Group purchasing enters new phase in 1990

Group purchasing enters new phase in 1990

We are entering a new phase this year of group purchasing that is growing and attracting more products and services. However, many issues are still unresolved. It is necessary to be aware of the direction and the trends evolving in the group purchasing arena to benefit from increased group contracted product sales in the 1990s.

Growth of Groups

The groups are looking for measured, controlled growth. They have recognized that growth in the number of hospitals, without their commitment to their vendor contracts, is worth little, if anything. There will be some growth through the merging of systems or the closing of groups, and their hospitals will be picked up by the remaining groups.

However, there will not be a large shake-out of groups since administrative fees continue to be paid. As long as hospitals can belong to more than one group and manufacturers continue to contract with these groups, there will be funding and they will survive.

Membership growth

The alternate care markets will play a bigger role in group contracting in the future. Nursing homes and extended care facilities now offer the most opportunities for growth. The outpatient retail pharmacies at many of the alternate sites offer new growth opportunities.

Alternate site contracts will be written for these groups (surgery centers, nursing homes, clinics, etc.) with pricing higher than is granted to the hospital market. However, as these markets become larger, the differences in the pricing and the number of different pricing structures will diminish.

Products offered

A broader array of contracted products will be offered to their members, particularly in equipment and food service. Many of the groups are not offering these products now.

The groups are beginning to negotiate contracts for products and even physician preference items that have not traditionally been made available through group contracts. Group resistance to contracting physician preference items is steadily decreasing since hospitals must purchase the most cost effective goods and services in spite of physician or nurse preferences. This has most recently been demonstrated by the American Healthcare Systems corporate contract with Smith & Nephew Richards Medical. Orthopedic prosthetic devices were included in their recently signed corporate contract.

Commitment/compliance

Membership will consolidate and become more committed to the contracts as the three players; the vendor, the group and the constituency recognize they must work together to make the contract work. This will result in higher levels of compliance than in the past. More contracts by the stronger groups will be committed volume contracts with volume incentives.

Multiple affiliations

Fewer multiple affiliations will exist. Groups are showing much more concern than in the past with noncompliant member hospitals. Those that don't participate in the contract programs are not allowed access to the contract. Some vendors are asking hospitals to sign a letter of agreement committing to exclusive use of their contract, prohibiting them from using other contracts to which they may have access. In the future, most hospitals will belong to one major group in addition to a regional or local group.

Lack of accountability

By the early 1990s, the groups that don't have their houses in order to demonstrate the effectiveness of their contracts will fail. Accountability will be imperative on both the vendors' and the groups' parts for the contract to succeed. Information is power and the key to success for both the vendors and the groups.

Contracting in the 1990s

Vendors are becoming more selective in the groups they work with and are looking for new partners.

A fear the groups have for the 1990s is that the major five or six vendor companies will become so powerful that the groups will be at the mercy of dealing exclusively with them. Their fear is that the Baxters, the J&Js and the Abbotts may reverse their directions and won't deal with them, but negotiate contracts individually with their big hospital customers, perhaps dropping many of the other hospitals from their contractual agreements.

As hospitals become more selective in their product choices and require more special services, the opportunities for direct contracting with individual hospitals increases, thus by-passing the groups. This involves many additional services and incentives such as those put together by J&J and Abbott.

Contract length

The one-year contract will pass for most groups because they have too many contracts and not enough time to go back to the drawing table every year to renegotiate. Three years is considered ideal with evaluation of the contract on a regular basis.

Many groups are working with five-year, open-ended contracts with changes negotiated as prices and technologies shift. With these longer contracts, relationships are established with the vendor so changes and shifts in the market can be worked out quickly.

Thus, some long-term contracts negotiated with American Healthcare Systems and Hospital Corporation of America may turn into 10-year or even 20-year agreements. They are, in effect, "open-ended" contracts with annual reviews. There is often expressed fear of these long-term agreements because the groups may lose contact with the products and may find they are no longer getting competitive pricing or technologically advanced products.

Length of contract depends on the product. Equipment is changing so quickly that contracts longer than two years may no longer have merit. For commodity items, longer-term contracts can apply as long as the competitions' product innovations don't exceed the current contract holders to such an extent that the hospitals start purchasing from the non-contract vendor.

John A. Henderson is president of SMG Marketing Group Inc., Chicago. SMG maintains databases on institutional health care providers and Henderson consults with vendors, 312-642-3026.

COPYRIGHT 1990 J.B. Lippincott Company
COPYRIGHT 2004 Gale Group