Testing the GPO waters: as competition for your business continues to increase, it may be tempting to abandon your group purchasing organization for a competitor. However, it's important to consider whether the savings presented can actually be realized

Healthcare Financial Management, June, 2004 by Martha A. Dula

Can't you feel 'em circlin', honey? Can't you feel "era swimmin' around? You got fins to the left, fins to the right, And you're the only bait in town.--Jimmy Buffet

Such is the helplessness many hospital and healthcare administrators are feeling as they deal with the current feeding frenzy of group purchasing organizations (GPOs) competing for their business. More than 800 healthcare GPOs operate in the United States, and lately a new one seems to enter the market every day.

Although changing your GPO can be tempting, you may discover through closer examination that the promised savings are not as they would seem. How can you determine whether an offer truly is a good deal, or whether you're simply getting caught in the "jaws" of deception?

To gain a true perspective on whether a change is right for you, consider the following:

* Context of the opportunity

* Character of those associated with the GPO

* Terms of the conversion

* Measurement of savings and availability of support

Context

When examining a GPO's offer, look at the big picture and see if your expectations regarding savings are realistic. For example, an offer of product savings between 10 and 15 percent should be suspect. Recognizing that the supply chain typically accounts for about a third of a healthcare organization's overall expenses and that pure acquisition cost typically accounts for less than 20 percent of the cost of the product in the hospital, it stands to reason that the possibility of saving 10 to 15 percent on what amounts to 20 percent of 30 percent of your operational budget may be too ambitious a goal.

In the same way, due diligence should be given to savings associated with pharmaceuticals. Industry staff sties show that roughly half of the supply budget is spent on pharmaceuticals. If your patient and volume mix force you to budget for a 9 to 14 percent increase in the pure cost of pharmaceuticals, then an offer to save 8 to 10 percent on all supplies will be unrealistic.

Setting reasonable budgetary goals for medical/surgical supplies, which account for the majority of the supply budget that remains after pharmaceuticals, also can be challenging. One frequently overlooked consideration is normal inflation. You should always ask the GPO's broker whether the projections and supporting audits presented have been adjusted for inflation. This adjustment is necessary because by the time you make the decision to change GPOs and get a new program implemented, your current GPO may already have discovered that the competing GPO has a few basis points price advantage and will make a correction with suppliers.

Also, pay attention to the supplier contract. Keep in mind that at any given time, one GPO may have a better price from a particular supplier. This difference can usually be attributed to GPOs having different start and end dates on supplier contracts. Therefore, savings for a particular item may vanish as soon as the contract rolls and pricing adjusts.

Character

Be cautious of the circumstances behind recommendations to switch GPOs. If an outside consultant is making the recommendation to switch GPOs or is performing a price comparison, then make sure the consultant is an honest broker. One way to discourage bias is to ensure a request for proposal is sent to all GPOs of interest. It is also important to ensure there are no economic ties or potential economic ties between your consultant and any other interested party such as a supplier, distributor, or another GPO.

To help gauge objectivity, ask about the results of the past five to 10 engagements the consultant has had with other hospitals. This information will reveal whether there are any patterns to the consultant's recommendations regarding GPO affiliation. In one instance, an integrated delivery system (IDS) paid a consultant $100,000 for a study on product price that concluded that there were no savings to be made in the acquisition component of the supply chain. Although this proposition was expensive for the IDS, it also indicates the organization had hired a truly honest broker.

Of course, consultants aren't the only sources of recommendations regarding GPOs. Pharmacy directors and materials managers also may suggest switching to a competitor. In the case of pharmacy directors, you are likely to notice that they don't spend a lot of time comparing prices among GPOs. In recent years, they have recognized that outsourcing product pricing for their entire program is a best practice. Pharmacists have come to learn that standardizing formulary and utilization can be more effective in reducing costs than chasing small savings. Purchasing departments still have a way to go in this respect. Financial managers should try to get materials managers to go beyond price. Ask how much the manager is planning to meet the budget through price reductions versus other cost-reduction efforts. These other efforts should account for 80 percent of the manager's time and activity. And most important, financial managers need to develop metrics. For example, measuring cost of supplies per DRG would be an ideal, measuring per discharge would be a start. If these numbers do not begin to go downward, or at a minimum stabilize, then the materials manager is not performing effectively.