Establishing the true value of groups - group purchasing organizations

Health Industry Today, June, 1991 by Teri L. Louden

What is the value of group purchasing organizations for their members, manufacturers and the industry?

This was the "50 million dollar" question raised during the medical-surgical panel on group purchasing organizations attended by 300 plus manufacturers at the recent Federation of American Health Systems annual meeting.

As the moderator of this nine-person panel of representatives from two manufacturers, two distributors, and five GPOs (one multi-hospital system and four alliances), I had a prime spot to hear the questions and comments from all sides, including the audience.

The value placed on GPOs varies depending on who you are talking with and which GPO you are talking about. Things are seen quite differently by each participant in the group purchasing triangle, which includes manufacturers and distributors, GPOs and member organizations.

Manufacturers have doubts

By now it appears that most manufacturers accept the fact that GPOs provide some value and are here to stay. At least it certainly would seem that way given the investment that has been and continues to be made by manufacturers in "national account" programs and personnel.

Despite this apparent show of support, comments during the Federation panel session reflected continued questioning by manufacturers about the value of many GPOs. From the manufacturer's perspective, the value of GPOs is typically measured by their ability to deliver member compliance to group contracts. The higher the contract compliance, the more the value the manufacturer perceives they receive from their GPO. Since owned systems typically deliver higher compliance levels, these are commonly seen as delivering the greatest value.

With compliance still not at desired levels for many GPO contracts, many manufacturers feel they are not getting value in return for payment of GPO's administrative fees. As a result, many manufacturers are beginning to talk about GPO contracts that would pay administrative fees based on only "new" business obtained (vs. all business) or on various levels of compliance. Another approach is to demand bilateral agreements, which are contracts signed by both GPOs and their members.

While most manufacturers still question the value of GPOs, some suggest that it depends on how the parties approach the situation. Those who focus on building solid, long-term relationships with selected GPOs are most likely to receive value in return; those who simply seek to "cut a contract" are not.

Building long-term relationships with GPOs could involve conducting special research of their members, developing customized value-added services, and working with them to develop and implement specific marketing and sales strategies to help maximize member compliance.

The recent trend of distributors providing stockless and JIT inventory programs adds an interesting twist. Will distributors have any say over GPO contract usage in these hospitals, and will they support GPO contracts or not? It is still too early to tell.

GPOs and members

GPOs believe they provide value by helping manufacturers enhance and expand their product sales through delivering on contracts, keeping members' medical product prices down, and providing various value-added services and forums for members to share information and problem solve. They also help the industry reduce overall costs by reducing medical product prices and keeping them from escalating.

GPOs also serve as an intermediary between manufacturers and their members. Hospital members most often trust their GPOs more than they do manufacturers, who they see as vendors. As a result, they are able to share and discuss confidential and other information with their GPO staff and with other group members.

While there has been some minimal switching among GPOs, most hospitals have continued to support one or more GPOs. Various industry surveys of hospital executives show they also support GPOs.

While manufacturers want to see committed purchasing volume returns, hospital executives look at factors other than purchasing savings, including:

* Sharing of management and operating data and information across members to help them better manage their facilities;

* Discounts on costly services such as insurance; and

* Sharing problems and insights with member hospital management groups (in essence, a club).

Even just in terms of the value of purchasing contract savings, what the hospital may see as sufficient volume and savings on their end may look insufficient from the manufacturer's viewpoint.

Given this dilemma, it seems that a number of solutions might exist to bring everyone closer together. Some GPOs have started to develop and enhance some of these approaches.

Premier Hospitals Alliance, for example, has an outside auditor conduct a value review for their members every year and publishes what they call a "value index." While this may be an extra expensive, it helps in quantifying a GPO's value for both members and manufacturers.

GPOs and their members need to come together to help establish their value if they want to continue to provide service through the financial support of manufacturers.