National account renewals hinge on value - contracts with hospital purchasing groups

National account renewals hinge on value

As second and third generation contracts with hospital purchasing groups come up for renewal, vendors are finding that their clients are looking more at the total cost, or value of the contracts than at line item prices.

Group purchasing organizations are looking at such issues as: * Co-op marketing efforts, * Value-added services, * Presence (vendor size) in the market, * Penetration within member hospitals, * Users' acceptance of the product and * The cost of switching vendors.

This is making it a lot harder for the newcomer to gain access to the GPO and to the markets that are controlled by these GPOs. If the incumbent vendor is playing its cards right, it will be very difficult to dislodge.

Cooperative marketing

A vendor that has an effective cooperative marketing program for the group purchasing organization has: * Established long-term relationships with its client GPOs' purchasing and marketing staffs and * Ingratiated itself with hospital purchasing managers, purchasing agents, chief financial officers and, most important, end users.

The vendor that effectively uses value-added services has: * Developed value-added services that deliver and have long shelf lives, * Offered value-added services that are both directly and indirectly related to its specific product and * Provided value-added services that aren't available from other sources.

Market presence

One of the most important reasons vendors seek contracts with multi-unit health care providers is that they want to increase their market share, often sacrificing profit margins in the process. The supplier that is in a good position to renew a contract with high compliance has: * Used group contracts to achieve significant market share in the areas served by client group purchasing organizations, * Publicized its market dominance and convinced users that it is important to stay with a market leader, * Effectively motivated its field sales representatives to implement national contracts and made them acutely aware of the critical roles they play in retaining contracts and * Sold any distributors used to implement the contract on making the contract work.

Hospital penetration

Achieving market dominance, of course, requires the effective penetration of hospitals belonging to member groups. The supplier that has market dominance and has penetrated target hospitals has: * Sold members of contracting GPOs on serious compliance with contracts, * Effectively used its contracts to win serious hearings from end users, * Products that demand loyalty, * In-service training and * Value-added services needed to build long-lasting loyalty.

Finally, the vendors that survive the efforts of group purchasing organizations to reduce the number of vendors that they contract with have raised the hospital's cost of switching suppliers.

Switching costs

Switching costs are raised by building systems for patient care that incorporate the contractor's products and services as well as those of noncompeting allied vendors.

The marketers of IV products are especially effective at introducing new pharmaceutical and nutritional IV solutions, pumps, administration sets, bags, compounders and other components that make it very expensive to retrain nurses to use competing products.

Even such basic items as beds are becoming so complex that the cost of orienting bedside caregivers to use new brands can discourage hospitals and their group purchasing organizations.

And after a hospital's maintenance staff has learned to work on a brand of beds, imaging equipment, computers, surgical tables or floor cleaners, a hospital's switching cost has been increased substantially.

Defenders' advantage

For example, if two manufacturers have the bulk of the group purchasing organization contracts for a specific type of product, it will be very difficult for a newcomer with a better product to win more than a hearing from that group's hospitals or standardization committee as long as they are happy with the incumbent supplier.

The best strategy for a new competitor or one who has a small market share and a new product that might win new converts is to go after individual hospitals and smaller groups. After winning a significant share of the hospitals that don't belong to groups with contracts for the product involved, a supplier can try to break into groups.

To capture the non-group market, it is important to zero in on physicians who are early adopters. As early adopters buy into a product, their influence can be used to begin building bottom-up pressure on hospitals and group purchasing organizations to specify your product in their conracts. Such an effort may take years.

Hospital contracts

A new supplier facing strong defenders may want to focus on individual medical centers and GPOs that are looking for better products and values than the target providers' purchasing groups offer.

The bigger hospitals don't need GPOs as much as the smaller hospitals. This is because many of the national groups structure their purchasing programs to a broader number of hospitals of many different sizes and constituencies.

Group purchasing organizations that serve major medical centers and attract members with programs tailored specifically to their individual needs must offer services that can enhance the hospitals' positions in their markets.

Thus, the old saying that it pays to know your customer bears repeating. No two purchasing groups or medical centers are exactly the same. Their missions, politics and people are all different, and it pays to know how to help them achieve their goals and at the same time win and keep important customers.

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.

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