Last month I wrote a story about the death of the Group Purchasing Organization (GPO) business model. The basic premise is that the traditional GPO purchasing “aggregator” business model will be on the decline in the future. There are many drivers that will cause this decline in the aggregator model.
It’s not that I think that GPOs will go away. On the contrary, they will evolve and find new ways to create value for their members. With the changes brought on by healthcare reform, and with “big data” and increasing outcomes transparency, GPOs probably have the opportunity to create much more value for their members. In the process, they also have the potential to have even greater influence on supply decisions.
Just this week, Premier officially announced their initial public offering. In their press release, Premier noted…”We believe the future for healthcare providers in the United States will require transformational change, due to intense cost pressures, a shifting competitive landscape, a changing regulatory environment, the evolving use of data and analytics and the transition to a fundamentally different payment model.”
GPOs are already sizable businesses. In its IPO filing, Premier stated its annual revenue as $869 million (1). Medassets, another public GPO company, had revenue of $600+ million in the most recent fiscal year (2). With a $150 billion supply market in the US and with an estimated $700+ billion in waste of all kinds in the US healthcare system, there’s a huge business opportunity in reducing supply costs and driving out overall waste (3).
In order to understand where value will be created in the future, and the implications for suppliers, consider figure 1 below. This is a standard five-step sourcing process. In the past, the GPO aggregator model provided value across the entire sourcing process. However, the real value creation was in step #4. This is where GPOs used the leverage of hundreds or thousands of hospitals to negotiate better pricing with suppliers.
Figure 1 – Simple 5 Step Sourcing Process
Yet, this typically only worked well with supply items that were not high physician preference items. The GPO model traditionally did not work as well with high physician preference items (e.g., implantable devices, new technologies, etc.) (4).
Since physician preference items represent 50-60% of total supply costs for many hospital, the traditional GPO model missed a significant portion of spend. More importantly, it is these physician preference items that often have the biggest impact on longer-term outcomes and downstream costs.
Under healthcare reform, where hospitals are now accountable for costs, outcomes and quality, this is where the real opportunity exists to create value. The evolution of the payment system from paying for activity (fee for service) to paying for value is creating a big opportunity. The opportunity is to use outcomes data and cost transparency to direct which specific device or drug works best in different patient populations. This is a movement to evidence and value based sourcing.
With insights on outcomes and using analytics, the GPOs have the potential to play a more important role in supply selection in the future. They can help develop evidence-based care protocols, use data for outcomes-based pricing with suppliers, and force suppliers into risk based contracting. It’s hard to say what the speed of change will be or whether the GPOs will be the winners in providing these services to providers. There are a number of other entities trying to fill this need for hospitals. I’ve written about SharedClarity and many of the new promising start-ups that are also trying to make an impact here.
However, it is fair to say that healthcare suppliers should be prepared whether a GPO or another entity approaches them. Imagine a future where a GPO presents outcomes and cost data to you on your product, and then tells you what they would be willing to pay based on these data. In order to prepare, suppliers should spend some time trying to answer a number of questions:
- Do you have the right skills in your GPO account management organization to handle this new future? Are the account managers trained in the basics of health outcomes and economics. Do they understand value and healthcare reform?
- Can your back-office contracting and data management capability handle different contracting models in the future?
- Have you thought through the right pricing and contracting models to handle risk-based and outcomes based contracting?
- For your key offerings, are the outcomes and value relative to other alternatives well understood?
- Do you have adequate evidence to substantiate and defend the value of key offerings?
Notes & references:
- Premier makes it official, files for IPO. Modern Healthcare. Accessed August 26, 2013
- Edgar Online.com
- How Much Waste Is There in the Health Care System? AARP.com November 6, 2013. Accessed August 27, 2013
- Saha, R., et. al. A Research Agenda for Emerging Roles of Healthcare GPOs and Their Evolution from Group Purchasing to Information Sharing to Strategic Consulting. Proceedings of the 43rd Hawaii International Conference on System Sciences – 2010