Group purchasing options create significant savings

Why don't we shop for everything that we need in our personal lives in one store?Kevin Shrake

The answers are obvious. No one store has everything that we need, nor can they develop the business relationships with every supplier that results in the best financial deal for all goods or services. Options create cost savings in our personal lives and we should apply that principle to our purchasing procedures in the organizations we manage.

I have had the opportunity to work directly with every major group purchasing organization (GPO) in healthcare during the course of my career. They all provide valuable services, but each one also comes with their individual strengths and weaknesses. Taking advantage of the basic principle of using the power of bulk purchasing to lower costs is the essence of GPOs. Structuring your GPO relationships in a manner that best covers all of your needs is what separates top performers from their competitors.

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Be hard on things and good to people. Far too often we simply look to how many positions we need to eliminate in order to balance our budgets. Although having an effective labor management program is essential, if we aggressively go after savings that do not affect jobs, it allows us to staff our organizations better. If we don't maximize our cost savings on acquiring goods or services, we will need to find those dollars in other ways that will likely be more painful.

Dispelling the myths. Here are some common myths that health care executives need to dispell in order to optimize performance:

  • All GPOs do the same thing. Just pick one and move on
  • All GPOs have the same footprint of relationships and contracts
  • Product standardization is not important, just get the best price on everything you want
  • Organizations have most all of their spend going through a GPO
  • Larger GPOs have the best value
  • All GPOs are willing to offer secondary agreements
  • All GPOs require commitment and a pay to play relationship
  • Having one GPO is the best way to maximize savings

All of these standard myths are false. Not all GPOs are the same. They all have different relationships and footprints, and you need to assess the value added services that each provide. Having protocols in place that establish preference items is key to lowering costs. Rather than offering 100 different types of sutures, making clinical decisions on stocking a lower number of suture options will enhance quality and lower costs by purchasing higher quantities of the desired items. Although most organizations use a GPO and may brag about the high level of compliance they have with their existing contracts, a lesser known fact is that often up to 50 percent of an organization's spend is with off contract purchases. Let's take that fact and concentrate on the concept of establishing a secondary GPO relationship.

Secondary GPO relationships. There are some distinct advantages of a secondary GPO relationship. If a large percentage of spend in every organization is off contract, why not let a second GPO concentrate on that spend and bring additional savings? This is accomplished without disrupting your current purchasing practices or compromising contract compliance with your primary GPO. If you believe that competition is good and are willing to be more disruptive, allow the secondary GPO to perform an assessment on your current purchases to determine if they have a better contract or relationship in specific areas. For example, your primary GPO might have great medical surgical supply contracts but below average contracts for pharmaceuticals. Having a second option allows you to pick and choose the best approach for all of your purchases.

Look for value-added services that differentiate one GPO from another when choosing your relationships. Some GPOs bring executive solutions to the C-suite that involve unique cost savings ideas from inside and outside of healthcare. Since not every best practice resides in one industry, having a partner dedicated to finding unique margin improvement concepts and bringing them to you can be extremely valuable.

Case study. A 200-bed hospital on the East Coast used a sole GPO approach with the same partner for the past 15 years. They were approached by a competitor GPO and agreed to an assessment of their current spend, both on contract and off contract. The secondary GPO was able to identify an additional saving of $1.2 million by addressing their off contract spend and also brought additional savings of $800,000 on some specific contracted items. In addition, they bring executive solutions in the areas of revenue cycle and e-payables amounting to $600,000 of margin improvement.

Perhaps it's time to kick the tires. The decision to improve your overall GPO value often requires that you consider a secondary GPO relationship. This applies across the spectrum of hospital size, complexity and whether a stand-alone or an integrated delivery network. GPOs that are flexible in their approach and that are willing to build a program around the needs of the hospital will likely prove value relative to reducing costs and improving revenues. Another important factor to consider is the level of service that you are getting from your GPO partner(s). Are they constantly working on your behalf and are your goals aligned?

Kevin L. Shrake ([email protected]) is a 35 year veteran of healthcare, a Board Certified Fellow in the American College of Healthcare Executives and a former hospital CEO. He currently serves as the Executive Vice President/Chief Operating Officer of MDRâ„¢, based in Fresno, California.