November 6, 2015

A huge deal just shook up the GPO industry. Here's how to think about it.

Daily Briefing

    Brian PellegriniThe Daily Briefing's Dan Diamond spoke with Brian Pellegrini, managing director of Spend Performance Solutions, to discuss this week's news that MedAssets is being sold for $2.7 billion, with VHA-UHC purchasing the company's GPO business.

    Daily Briefing: Help frame this news for our readers, not all of whom follow the supply-chain industry. Was the MedAssets sale a surprise?

    Brian Pellegrini: MedAssets had been going through some challenges. There was CEO turnover and loss of a major client, Tenet. There was the appearance of an activist investor—Starboard Value LP—that was calling for significant changes. 

    In light of that, an M&A event for MedAssets was not surprising, but the [sale] to VHA-UHC was unexpected. 

     The GPO market has already seen consolidation over the last decade, which has left just a handful of national GPOs that control the vast majority of the market. Now the market looks to get even more concentrated.

    DB: There have been a flurry of enormous deals in health care this year, like the $54 billion Aetna-Humana merger. In contrast, this was a $3 billion sale. 

    In a year of mega-mergers across health care, how BIG a deal is this, really?

    Pellegrini: Here's how to think about it. Outside of this new combination, there's now only one large national GPO, Premier, and two national provider-led GPOs, Intermountain's Amerinet and HCA's HeathTrust Partners.

    So at minimum, this represents a major shift in terms of market consolidation.

    It's also important to know that it combines a number of legacy organizations that aren't yet fully integrated themselves—notably MedAssets' acquisition of Broadlane Group and the merger of VHA and UHC.

    But clearly, this new organization will have significant influence on the marketplace.

    It's difficult to put an exact number on the total spend managed by GPOs, but a 2014 GAO report put the figure for the top 5 GPOs at nearly $131 billion during fiscal year 2012. And in the announcement of their deal, MedAssets and VHA-UHC claim to control $59 billion and $50 billion, respectively.

    DB: GPOs were founded so hospitals could pool their purchasing power. But there's been rising scrutiny of the health care GPO model—that it's not as effective as it used to be, basically.

    Pellegrini: Yes—industry changes such as hospital consolidation and the shift toward value-based care call into question whether aggregating volume is the right way to drive the best value.

    One thing we've seen: Hospitals are routinely finding that by striking out on their own, and partnering deeply with their key stakeholders such as physicians, nurses, and support staff, they can drive better terms and pricing.

    As a result, hospitals are increasingly willing to invest in making supply chain a strategic part of the hospital enterprise. It's an investment that enables hospitals to migrate from a transactional and price focus toward a value-based and resource utilization focus.  

    And that shift in focus will further pressure the traditional aggregate contracting strategies that are at the heart of group purchasing.

    Do GPOs still have a role in your spend strategy? Find out by asking three questions

    DB: So what does this deal say about the future of health care GPOs?

    Pellegrini: Here's one thing to watch. The GPOs were granted a safe harbor from the Anti-Kickback statute to allow them to collect administrative fees from these suppliers to fund their efforts. In late 2014, a GAO report raised concerns about the funding administrative fee structure and the safe harbor provisions that allow it to exist.

    Given the unprecedented scope and scale of the combined VHA-UHC/MedAssets organization, we may see renewed focus here as well.

    DB: Take a bird's eye view of this deal. Is it good for hospitals? Good for patients?

    Pellegrini: It's harder to see how this affects patients. But when considering how this will affect hospitals, I think it's worth answering three questions.

    The first: will the new, larger organization will be able to negotiate better prices from suppliers because of their roughly doubling in volume?

    And unfortunately, there's no strong case for this to happen—each GPO is already of a size and scale that additional volume does not move the needle significantly for suppliers. And, as we look to the existing players and their relative price competitiveness, there's a case that some of the smaller, more nimble organizations already have better pricing than the largest.

    The second: will the fees paid by hospitals to their GPO will go down?

    This is a more complex situation, but again we don't see a strong case, and in fact consolidation in other industries has seen prices increases rather than decrease. Because the GPO is funded primarily through administrative fees paid by suppliers, we would not anticipate seeing any changes in these fee levels. However, we do see this potentially creating some churn in hospital-GPO relationships as organizations rethink the right partner for them. We also expect to see more sophisticated organizations striking out on their own or dramatically shrinking the nature of their relationship with a national GPO.

    This kind of churn makes it a powerful moment to forge new, more favorable terms with a GPO as they scramble to retain and/or grow clients.

    DB: What's the third question?

    Pellegrini: The third question might be the broadest: how will this affect innovation?

    What we expect from the new combined MedAssets/VHA-UHC is several years of integration and merger activity, which will likely make it very hard for them to focus on or invest in innovation. So for clients of these organizations, we would expect to see a period of stagnation. However, this may accelerate the pace of new entrants and new models to drive innovation. We've already seen organizations like Ascension Health and Intermountain re-envisioning the provider-led GPO model in recent years.

    We also see a number of technology and consulting-based solutions coming to the market enabling hospitals to tie product to outcomes and other value-based measures. So I think we can expect—especially in a moment of market disruption like this—for this form of innovation to be spurred on.

    Five reasons to rightsize your GPO

    GPOs are broadly considered to be the safest and easiest route to appropriate hospital spend. But more and more hospitals are realizing that there are hidden costs from putting their purchasing on autopilot. While aggregation is often the right answer—especially for fragmented, low-dollar commodity purchases—success hinges on how you do it.

    Five reasons to rightsize your GPO

    Best practice institutions are realizing tremendous gains by selectively shifting the more strategic portions of GPO spend to self-contracting. Download the infographic from our Spend Performance Solutions team to learn five reasons to rethink your organization's GPO spend strategy.

    DOWNLOAD THE INFOGRAPHIC

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