Hospitals are under pressure to cut costs as reimbursement shrinks and expenses rise. One way hospitals can capture additional savings is by maximizing their relationship with group purchasing organizations.
GPOs long have been a key partner for hospitals to manage the costs of their supply chains, providing a way to slash costs and gain efficiencies by combining their purchasing volume, while using contract aggregation to create leverage. This allows hospitals to negotiate greater discounts with their vendors and distributors
However, some smaller hospitals may be able to do more to ensure they are receiving the full benefits of their current GPO agreement.
Getting the Right Price
Hospital administrators can face hurdles in determining if they are getting the best market prices for the supplies they need. Not all hospitals are receiving the contract prices, said Pat Carroll, president of Patrick E. Carroll & Associates, Inc., a hospital operations consultancy company based in Cypress, California. While larger organizations have the capability to utilize software and have sufficient personnel to monitor that they are receiving the contract prices, many smaller rural hospitals frequently are not getting contract pricing from their GPOs, he said.
If a hospital has allocated the time to ensure the correct pricing is loaded, then it likely is receiving the right pricing, said John Everett, chief financial officer of Cogdell Memorial Hospital in Snyder, which is 85 miles from Abilene. In other instances, hospitals are probably getting only 60 percent to 70 percent of the savings they should be receiving.
“One thing hospitals should do is have a good working relationship with their account manager with the GPO to help review things like this,” he said.
Recourses for Hospitals
Most GPOs require hospitals to sign a letter of commitment for a contract that typically lasts two to four years, Carroll said. Hospitals have more recourse if the letter of commitment was signed, but the facility is not receiving contract pricing. In that case, the hospitals should expect to receive a refund starting from the date the letter of commitment was signed.
“Most smaller hospitals do not have the time to review every purchase order placed because checking the current price against the contract pricing is laborious,” he said. “Sadly, there are some distributors and suppliers that take advantage of that situation.”
Another option is to go back to the GPO and vendor and ask them to re-price the prior purchases, but this requires some work and time, said Everett.
“It also depends on how long a hospital has let this go,” he said. “Most GPOs and vendors are willing to make things right, but not willing to go back past a year or so.”
Best Practices for Relationship Management
Following the best practices for managing a GPO relationship can be advantageous for hospital administrators. For smaller hospitals, the key is to have a GPO representative closely working with them, said Carroll.
“I have seen excellent GPO representatives for all the GPOs,” he said. “The GPO representative can make sure all the letters of commitment are signed and that the correct prices are loaded since it can be time consuming and confusing.”
Maintaining regular communication with the GPO representative is key, said Everett. He recommends sticking to a plan of having a monthly call to discuss any changes, concerns or methods to get better pricing.
Is Belonging to One GPO Enough?
One looming question for hospitals is whether they should belong to just one GPO or participate in several. Larger organizations usually concentrate their spend with one GPO, said Carroll. They have procurement staff who can research product prices for those items not covered in a GPO (usually about 60 to 70 percent of a hospital’s purchasing budget is covered in the GPO).
GPOs largely are funded by administrative fees, and typically receive 1.5 percent of a hospital’s contract expenditure from the supplier.
“It is in their best interest to cover as much of a hospital's spend as possible,” he said. “To some degree, the goals of the hospital and GPO coincide.”
Since smaller hospitals have smaller staffs, Carroll said he always recommends signing up with at least two GPOs. The benefit of joining a second GPO is coverage for the items not covered by the primary GPO.
“This can be ‘one stop shopping,’ meaning the hospital just needs to access the GPO's website and not search for prices.” he said.
Cogdell Memorial Hospital belongs to a few GPOs because a single GPO wasn’t providing sufficient coverage of everything the hospital uses, said Everett.
“We use others to get better contracted pricing if we can’t negotiate it on our own,” he said. “We use companies that can help us get aggregate pricing, so even though we have lower volumes, we get higher-tiered pricing.”
Carroll has other clients that have benefited from pursing aggregate pricing. “Most GPOs have ‘aggregation’ contracts that enable small hospitals to receive better pricing by combining their volume with larger organizations,” he said.
Best Processes for an Agreement
Market studies have demonstrated that product pricing does not vary much among the main players, yet the culture of the GPO and how effective the local representative is makes the difference, especially for the smaller rural hospitals, said Carroll.
“Smaller hospitals need assistance, both from their GPO and their medical surgical distributor,” he said.
While some rural hospital administrators have considered collaborating to increase purchasing volume and make themselves more attractive to a GPO, Carroll explains this strategy usually is not realistic because of legal reasons. A GPO would need to deal with the hospitals independently unless they merged as an integrated delivery network, said Carroll.
Larger hospitals have different challenges. Some are part owners of the GPO, which means they are limited in their options to change or join a secondary GPO.
Changing GPOs also can be very time consuming for larger hospitals and health systems. However, larger hospitals could work with consultants to review their purchases and make recommendations about how to improve purchasing decisions and pricing, explained Everett. Larger hospitals also can work with the GPOs to ensure the best pricing.
“Enlist the help and resources of your account rep at the GPO,” Everett said. “Their job is to be there for your organization to ensure you are getting everything per the contract, but if you don’t communicate, they are going to assume all is well when this may not be the case.”