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The power of group purchasing has been diminished

Posted Jan 13 2010 10:05am

by John Cunningham

Group purchasing in healthcare continues to be under scrutiny from lawmakers in Washington, but as a senior supply chain officer, I don't understand what the noise is all about.

Lawmakers have become convinced that GPOs restrict the provider's choice and ultimately dictate what providers can select and use. This could not be further from the truth.

Yes, GPO members are encouraged to purchase on the GPOs contracts in order to get the best value. But providers will still make choices outside of the GPO contract portfolio when it is in the provider's best interest to do so.

If anything, the value that GPOs provide to their members has been diluted over the past decade, due to pressures from manufacturers, suppliers, and their related industry associations.

In the first decade of 2000, lawmakers forced a dramatic change in the way healthcare providers and their associated organizations contract for goods and services. In the course of doing so, providers have spent time and money analyzing and comparing group purchasing organizations, and GPOs have spent time and money adapting their business model to suit the lawmaker's demands. Meanwhile, the cost of goods continues to rise.

Since being villainized, contracting practices of commitment, compliance, and single-source have been replaced with softer programs such as voluntary participation and multi-source contracts. This has dramatically changed the value proposition of group purchasing.

Contracting is all about market leverage and when a group goes to market but cannot take with it the commitment of its members, the resulting value of that group's contract is greatly diminished. Simply, it is basic business strategy for the supplier, in order to offer their best price to a group there must be the certainty that the group will deliver to the supplier growth and market share.

So with the diminishing value of the GPO in contracts and pricing, groups have begun to diversify their offerings in order to create new or replace lost value. A look inside many groups today, as compared to a decade ago, results in an almost unrecognizable organization and set of resources, human and technological.

The more recent diversification of the GPO's offering has now come under similar legislative scrutiny as the contract practices did early in the previous decade. Lawmakers are now asking the GPOs to explain their new business ventures, the funding involved in developing and marketing these ventures, and the subsequent cost to healthcare providers.

After many years in the provider setting, I had the opportunity to work within a group purchasing organization and from that experience, gain a deeper understanding of the value proposition to the provider as well as the infrastructure and resources required for the group to add value to its members and compete in the marketplace.

Here's what I know: GPOs and the contracting practices of commitment, compliance, and single source reduce supply and services expenses and drives competition and innovation at lower costs. And here's what has been proven: Volume aggregation by groups or large delivery networks has saved billions in healthcare spending in the U.S.

Bottom line: lawmakers have spent a great deal of time and effort on an issue that pales in comparison to healthcare issues such as data standards, tort reform, self-referral, and industry conflict of interests.

John Cunningham is VP, acute division, supply chain operations at Universal Health Services, Inc. He has extensive experience turning around and leading hospital supply chain operations in some of the nation's leading academic medical centers and large integrated delivery networks. In addition to his current position with UHS, John is also a member of the adjunct faculty in the Drexel University School of Nursing and Health Professions and served in the United States Navy.

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