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3 Benefits of Working With a Hospital Group Purchasing Organization (GPO)

By , SVP CHC Supply Trust February 7, 2020 Financial Performance, Supply Chain

Across the United Sates, news of the rising cost of healthcare is spreading. The U.S. government reported that Americans spent $3.65 trillion on healthcare in 2018. This level of spending is by far the highest in the developed world, and there is an ongoing debate about why healthcare is so expensive and what can be done about it. In the 1980s, Congress took a look at Group Purchasing Organizations (GPOs) and found that GPOs can help reduce healthcare costs for both the government and private health-care sectors.

What Is a Hospital Group Purchasing Organization (GPO)?

A Hospital Group Purchasing Organization (GPO) is an entity formed to help clinics save money, lower patient costs, and become more efficient. Basically, a GPO sources and negotiates prices for drugs, medical devices, and other products and services on behalf of health-care providers. As well as hospitals, other healthcare institutions such as nursing homes, clinics, ambulatory care facilities, physician practices, and home health-care agencies can also make use of GPOs. GPOs work by combining the acquiring volume of their members and using that as leverage to negotiate the best discounts with vendors.

Are There Different Types of GPOs?

GPOs vary greatly in size and the type of services that are offered to their members. Some GPOs are owned by hospitals, while others are not. Some group purchasing organizations specialize in not-for-profit clinics or long-term care facilities. Some GPOs offer clinics the ability to contract for almost every conceivable type of product, while others focus on more specific products or service categories. However, all GPOs have one thing in common, they enable health-care providers to use group acquiring to obtain the best products at the best prices. The main benefits of a group purchasing organization are improved cost savings, efficiency, and providing more consistent pricing.

1. Cost Savings

GPOs reduce costs primarily through two mechanisms: lower prices through joint negotiation and lower transaction costs. The health-care supply acquisition process is very complex. It involves thousands of suppliers selling medical products and services to thousands of health-care providers. Because prices are frequently negotiated, and negotiations are often complicated, the scope for savings on transaction costs by lowering the number of negotiations is huge.

For perspective, think of 1,000 vendors, each selling just 10 products to 2,000 separate hospitals. Each vendor interacting separately with each hospital will produce a total of two million negotiations in an effort to determine as many as 20 million prices. However, if a GPO negotiates one price for each product on behalf of its 2,000 members, then the number of negotiations falls dramatically from 2 million to 1,000. Using the same methodology, the number of prices negotiated declines from 20 million to 10,000.

A report from the Health-care Supply Chain Association (HSCA) shows that GPOs are saving hospitals between 10 to 18 percent per year on their supply chain costs. Moreover, it is projected that using group purchasing organizations will have saved the entire US health-care system somewhere around $392.2 billion to $864.4 billion between the years 2013 and 2022. GPOs are in the business of saving hospital administrators from the burden of finding critical cost savings themselves. This allows clinics to focus on their core mission of providing first-class patient care. Importantly, providers are likely to pass some of these cost savings on to their patients.

  • Case Study: According to one HSCA case study, a hospital experienced $3 million of annualized savings by working with its GPO to optimize management of its purchases and usage related to its cardiac rhythm facility. Working with data analytics, the group purchasing organization discovered that the hospital’s pricing and contracting model did not produce best-in-class pricing. Using data that focused on the hospital’s purchasing and utilization patterns, as well as how the organization compared to other hospitals, a strategy was developed to successfully turn cardiac rhythm management from a cost center into a profitable service specialty. The number of vendors involved in the service line was consolidated, and their purchasing contracts were renegotiated. These steps optimized cardiac rhythm management and reduced supply chain spending.
  • Case Study: A critical access hospital grew in size and moved to a new facility, but was still relying on its old methods. Assisted by its GPO, a plan was devised to optimize the hospital’s supply chain management by centralizing their operations and switching to a just-in-time inventory management system. After implementing the new strategy, the hospital reported annual savings of:
    • 49% in facility service contracts.
    • 38% in lab reagent agreements.
    • 12% in lab equipment purchases.
    • 10-15% percent on health-related IT purchases.

2. Improved Efficiency

Perhaps no other industry benefits more from GPOs than the health-care industry. Efficiency is critical for hospitals, and consistent contracts negotiated by a group purchasing organization allow hospitals to be fully stocked with medications, medical tools, medical devices, etc. with minimal administrative work. A GPO does not take title to, or possession of, products. Rather, the central purpose of a GPO is to improve efficiency. The HSCA found that more than 7,000 hospitals and other healthcare facilities have been able to realize savings related to their supply chain management through purchasing efficiencies, price discounts, and other benefits provided by group aquiring. GPOs add predictability and efficiencies to hospital supply chain management. They enable new and innovative healthcare technologies and the distribution of healthcare supply chain management best practices.

3. Consistent Pricing

GPOs provide hospitals with bulk purchasing power by assembling them into a larger community and negotiating contracts for products and services on their behalf. Hospitals are then able to cut their overall costs by buying at the bulk rate. They are freed from spending time negotiating with vendors and are able to rely on more consistent and stable pricing. A good group purchasing organization has the ability to protect providers from demand-related price hikes in response to production or delivery problems. Part of the job of a group purchasing organization is to monitor market conditions and be on the lookout for any scarcity of products, or any sudden dramatic price increases for available products. A GPO relationship helps clinics who may not have a secondary source or plan in place to deal with unexpected shortages. The GPO will be able to offer other supplier contracts to the facility and streamline the new client process between the supplier and the hospital.

Protections against shortage-induced market dynamics are part of a GPO’s contracting process and will help to prevent such events as the shortages of IV fluid that developed during 2017-2018.

Closing Thoughts

GPOs are critical partners to health-care providers. GPOs bring the concept of power in numbers to hospitals. Cost savings and delivering the best products and services at the highest value remain at the center of the GPO core mission. However, health-care providers are coming to rely on GPO for a much broader range of services integral to cost-effective patient outcomes. These services include data analysis, market research, innovative technology integration, electronic product tracing, infection control, and the development of shared knowledge among health-care providers and supply chain experts to enable best practices. All of these services will work to further lower costs and improve operations.

Through CHC Supply Trust, Community Hospital Consulting (CHC Consulting) brings a tailor-made GPO to community hospitals. Because of their size, community hospitals don’t tend to have the purchase power of larger facilities. CHC Supply Trust enables community hospitals to achieve the same price savings as their larger counterparts. If you are a community hospital, contact CHC today for more information.

By , SVP CHC Supply Trust February 7, 2020 Financial Performance, Supply Chain
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