Regional GPOs work to offer value, services that their national counterparts often don't provide

by Shawn Rhea courtesy of modernhealthcare.com

When regional group purchasing organizations consolidated into a handful of national groups throughout the 1980s and '90s, the moves were largely based on a belief that healthcare providers leverage better pricing when large organizations band together to contract with suppliers.

But recent efforts by organizations such as the Colorado Hospital Association, Illinois Hospital Association and a group of providers in Kansas and Missouri to establish new regional GPOs suggest a growing number of healthcare providers are finding value in the nimbleness of smaller groups that share more aligned purchasing and supply-chain goals.

“When you boil down to the local level, we make every attempt to create a face-to-face relationship with our customers in a way a national GPO might not be able to,” says Jerry Welsh, president and CEO of Hospital Purchasing Service, a regional GPO serving 128 hospitals plus 1,100 alternate sites such as nursing homes and physician offices in the Great Lakes area.

Bob Meling, senior vice president and chief operating officer for Associated Purchasing Services, a regional GPO that serves 122 hospitals and nearly 400 alternate-site facilities in Kansas and Missouri, offered similar perspective. “A lot of the hospitals outside of the Kansas City area are critical-access with 25 beds or less,” he says. “The nationals can't afford to do hands-on servicing of those facilities. Our people are willing to drive seven hours to sit down and walk them through the contracts and make sure they're getting savings.”

Such enhanced service opportunities are part of the incentives driving the creation of regional GPOs in areas where providers see a chance for greater savings and supply-chain efficiencies through local affiliations. While none of the newly established regional GPOs Modern Healthcare spoke with was far enough along in development to submit a response to our 2009 Group Purchasing Survey, four of the 11 GPOs that did participate in the survey were regionals: Mid-Atlantic Group Network of Shared Services, Hospital Purchasing Service, Associated Purchasing Services and Resource Optimization & Innovation.

As in previous years, Irving, Texas-based Novation ranked highest in purchasing volume among the GPOs that reported this information. Members of that organization bought nearly $35.8 billion in contracted healthcare supplies and services in 2008 and are expected to buy just under $36 billion in 2009. Resource Optimization & Innovation, which ranked fifth in purchasing volume with members buying $580 million in contracted goods and services in 2008 and expected to buy $652 million in 2009, ranked highest among the regional GPOs reporting in this category.

With 750 hospitals among its membership, Mid-Atlantic Group Network ranked highest among regional GPOs in the hospital membership category and came in fifth overall based on the number of hospitals. Novation again reported the highest GPO membership, with 2,533 hospitals.

Overall, projected purchasing-volume growth appears to be trending steady for both regional and national GPOs during a year in which hospitals have been plagued by spending cuts. Outliers include Consorta, whose purchasing volume is expected to fall from $943 million in 2008 to $340 million in 2009 as a result of its membership being switched over to HealthTrust Purchasing Group following a merger of the organizations in 2007. Associated Purchasing Services also expects to see purchasing volume fall from $55.6 million in 2008 to $42 million in 2009.

Regional GPOs are re-emerging largely because national supply-chain organizations are acknowledging they have limited influence on their members' use of negotiated contracts, and that it's impossible for centralized organizations to address the idiosyncratic needs of their members. In their newest incarnation, regional GPOs are not competitors but partners to national purchasing organizations. Their efforts are synergistic, supply-chain experts say.

“We view our (regional) GPO as having the ability to negotiate local contracts for our members, and we have MedAssets to negotiate the large, national contracts,” says Steven Summer, president and CEO of the Colorado Hospital Association, which in June 2007 began working with MedAssets to create a regional purchasing group.

The association is hardly unique in its partnership with a national GPO. In fact, unlike a couple of decades ago when regional GPOs stood on their own, the vast majority are now affiliates of large national supply-chain organizations like MedAssets, Novation and Premier. In many cases, national GPOs are in fact supporting the formation of regional purchasing groups.

Mike Alkire, president of Premier Purchasing Partners, says his GPO has dedicated staff members who assist regional groups with administrative work and work on spending analysis, among other services. Alkire says the partnership between Premier and its 19 regional purchasing groups has to date brought an additional $15 million in savings to members during fiscal 2009.

The financial arrangements for regional GPOs vary, with some like the Colorado Hospital Association's being for-profit organizations that are paid fees for bringing new members and business to the national GPOs. Others like Hospital Purchasing Service and Mid-Atlantic Group Network are not-for-profit organizations. Some regional GPOs also charge membership fees. Associated Purchasing Services, for example, charges annual membership fees of $1,100 to $5,000 per year based on the number of staffed beds a member facility has.

“Regional contracting by itself probably doesn't deliver better cost controls than national contracting,” says Pat Sonin, COO of the Premier-affiliated Illinois Purchasing Collaborative, a regional GPO launched in May 2006 by the Illinois Hospital Association. “But if you put regional contracting efforts on top of the national contracts and write contracts for regional suppliers and services that the nationals don't offer, well then that's where I think you find real value.”

Taylor White, senior vice president of supply networks for Novation parent company VHA, says regional GPOs help drive providers' front-end commitment to contracts. He notes that Novation is currently working with 30 regional purchasing groups as a means of addressing contract commitment on a more intimate level. “Every time you get a group of hospitals together, each one has a different desire in terms of the level of commitment they want” to give to contract purchases, he says.

Christopher O'Connor is executive vice president of GNYHA Ventures, a Premier-affiliated regional GPO that serves members of the Greater New York Hospital Association. O'Connor says his hospitals are able to realize even greater savings by aggregating their contract purchases and buying at high-volume tiers that providers could not reach as individual hospitals or systems.

“What we do is work with all our members to get them to that top tier,” O'Connor says. “We can say, ‘All our hospitals will commit to buying from a particular supplier.' That way, the supplier views all of us as one entity, and our small hospitals will be put into the system” at top-tier pricing.

O'Connor says confidentiality agreements prevent him from detailing any specific savings his members have received as a result of regional aggregation, but he does say “savings are all over the map” and have on occasion been 20% greater than what the national GPO originally negotiated.

The benefits of regional GPOs can go beyond aggregated purchasing power, VHA's White says. “The other value that groups are trending toward is not just contracting, but also, how do they implement certain standards in their regions so that they can be more effective and eliminate certain redundancies?”

That's precisely the thinking that brought together providers to form Mid-America Service Solutions, says Dale Montgomery, vice president of 147-bed Hays (Kan.) Medical Center—one of the hospitals involved in the partnership.

Formed this past January, Mid-America consists of provider investors in Kansas and Missouri that are attempting to save money not only through aggregated purchasing, but also through shared order processing, distribution, warehousing and invoice processing.

“It's a limited liability corporation formed by six hospitals,” Montgomery says. “We have a group of about 90 to 100 affiliated hospitals that we eventually want to bring into the organization.”

The investors—which in addition to Hays include two-hospital CoxHealth, Springfield, Mo.; 11-hospital St. Luke's Health System, Kansas City, Mo.; two-hospital Freeman Health System, Joplin, Mo.; 219-bed Salina (Kan.) Regional Health Center; and 348-bed Stormont-Vail HealthCare, Topeka, Kan.—provided $1.5 million in seed money to fund the effort. Mid-America partnered with VHA on the project since all six providers were already members of Novation.

Under the partnership, VHA is providing Mid-America with a shared information technology platform that will process orders and route the product delivery. The system essentially treats the hospitals' purchases from any one supplier as a single order, allowing the providers to automatically aggregate their purchases. It also allows members to seek out a vendor's lowest price and best contract terms from among the six providers.

“If we found a price in any of the systems that were better at one hospital than the others, we went back to the manufacturer and said, ‘We want best pricing,' ” Montgomery says.

The purchases will also ship as a single order to a central warehouse in Kansas City, Mo. Mid-America has contracted with distributor Owens & Minor to store the goods until the member hospitals are ready for them to be shipped to individual locations.

A group order from any one supplier will also be paid as a single invoice, Montgomery says, but the hospitals aren't billed until they pull products from the Mid-America central inventory. “With all our orders going in through the same system, we'll have a really good sense of actual use,” he says.

Montgomery says warehousing and shipping supplies as a single organization, along with aggregating its contracted purchases, should help Mid-America shave about $2 million off its members' supply-chain costs this year. The collective expects those savings to increase as they improve efficiencies and add members.

To maximize savings opportunities, Mid-America will require all of its members to make at least 85% of their purchases through the regional collective, Montgomery says. And while the group has chosen to partner with VHA/Novation, it isn't obligated to use those contracts, according to Montgomery. “If we think we can negotiate a better agreement, or if Novation doesn't offer a product or service, then we'll go out and negotiate” its own agreement.

Montgomery says Mid-America is currently considering negotiating a contract with a local IT equipment supplier and that it has already negotiated a regional contract for customized procedure trays.

Other regional GPOs are also looking beyond their roles as agents for national GPOs, and are negotiating contracts with local suppliers. “There are a number of contracts that are best done regionally,” says Meling of Associated Purchasing Services. “Something like medical gas—that's a difficult contract to manage, and a national group will often choose a solution that's excellent for delivery to a metro area, but not for a rural area. When you negotiate regionally, you can adapt and secure favorable terms that blend the region's characteristics.”

Welsh of MedAssets-affiliated Hospital Purchasing Service echoed Meling's assertion, saying that while national GPOs can secure best pricing for a number of supplies, some items such as perishable food, equipment maintenance and medical-waste removal are typically offered through local and regional businesses that, out of necessity, limit their geographical customer base.

“National GPOs tend to limit contracting to large national vendors,” Welsh says. “But by us being able to fill a truck that travels on a regional basis, we can offer an economy of scale” to local vendors. As a result, Hospital Purchasing Service offers its members several contracts with suppliers that were negotiated independent of MedAssets. They include, according to Welsh, a contract with a local medical-surgical supplier for gloves, wound-care and other products used by Hospital Purchasing Services' alternate-care members.

Illinois Purchasing Collaborative's Sonin says his group also engages in direct contracting. “We've gone outside in one case on an office-supply agreement because we found better value than what we could get through Premier. We also went outside to get a contract for printing services, which weren't really covered by Premier.” According to Sonin, the 88 regional contracts negotiated by the collaborative provide members with an average savings of about 13% greater than what they would get through Premier-negotiated contracts.

But even while regional purchasing groups engage in their own contracting, it is unclear exactly how independent these organizations are of their national affiliates and whether if, as a single entity, any of them wield enough power to get providers within their organization to move with them should they decide they could be better served by another affiliation or by going it alone.