IDNs solving contract woes with help from Group Purchasing - News

Integrated delivery networks have long been enigmatic entities within the healthcare provider community -- even to those within the organizations themselves. Perhaps it's because IDNs don't fit snugly into the conventional supply chain mold, especially as they relate to group purchasing organizations. Are IDNs merely amalgamated hospitals that should fit comfortably within the GPO membership legions or are they themselves miniature versions of GPOs and therefore, essentially competitors?

As this search for a clearer identity continues, an evolution is taking place. The two groups are binding in a way previously not considered. Instead of IDNs becoming part of the GPOs, the GPOs are becoming part of the LDNs. You might say that IDNs are hiring GPOs as "contracting contractors."

At least three group purchasing organizations are experimenting with this novel concept -- a symbiotic relationship that representatives from both sides say they have been searching for to bridge the contracting gap between them. While their formats differ somewhat, these new GPO adjuncts all recognize IDNs as independent organizations that should have their own supply contracts, apart from national ca-op arrangements.

The advantage to adopting these new programs, GPO representative say, is in getting individually tailored contracts backed by collective leverage. And depending on which program they choose, IDNs can opt to bring GPO staff inside their operations, connect to sophisticated computer systems that closely track each supply contract, or even assign agents to seek insurance coverage on cutting edge products.

While it may be too early in the process to say definitively whether this type of relationship will last, it seems like a logical step forward, says David Kaczmarek, vice president of McFaul & Lyons Group, a materials management consulting group based in Horsham, PA, and himself a veteran of years as a materials manager.

"I always figured that as they grew, IDNs would move completely away from GPOs -- but that didn't really happen and I've always wondered why because they could provide manufacturers with a more committed program," he said. "Most likely it hasn't happened because of the costs associated with creating infrastructure. Under the model being put forward now, GPOs appear to be modifying their positions and being more flexible with IDNs."

Playing second fiddle

That observation certainly fits Calvin White's experience with Alpharetta, GA-based MedAssets HSCA. When director of purchasing for North Mississippi Health System solicited bids for a new contracting agent last year, he stipulated that the arrangement be on his terms -- meaning he would call the shots.

"The first question I asked [MedAssets executive] Rand Ballard was whether he was willing to play second chair violin to our purchasing department," White recalls. "He said 'We are the GPO you want us to be. A lot of people are asking us the same thing, but not in the same way.'"

North Mississippi Health Services -- defined by Medicare as the largest rural hospital system in America -- started evolving into an IDN about 15 years ago, said White, who has been with the organization for 20 years. The flagship hospital in Tupelo, MS, consists of 650 licensed beds, while the other five community hospitals in the network combine for 1,200 beds. The system covers a market of approximately 750,000 residents scattered across a 15-county area in northeastern Mississippi and northwestern Alabama. The IDN also includes 45 physician offices, four nursing homes and outpatient surgery centers.

"We're a large hospital system, but we're small as IDNs go," White said. "We need flexibility, but we also want support."

As North Mississippi grew into an IDN, it gradually became less and less compatible with the national GPO it helped found. In White's view, the problems began to surface when the burgeoning IDN started collecting data and learned how to use it to evaluate contract strengths and weaknesses.

"We started second guessing the GPO," he said. "They weren't doing a good job in negotiating the high-tech items. We had good relations with cardiologists, so we started our own capitated procedure-based pricing in the cath labs. We started getting ahead of the GPO. That was the beginning of a breakdown."

At that stage, the IDN wanted to extricate itself from the national franchise to forge its own contracts, which proved to be a more daunting task than management envisioned, White said.

"The manufacturers hid behind the GPO contract, which weakened us," he said.

MedAssets recognized that North Mississippi's situation was shared by other IDNs and that these special contracting needs could be outsourced, said Gary Johnson, MedAssets vice president for marketing and marketing services.

"There are now 600 IDNs providing just over two-thirds of the nation's healthcare delivery services," Johnson said. "They are becoming a prominent segment of the industry. Because each IDN evolves on its own path, a rigid, national cookie-cutter contract program doesn't work for them."

By availing itself of MedAssets' customized program earlier this year, North Mississippi is already projecting $600,000 in savings through contracts for high-tech surgical instruments and other items not previously covered under national GPO agreements.

'Create-your-own' GPO

New York-based Joint Purchasing Corp.'s Strategic IDN Solutions program is characterized as a "create-your-own GPO," and the description fits perfectly, says Bob Curtis, president and CEO of Cardinal Health System in Muncie, IN.

"We have quite a bit of autonomy -- it's our GPO, we direct it and we decide which direction to go with it," he said. "A big thing they offer is empowerment. We decide what the specs are, what the product is and the evaluation, and that has gone a long way in us taking back control of the supply chain."

Incorporated as a limited liability corporation, JPC's network contracting model is designed not only with IDN needs in mind, but for manufacturers as well, said Ed McManus, senior vice president of sales and marketing.

"Manufacturers like our model because it is designed to deliver committed volume over a long period of time," McManus said. "We've essentially taken the GPO relationship out of play -- the manufacturers get their commitment and the contract is in the name of the IDN, not JPC. We're utilizing the GPO, but going hack to the basics of group contracting."

Free of contracting responsibilities, materials managers can concentrate on other objectives, such as product standardization, he said.

Ball Memorial, a 400-bed teaching hospital, anchors Cardinal Health, which is located near the Ball State University campus in central Indiana. In the six months it has used JPC's services, Curtis says the facility has reduced in excess of 30 percent of their spend through new contracts for gloves, radiological supplies and pharmaceuticals.

For now, those contracts apply only to Ball Memorial, but Curtis maintains that other hospitals and physician clinics in the IDN will soon have the opportunity to gain from the contracts as well.

Recasting purchasing

One of the biggest contracting pitfalls IDNs run into is determining how much of its spending is under contract, says Tom Sherry, managing director for Dallas-based Broadlane Inc. Based on his experience, Sherry estimates that between 40 percent and 45 percent of IDN purchases are under contract.

Broadlane is touting its operational expertise as a selling point for IDNs to use its system because it aims to bring the network's spending under its control.

"When we come in, we ask to be exclusive contracting agents and take over 100 percent of their spend," Sherry said. "We do all contracts -- including capital equipment, even though it's a balance sheet issue. Unlike a national GPO, we are accountable to drive expenses down.

To facilitate the program, Broadlane refashions the materials management department by appointing a manager to oversee operations and bring incumbent staff under its auspices. In order for this radical method to work, senior management must provide strong support, said David Klumpe, who serves as Broadlane's general manager at Continuum Health, a big New York City-based care network.

"This project implements change and it's natural for people not to like change -- so the key to success is for senior management to constantly reinforce the message that they are committed to implementing these reductions," Klumpe said. "You get traction by organizing focus teams in radiology, lab, pharmacy and cardiology and give them specific targets that are visible to the CEO, who then assigns senior managers to lead those teams."

This approach has led to a whopping $33 million in savings for Continuum over the past two years. The goal for this year is another $12 million saved. And while not all of that is specific to contracting, Continuum certainly needed help in that area, Klumpe said.

"They [Continuum] didn't have discipline around the contracting process," he said. "There were no clear guidelines about who could develop and sign contracts, so anyone from a mid-level manager up to the CEO could negotiate a contract. They weren't acting as a system and had no economies of scale. Because there was no central repository for contract pricing, there was no way they could ensure they were paying the same price for the same product at each facility."

Gaining momentum

The concept of IDN-specific group purchasing programs dates back about five years, but only in the past year or so it has it gained a lot of momentum, McManus said.

"Because of bad publicity in the media, the past year has been a tumultuous time for those in the GPO business," he said. "For us it has been a marketing godsend -- this model is the quintessential difference. All this about GPO ethics points to the fact that there is a better way of doing things."

JPC continues to invest in new IDN programs this year as it courts several IDN client candidates.

"We expect two of those will close this year and bring an additional $300 million in spending potential," McManus said.

Broadlane grew out of Santa Barbara, CA-based Tenet Healthcare as the IDN's need for a self-contracting model increased. It now counts Oakland, CA-based Kaiser Permanente, Cincinnati's Health Alliance and William Beaumont Hospitals in southeastern Michigan among its clientele.

Then and now, the group's objective is to strive for 100 percent contract coverage, utilize technology to consolidate information and monitor compliance and to bring clinicians into the decision-making process.

"You need to involve the clinicians in order to have a successful contracting strategy," Sherry said. "You need their approval because if you get a product at a good price but no one uses it, what good is it?"

MedAssets has seven IDNs in its fold and its leaders are optimistic that it will build on that portfolio in the future. Critical to that success, Rand Ballard contends, is the organization's information technology capabilities. Giving providers electronic access to every contract ensures consistency and compliance, he said.

"Although we do some of the things GPOs do, we are primarily a data and technology organization and can leverage that on behalf of providers," Ballard said. "As changes occur, they instantaneously know the impact on their revenue. It's a total cash solution for the health system."

COPYRIGHT 2003 Healthcare Purchasing News
COPYRIGHT 2003 Gale Group