitrust, Competition, and Business and Consumer Rights of the U.S. Senate Committee on the Judiciary, stated at an April 30, 2002, hearing on hospital group purchasing.

The business practices, finances, and vendor relationships of group purchasing organizations (GPOs) were scrutinized by the U.S. Senate, the General Accounting Office, and the news media in 2002. Critics decried anticompetitive conduct, conflicts of interest, and deals that were not in the best economic or clinical interests of the healthcare organizations represented by GPOs. The criticized business practices included the possible "locking out" of small, innovative product suppliers by GPOs; the personal gain of some GPO executives from stock ownership in companies with which the GPO does business; and the degree of competitiveness associated with sole-source, long-term (ie, five or more years) contracts. This scrutiny led to the development and adoption of a new code of conduct for GPOs.

As GPOs evolve, they are challenged with managing the benefits of their evolution and growth--commanding lower product prices than individual hospitals could achieve on their own--as well as the pitfalls and temptations of that size and power. Their hospital owners and business partners also have evolved, thus compelling them to reevaluate the structure of, relationship with, and value provided by GPOs.

Healthcare organizations that work with GPOs can achieve favorable prices on a range of supplies through economies of scale. Even though healthcare organizations may be satisfied with the savings achieved, they should periodically evaluate their GPO relationships to ensure that the GPO is providing the best possible value at a low total cost.

An evaluation of this sort can be complex and challenging. A thorough method looks at the financial, philosophical, and operational aspects of a GPO relationship. All of these factors are important in deciding about which GPO to use, how well the selected GPO is performing, and whether other, more valuable alternatives to the current GPO relationship exist.

GPO Evaluation Process

An effective way for healthcare organizations that have a GPO relationship to evaluate a GPO is to proceed as if making a new relationship decision. Doing so can avoid the bias associated with a current or past GPO relationship. Healthcare organizations that contract with more than one GPO for their supplies should evaluate each GPO independently.

The GPO evaluation process includes the following steps:

* Identify GPO-related factors that are important to the healthcare organization (see Exhibit 1);

* Convert those factors into criteria that will be included in a request for proposal (RFP), such as how contract compliance is achieved;

* Create and distribute the RFP to each GPO being evaluated;

* Review the responses to the RFP and the supporting data, including the market basket and other quantifiable elements, using an objective scoring instrument; and

* Provide and add the weighting factor to all scores to determine a comparative score and enable a uniform comparison.

Healthcare organizations that are affiliated with a GPO should conduct an internal assessment of the perceived current level of performance and service. Because the level of GPO service and performance awareness can vary significantly within the organization, the selection of individuals for opinion sampling should not be confined to administrative and material management staff. The opinion survey asks executives, managers, and selected clinicians for their opinions regarding various aspects of the relationship with the current GPO (see Exhibit 2, page 38). Because the survey uses a Likert scale, the responses can be easily scored and quantified.

The survey results can aid in the developing and weighting of criteria to be used in the RFP. The criteria typically can be grouped into one of three categories:

* Purchasing and financial services;

* Value-added services; and

* Corporate and operational relations.

Purchasing and financial services. Because the objective of GPO's is to help healthcare organizations reduce overall supply expenses, evaluating a GPO's ability to do that is critical. A financial analysis should consider the following:

* Item pricing relative to annual volume of items purchased;

* Costs to join, own, and participate in the GPO; and

* Cash returns from the GPO.

The approach used is to start with a market basket (a sample of about 400 of the products used by the healthcare organization) that represents a cross-section of high-volume, medium-volume, and low-volume products. Market-basket data need to clearly define each product included. Therefore, the description, manufacturer item number, unit of purchase/use, unit price, and annual volume should be provided for each item to ensure an apples-to-apples comparison.