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Leveraging Group Purchasing for Hospital Supply Chain Management

Adopting group purchasing for medical supplies can streamline hospital supply chain management processes and reduce healthcare costs.

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Good things may come in small packages, but hospitals and health systems on the smaller end of the spectrum oftentimes face higher hospital supply chain costs because of their size.

Larger hospitals and health systems tend to have more power behind them to negotiate lower supply chain prices. Since larger organizations order more items in bulk, manufacturers and other vendors offer these facilities greater discounts.

However, group purchasing organizations (GPOs) can help maximize supply chain spending by leveraging the buying power of several hospitals and creating an equivalent incentive for vendors to make a better deal.

According to the Healthcare Supply Chain Association (HSCA), a group purchasing organization is “an entity that helps healthcare providers, such as hospitals, nursing homes, and home health agencies, realize savings and efficiencies by aggregating purchasing volume and using that leverage to negotiate discounts with manufacturers, distributors and other vendors.”

Using a GPO can help hospitals make the most out of their supply chain budgets. Healthcare supplies account for 15 percent of the average hospital operating budget, the Health Sector Supply Chain Research Consortium at Arizona State University reported in May 2015.

For some healthcare organizations, supply chain costs can reach up to 40 percent of total operating budgets, according to research in Materials in Management in Health Care. 

Yet a 2016 Survey from Cardinal Health and SERMO Intelligence found that only one-third of hospital decision-makers described their management processes as very effective.

Providers who used GPOs, however, saw supply chain spending decline by 10 to 15 percent, HSCA recently reported.

As a result, researchers estimated that group purchasing would save the healthcare industry between $392 and $864 billion from 2013 to 2022.

To make the hospital supply chain more effective and cost-efficient, providers and executives should consider group purchasing.

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GPOs offer lower prices and hospital supply chain best practices

The primary function of a group purchasing organization is to aggregate the purchasing power of multiple healthcare organizations to achieve economies of scale. With the combined purchasing volumes of several organizations, the group purchasing entity can negotiate with manufacturers on behalf of the hospitals for lower supply chain prices.

GPOs are funded by collecting administrative fees from vendors, although some groups may also charge healthcare organizations for membership.

Hospital leaders should understand that GPOs do not purchase products for their facility, HSCA emphasized. Group purchasers are there to support hospital supply chain contract development and management, but hospital leaders oversee purchasing of specific products.

Based on the GPO’s hospital supply chain contract, providers and executives at the hospital usually meet to decide which medical supplies will best support their service lines and clinical departments.

HSCA also noted that just because a hospital uses a GPO for most supply chain purchases doesn’t mean the facility cannot buy other medical supplies outside of the contract. Hospitals are free to make non-GPO contracted purchases, especially for items that are not part of the GPO-negotiated contract.

Using a GPO can also make clinician workflows more efficient. Frontline clinicians surveyed by Cardinal Health and SERMO Intelligence last year said they spent an average of 17 percent of their workweek managing inventory issues.

Adopting a group purchasing model can help to streamline inventory procurement processes, allowing clinicians to focus on care delivery rather than supply chain tasks.

"Hospitals are increasingly relying on their GPO partners for a broad range of services beyond cost-savings."

In addition to discounts, many GPOs also offer supply chain optimization consulting services. Since group purchasers understand the healthcare supply chain from product development to care delivery use, the organizations can provide healthcare facilities valuable insights.

“Although cost-savings and delivering the best products at the best value remain central to the GPO core mission, hospitals are increasingly relying on their GPO partners for a broad range of services beyond cost-savings,” Todd Ebert, RPh, HSCA’s President and CEO, stated in the report.

“GPOs are expanding their offerings to meet evolving hospital and provider needs, including data analysis and benchmarking, market research, innovative technology integration, infection control, electronic product tracking, and developing and facilitating communities of knowledge among healthcare providers and supply chain experts to share best practices,” he continued.

Many GPOs provide hospitals with electronic supply chain purchasing solutions as well as best practices for supply chain standardization and clinical documentation of medical products.

Hospitals are seeing the benefits of using GPOs for more than just supply chain discounts, too. A 2014 survey from the American Hospital Association (AHA) and the Association for Healthcare Resource and Materials Management (AHRMM) showed that hospitals agreed that their facility derived value from the following GPO services:

  • Benchmark data (58 percent)
  • Data analytics (51 percent)
  • Purchased serviced (38 percent)
  • Clinical outcomes data (38 percent)
  • Revenue cycle (25 percent) 

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Top players in the hospital group purchasing space

Ever since the group purchasing business model first appeared in 1910 through the Hospital Bureau of New York, the business model has significantly expanded in the healthcare space, HSCA stated. About 40 GPOs existed by the mid-1970s and this number jumped to 100 GPOs a decade later.

Currently, hospitals can choose from over 600 group purchasing entities to help them maximize their healthcare supply chain budgets. HSCA reported that about 30 of the GPOs are considered true group purchasing entities that bargain for contracts on behalf of their hospital members.

Most of the other GPOs offer contracts to hospitals at larger group rates and negotiate agreements with regional vendors for supply chain and other healthcare services, such as EHR implementation and patient safety improvement solutions.

With hundreds of group purchasing options available to hospitals, how can executives choose just one? Fortunately, hospitals can become a member of multiple GPOs to leverage the bargaining power of the entities for all their supply chain needs. Approximately 97 percent of hospitals were members of one or more GPOs, Definitive Healthcare revealed in August 2016.

On average, hospitals partnered with two to four GPOs per facility, HSCA reported.

As the hospital group purchasing market grows and hospitals seek multiple GPOs, executives may consider turning to the top group purchasing entities with the broadest buy power. According to Definitive Healthcare data from 2016, the top GPOs ranked by the total number of member hospital beds were:

  • Premier Inc with 350,358 member hospital beds
  • MedAssets (Vizient) with 293,763 member hospitals beds
  • Vizient (Formerly known as VHA, UHC, and Novation) with 285,676 member hospital beds
  • Intalere (Formerly known as Amerinet) with 273,129 member hospital beds
  • Cardinal Health with 212,099 member hospital beds
  • McKesson Pharmaceutical with 197,223 member hospital beds
  • AmerisourceBergen with 182,732 member hospital beds
  • HealthTrust Purchasing Group (HPG) with 168,462 member hospital beds
  • Department of Veterans Affairs with 39,244 member hospital beds
  • Provista with 27,947 member hospital beds

Definitive Healthcare researchers also pointed out that the hospital group purchasing market may face some changes as healthcare consolidation continues to trend upward. Just as hospitals and practices merge to increase their market share, GPOs are similarly consolidating to increase their buying power even further.

For example, Vizient acquired MedAssets in 2016 to become the largest member-owned healthcare company. As a result, Vizient group purchasing members represented about $100 billion in annual purchasing volume.

Hospitals may want to consider joining GPOs with greater purchasing volumes because medical supply manufacturers typically provide larger discounts in exchange for more business.

Smaller GPOs that tout better customer service because of their size are also responding to the GPO consolidation trend. For instance, the Afaxys GPO leverages the purchasing power of 2,300 member site, but the group purchaser also offers the sites automatic membership to the national GPO Provista.

Hospitals adopting a group purchasing business model can also join regional and specialized GPOs depending on their facility’s focus. Regional group purchasing entities provide another option for hospitals that may not want to deal with the bureaucratic nature of a larger GPO.

Specialized GPOs also help hospitals achieve their goals, such as becoming greener. In May 2016, Dartmouth-Hitchcock, Dignity Health, Gundersen Health System, and Partners HealthCare developed the Greenhealth Exchange to help hospitals purchase supplies with less of an environmental footprint.

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Hospital group purchasing considerations to maximize supply chain success

While group purchasing for hospital supply chain items can yield significant cost reductions, providers and executives should evaluate their GPOs to ensure they belong to the appropriate groups and should also continuously monitor hospital supply chain contracts.

Before selecting one or more GPOs to work with, hospital leaders should consider what medical supply manufacturers and vendors the organization uses. A potential downside to GPOs is limited vendor selection.

If a hospital has a relationship with a specific vendor, decision-makers may want to search for a GPO that is willing to negotiate contracts with that vendor. Otherwise, the hospital will be stuck with a list of vendors they may not prefer.

One way to get around a limited vendor list is to engage in self-contracting for some hospital supply chain items in addition to joining a GPO. The Advisory Board reported in August 2015 that just five GPOs control about 90 percent of hospital purchases through a group purchasing agreement. With little room to avoid the top GPOs, the consulting organization advised hospital leaders to individually contract with preferred vendors.

"Long-term physician engagement not only improves your physician-hospital relations, but also keeps costs and off-contract purchasing down."

Through self-contracting practices, hospitals can develop custom and creative purchasing agreements that cater to their facility’s needs and boost physician engagement.

“When you enfranchise physicians at the local-level to purchase the best clinical supplies at the best price, you drive a credible sourcing process that encourages physicians to honor contract commitments down the road,” the Advisory Board wrote. “Long-term physician engagement not only improves your physician-hospital relations, but also keeps costs and off-contract purchasing down.”

Hospital leaders should also evaluate a GPO’s vendor lists and funding structures to ensure the group purchaser is working to benefit the hospital, not just its pockets.

Additionally, hospital leaders and providers should not relinquish their supply chain duties once a GPO negotiates a contract for the facility. Regularly evaluating and updating GPO-developed hospital supply chain contracts is key to ensuring the facility is paying the appropriate price for supplies.

Providers should always be aware of competitor rates and amounts paid by health plans for healthcare supplies, HSCA advised. Since market forces primarily influence price, providers should know market values to ensure they are paying the appropriate amount for items.

The Healthcare Financial Management Association (HFMA) also recommended that providers check their supply chain contracts for confidentiality clauses. Many vendors include the clauses to stop providers from discussing negotiated prices, but the clauses can hinder a healthcare organization’s ability to address cost concerns with providers and other entities looking for budget information.

As healthcare payment reform initiatives put more pressure on hospitals to control costs and improve care quality, more providers and executives are looking to healthcare supply chain optimization as a key way to achieve value-based care goals.

Through group purchasing, hospital leaders can streamline inventory procurement and contract development processes, allowing clinicians and administrative staff to focus on care delivery.

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