Is your GPO contract expiring? Now’s the time to rethink your healthcare supply chain strategy
Changes in the healthcare landscape are having significant ramifications across all aspects of provider organizations – and the supply chain is no exception. Provider supply chain organizations are essential to succeeding in a value-based healthcare environment and achieving the triple aim: enhancing the patient experience, improving the health of populations and lowering costs. Forces impacting the healthcare landscape, such as hospital consolidation and incentive alignment, combined with an expiring contract, provide an opportunity for procurement leaders to address their supply chains by determining the future role of the group purchasing organization (GPO).
Determining the future role of the GPO
The role of the GPO in the hospital purchasing equation is changing. Large hospital systems, increasingly with their own Provider Sponsored Plans (PSPs), are finding that they can achieve better savings negotiating directly with suppliers than through their GPO, a fact supported by research showing GPOs provide greater benefits to small and medium sized hospitals.1
These savings are one reason why a study by The Wharton School of the University of Pennsylvania found that the percentage of hospital purchases through a GPO declined to 55.9% of total hospital purchases in 2014 down from 70.6% in 2005.2 Given the declining role of the GPO, procurement leaders must determine the future of the GPO with respect to their organization, especially in advance of any contract renewal discussions.
While some GPOs are evolving and beginning to bring more advanced technologies to their members, most still focus on volume-based purchasing and adding spend data analysis. With the influx of new data solutions, we see clients pursuing solutions outside their GPO for comprehensive data analytics, a significant area of opportunity for providers.
Another area of consideration when determining the future role of the GPO is the payment model. Historically, GPOs operate in a supplier-funded model, where suppliers pay a negotiated administrative fee of each sale through the GPO. The GPO retains a percentage of the administrative fee to cover costs plus margin, then rebates the remaining amount to the provider organization. This model creates a misalignment between the provider organization, the GPO and supplier. Incentivizing GPOs to operate in a manner that maximize profits and may not necessarily achieve the lowest cost causes suppliers to keep prices inflated to cover the administrative fee. One approach to aligning the GPO and provider’s interest is to switch from an administrative fee approach towards a fee-for-service or an outcome-based model, where the GPO compensation is directly tied to results. Such a re-alignment, focused on health outcomes, may require adjustment on the provider side, to work more closely with the GPO on specific procurement categories, development of an analytics capability and potential sharing of outcome based data.
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Roadmap to the triple aim
Developing this strategic supply chain function requires investment from the provider organization, beginning well before the GPO contract expires. Follow this roadmap to ensure you are well prepared.
- Determine procurement’s role in lowering the cost of care and achieving other corporate goals, such as environmental, minority, and local purchasing. This step must occur in conjunction with hospital leadership
- At around 12-18 months before contract expiration, procurement leaders must determine the future role of the GPO as the primary purchasing vehicle. This decision will dictate the size and shape of a Request for Proposal (RFP) process for the GPO renewal. Simultaneous to the GPO decision, procurement leaders must establish a strategy for data analytics
- If a GPO is looking to vendors, the process should start at least 12 months before the GPO contract expires to ensure sufficient time for solution evaluations, negotiations and transition.
As the healthcare industry transforms, provider supply chain leaders must consider new approaches to contributing to the triple aim. Reviewing the role of the GPO and revising the procurement operating model for analytics are all proven avenues to generating new levels of cost savings while delivering increased levels of service to the organization.
1 GAO Report (d03998t.pdf)
2 Hospital Supply Chain Executives’ Perspectives on Group Purchasing: Results from a 2014 National Survey. The Wharton School of the University of Pennsylvania. Burns, Lawton Robert & Yovovich, Rada