At the Margins

Why self-contracting doesn't mean going it alone

If you feel like you’re not getting the same value from your group purchasing organization (GPO) that you used to, you aren’t alone.

Our 2013 Hospital-Supplier Alignment Survey found 54% of hospitals and suppliers are reporting less value from their GPO partnerships. This is a downward trend from the more recent heydays, when it seemed that volume, created through group purchasing, was the best strategy to drive cost savings in health care’s non-labor spend.

The current GPO situation

Today, just five GPOs control roughly 90% of GPO related purchases by hospitals, and their incentives aren’t always definitively aligned with their hospitals members. Current GPO fee structures incent GPOs to get as much spend on contract as possible, regardless of the value to providers. Worse, administrative fees are frequently charged as a percent of spend (and highly variable share backs to members), which does not appropriately reflect the actual cost of contracting activities and penalizes larger providers.

In what appears to be recognition of today’s challenges, some GPOs, which have typically enjoyed 50% or more profit margins, are now offering more services and beginning to change fee structures for some members. However, the cookie cutter GPO agreements reached by the larger group must be supplemented (at additional cost and resources) by one-on-one agreements, or a hospital risks alienating internal stakeholders and increasing costs through off-contract purchasing.

Group purchasing organizations can be helpful to your financial goals, but hospitals need to think strategically about to how to optimize their GPO relationship, what to purchase through the GPO, and what to self-contract.

The right mix will move margins.

When self-contracting comes in

One-to-one contracting allows for custom and creative proposals which are impossible at the group purchasing level. Independent research, such as the below charts, continue to dispel the volume myth, demonstrating that physician engagement is more critical than volume in securing the best prices.

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

Self-contracting doesn’t have to be resource intensive or cumbersome, because self-contracting doesn’t have to mean going it alone. So how can hospitals and health systems determine if they need self-contracting help and, if so, how do they find the right partner to support their sourcing initiatives?

Ask the right questions to identify the right partner for you

Here are some questions to consider when thinking about whether you need help and who can help you optimize your GPO relationship as well as driving greater cost savings at the self-contracting level.

  • What is your long-term supply chain vision?
      • Do you want to build internal competencies for long-term self-sufficiencies, or do you want a long-term partner to manage your spend?
  • Do you have the internal resources, such as staff, to dedicate to the short-term sourcing process and your long-term department vision?
  • Do you need assistance in facilitating the sourcing process in a way that will instill credibility and sustainability with key stakeholders?
  • Do you or your partner have the proven product category expertise and negotiation skills to develop an optimal solution?
      • Is your partner focused on deep knowledge of the specific categories you are sourcing, or are they generalists? What’s acceptable to you?
  • Do you or your partner have access to industry benchmarking and data assets to quickly and accurately support the decision process?
  • Can you learn how other organizations have solved similar challenges, and apply those best practices in your solution?
  • Are your partner’s financial incentives aligned with your own interest?
  • Do you clearly understand your partner’s fee structure?
  • Is your partner transparent about their supplier relationships?
      • Are they biased for or against suppliers in the market?
      • What fees, if any, does your partner charge suppliers?
      • Do they have experience working with your incumbent suppliers?
  • Do you have a partner capable of tracking contract compliance in real-time to ensure projected savings are realized savings?
  • Will your partner continue to support you after the contract is awarded, to ensure contract commitments are honored and expected savings are achieved?
  • Does your potential partner have references with sustained savings results?

It is important to choose an experienced and objective sourcing partner whose incentives are aligned with you so that they are dedicated to your long-term, self-contracting success. This is just the beginning of the due diligence you’ll need to determine the right support for your organization, as you balance group purchasing and self-contracting to find a custom sourcing solution for your bottom-line.

Learn how one health system saved $500M by self-contracting

Hospitals often assume that only those with major purchasing power can benefit from self-contracting. But the research shows you can do it, too. This free white paper shares how one health system saved $500 million over five years.