GAO questions savings from large buying groups: health agencies go it alone.

Nonprofit hospitals may envy the buying strategies from the Iowa Health System (IHS) in Des Moines. If the trend holds up from a recent General Accounting Office (GAO) report, nonprofits could save on supply purchases by buying directly from vendors.

Iowa saved $7.6 million in the first wave of new contracts signed with suppliers, compared to buying from traditional group purchasing organizations (GPOs). Further, the system expects to eventually save between 30 percent and 40 percent going it alone.

IHS consists of 11 hospitals with 3,161 beds. It now just maintains a few residual contracts with some buying groups. "We looked at what we were paying to see if we had the critical mass to buy from a supplier," said Jim Zahnd, vice president of public affairs for IHS. "We decided to change things two years ago because we wanted to buy more effectively."

IHS started the process by working through the large buying groups and selectively eyeing special contracts where an outside vendor offered a choice benefit. IHS studied buying some products locally, like office supplies, and arranged an office supply contract for the entire system. From that experience, Iowa chose selected surgical items, such as sutures. "We went for where the impact could be felt the most with the least amount of work," he said.

Large GPOs traditionally aimed to save nonprofits by buying in such quantities that are usually unavailable to smaller organizations. Approximately seven GPOs handle 85 percent of the hospital market, according to the School of Health Administration of Arizona State University (ASU). Approximately 72 to 80 percent of healthcare supply dollars are acquired from such GPOs. Estimates place the GPO market at $148 billion to $165 billion per year.

However, the role is changing because of Integrated Delivery Networks (IDNs) which hospitals form that can be as large as a GPO. Currently, half of the members of GPOs are also affiliated with or owned by an IDN, according to ASU.

IHS represents the trend, according to the GAO in Washington, D.C. The report, Group Purchasing Organizations, Pilot Study Suggests Large Buying Groups Do Not Always Offer Hospitals Lower Prices, was released in April. The study analyzed one market area of 18 hospitals that purchased 23 models of safety needles and 42 models of pacemakers. The study compared GPO prices to those obtained by hospitals buying on their own between October, 2001 and April, 2002.

The report found that, in general, the use of a GPO did not guarantee savings and the GPO prices were often higher. Specific findings showed some pacemaker models were lesser in price using GPO contracts by as much as 26 percent. Yet for other models, prices were as much as 39 percent more.

Savings differed by the size of the hospital. Large hospitals, those with more than 500 beds, often received lower prices on their own. However, smaller and medium-sized hospitals were likely to obtain a savings with the GPO.

"We picked these items because they are supplies people would recognize easily," said Jon Ratner, assistant director of healthcare issues for the GAO.

However, the study suggests more work is needed to fully understand the buying landscape. The report is just a pilot and Ratner admitted that two issues need further exploration. The report suggested that the GPO deal more with larger manufacturers than smaller ones and that larger hospitals may be purchasing better outside of the GPO.

"We just don't have data from the study to make broad statements," he said. "We just see a snapshot within the metropolitan community of the study."

The role of the GPO is evolving, according to Jody Hatcher, vice president of marketing for Novation, an Irving, Texas-based GPO. "We have a value for large members, as well as small ones," he said. "We don't do the purchasing but we put contracts in place to provide an umbrella agreement so we operate as a type of outsourcing function."

Hatcher doesn't think the GAO study is balanced. "It's not a valid representation of what can be purchased," he said. "The two products viewed are items where there is a lot of variation and physician preference of use. Until recently we couldn't get pacemakers on contract."

Hatcher further stated that the two products represent less than 1 percent of the total buying of most hospitals. "Some hospitals buy safety needles and syringes, and syringes aren't always used because there are varying applications of the product."

Many hospitals would rather partner with Novation because a cost savings of contracting could add up to $300,000 a year, according to Hatcher. The research needed to do contracting and contract management over time could be called a cost avoidance when the buyer deals with a GPO.

A hospital will spend around 20 percent of operating expenses on supplies and Novation offers contracts for around 75 percent of what could be purchased. "We can save most hospitals around 5 to 6 percent compared with what they could obtain on their own," he said.

The case of IHS is seen as an extreme example to Hatcher. However, IHS's success is attributed to a savvy management that could benefit buyers of supplies in any sector. Zahnd pointed to other elements, such as storage and delivery that affect overhead.

"Much of the savings will come beyond the price," Zahnd said. "Often we help the vendor by enabling him to buy larger quantities even if we don't take delivery all at once."

IHS has not spent capital to increase facilities for storage. "Most companies have facilities of storage or maybe the product is not being stored at all but is ordered on an at-needed basis," he said.

Buying apart from a large buying group can become a great opportunity for a mid-sized organization, according to Zahnd. "The important element is that you have to know your cost," he said.

Zahnd defined a mid-sized organization as one that is similar in budget size to IHS, with $1.4 million in operating revenue.

Actually, hospitals may be both buying more from GPOs and also looking increasingly for outside opportunities, according to Eugene Schneller, Ph. D. and director of the School of Health & Administration at ASU in Tempe.

Many hospitals belong to more than one GPO. Other options include checking out reverse auctions. "The buyer may use the GPO to see where the extent of the price ceiling is," he said. "But they can then gain benefits from outside the GPO."

In a reverse auction, a hospital may want syringes and then goes online to pre-qualify companies that would bid on supplying the syringes. Software exists to help the organization. The company that sends the lowest bid wins the contract. "This is common in the grocery industry and is just beginning in healthcare," Schneller said.

An organization that looks only at the product's price doesn't see the total cost to manage the process, according to Schneller. How the contract gets negotiated is an important dimension. Also, the hospital has to deal with returns when the wrong product shows up.

The cost of putting together a consensus of the medical community that uses a certain product is another factor. "There is about a $1,300 difference between a hospital doing its own contract and relying on the GPO," he said. "For a system that purchases many products, those numbers add up quickly."

A product like a syringe is a commodity where usually little difference exists in the quality of the manufacturer. Organizations could obtain those items outside the GPO with better prices. However, a pacemaker is a clinical product that requires the support of the cardiology unit. Often a variance of opinion leads to several models being purchased.

GPOs try to standardize products for various functions so they can study the tolerance and outcomes of the product. Yet one surgeon might go to a conference and find a new item or try to gain a special deal that is different from his department's purchase.

"Certainly there are items where a wide range of price exists," Schneller said. "In that case, many hospitals go out and check the price against their GPO and for those reasons the compliance with the GPO contract is probably low."

Organizations that go it alone will have to get the manufacturer to deal with smaller numbers. The organization will have to establish a learning curve on writing a contract.

Some technical expertise is needed, which usually worries a buying officer. The service provided by the GPO then appears attractive. "The central competency of the organization isn't to run a warehouse," Schneller said.

Yet such fears did not stop IHS. Zahnd stressed that an organization has to buy the items sought by its professional community based on its preferences.

"We spend a good deal of time with professionals to see which products and brands they see as the bests he said. "Those options often aren't available with GPO purchasing so you're open to more options by buying on your own."

Such a course is not a strategy for a 250-bed hospital. "Every situation is different," he said. "While I can't speak for the validity of the GAO study, our experience shows there is some truth to it because of the savings we achieved."

Tom Pope is a New York City-based journalist who writes about management issues.