February 2021 | Mark Thill, Journal of Healthcare Contracting
If you were the leader of a group purchasing organization, how would you grow it? Would you expand your contract portfolio? Merge with another group? Pursue new markets? Introduce new services?
There are all kinds of growth strategies. For instance, Vizient’s acquisition of Intalere from Intermountain Healthcare in November gave the GPO a bigger presence in the non-hospital market, among other things. And by acquiring Resource Optimization & Innovation LLC (ROi) in October 2019, HealthTrust gained experience in logistics and manufacturing (i.e., custom procedure trays).
Two supply chain experts recently shared their thoughts on GPO growth with The Journal of Healthcare Contracting. The first, Eugene Schneller, professor of supply chain management at the W.P. Carey School of Business at Arizona State University, believes growth comes from offering products and services that help customers build value. If Schneller were leading a GPO, he would develop stronger alliances with suppliers, so together they could create innovative products and services driven by customer demand – not their own sales and marketing exigencies.
If John Strong, chief consulting officer, Access Strategy Partners, Braintree, Massachusetts, were leading a GPO (as he did Consorta and Premier), he wouldn’t shy away from consolidation opportunities, but he would keep a watchful eye on his organization’s cost to serve. That way, he could drive up members’ dividends – an important draw for hospitals and health systems. What’s more, because of what he observed during COVID-19, he would work to ensure the integrity of his supply chain, so that necessary products would be on hand when they were most needed.
Growth strategies
“Just expanding the number of products on contract isn’t what you want to do,” says Schneller. “Instead, develop a product line that helps your customers build value.” Sometimes an acquisition that provides a unique competency can help a GPO do just that.
He points to HealthTrust’s acquisition of ROi. “ROi has consistently been a leader in supply chain management in the U.S. – not just about price, but about value,” he says. The deal combined excellence in strategic thinking with supply chain management, and integrated ideas from other industries.
Furthermore, as part of Mercy, ROi had already begun to think in terms of managing around episodes of care, he says. GPOs should take heed and help their members look at supplies in the context of bundled payments. “Many health systems are looking for that kind of thinking.”
Finally, as head of a GPO, Schneller would work with supply chain partners to smooth out wasteful processes, including the current ineffective method of conducting product recalls. Some manufacturers have already taken the lead, he says. Philips, for example, uses advanced analytics to examine service records and detect potential problems before they multiply, he points out. “It’s taking capabilities like these and translating them into value-added propositions for health systems that will make the difference.”
John Strong believes that trying to sign up more members shouldn’t be the go-to strategy for GPOs seeking to grow. “Ten years ago, there was arguably more competition and ‘shopping’ for GPOs than there is today. Gaining the last few non-affiliated acute care customers, or gaining share from other GPOs, was the focus. Today, that business is largely locked up. Now the focus is on smaller, but increasingly important customers outside the acute care hospital.”
Case in point: Vizient’s acquisition of Intalere, with more than 100,000 non-acute sites of care on its ledger, makes Vizient a big player in this arena, says Strong. “This should allow them to deploy more capital to achieve goals in this market, such as reducing the cost to serve, positioning some of their suppliers so they can either move into or expand their presence in this market, and have the size necessary to thrive even if this area of the healthcare market begins consolidation on its own.”
Competitive threats
One of the greatest challenges facing GPOs is figuring out how to navigate their relationship with their largest members – IDNs and health systems. After all, they are not only a GPO’s biggest revenue-generator, but also its biggest potential competitors.
“As health systems become larger, they become more able to aggregate their own volume,” says Strong. “If I were running a large healthcare supply chain today, I would be more interested in purchasing fast-velocity items directly from manufacturers and take the cost that manufacturers are paying to the GPO in the form of additional discounts. Each area of ‘friction’ in the healthcare supply chain costs money. There are probably ways to take this cost out of the supply chain through more direct purchases and reducing or eliminating the cost borne by manufacturers using GPO contracts.
“GPOs provide valuable services, and they need to be paid. But these need to be rationalized during the course of this decade, along with those of all the other players along the supply chain.”
Supplier consolidation presents its own set of challenges to GPOs, says Strong. “Larger and larger suppliers gain leverage. In some cases, they carry products that members insist on having, and dominate the market for a product category, all but forcing GPOs to sign a contract with them. For the GPO, this usually means smaller contract administrative fees. These fees are what fuels the GPO’s ability to pay dividends to the market, [which in turn] puts pressure on costs, and pressure on the GPO to increase dividends to their members.”
Growing in a pandemic
For GPOs, COVID-19 has presented opportunities for growth, as well as obstacles. Says Strong, “Because of the pandemic, I think all customers are seeking good service, little distraction, and quality supplies when and where they need them. This all distills down to great, responsive customer service to solve real problems quickly. While some GPOs may have stubbed their toe a bit on access to PPE, their members still look to them for cash dividends; the use of many more commoditized product contracts; data and analytics; and outsourcing the cost of their supply chain.”
At the same time, the pandemic has worked to separate providers from their GPOs and distributors just a bit, says Schneller. “In the pandemic, when the supply chain system failed, many large systems gained new competency for finding suppliers, and they found that in some ways, they had to, and could, reduce their dependence on intermediaries.
“In the long run, if GPOs fail to recast themselves as risk management organizations, they will have problems. I don’t think the ‘new normal’ will tolerate a focus solely on price or merely expanding services that can be acquired from more established consulting or service-enhancement companies. GPOs must strategically choose enhancements that will support customer/member resilience.”
