Health Industry Group Purchasing Association head discusses GPOs (transcript)

This is the transcript of my recent podcast interview with Curtis Rooney of the Health Industry Group Purchasing Association.

David E. Williams: This is David Williams, co-founder of MedPharma Partners and author of the Health Business Blog.  I’m speaking today with Curtis Rooney, he is President of the Health Industry Group Purchasing Association, which represents group purchasing organizations.  Curtis thanks for being with me today.

Curtis Rooney:            David thanks for the opportunity.

Williams:            Let’s just start with the basics. What is a GPO and how prevalent are they within the U.S.?

Rooney:            GPOs stand for Group Purchasing Organizations and they’re quite prevalent.  There are actually about 600 GPOs in the U.S.  My organization, the Health Industry Group Purchasing Association has 16 members, which make up about 95 percent of the market.  It is a market that is pretty mature.

This is just a health care GPO.  There are GPOs in other fields such as food and legal. There’s actually a GPO for tires as well.

Williams:            Hospitals are the main customers of GPOs.  What kind of benefits do they receive?

Rooney:            GPOs cater to hospitals and are often actually owned by hospitals.  A lot of people don’t know that. The primary benefit to a hospital is that the focus of purchasing their materials is conducted by someone else; by the GPO.  GPOs focus on helping materials managers do an incredible amount of purchasing for hospitals and also for long term care providers.

Williams:            Is it just a matter of dividing up the pie between the hospitals and the suppliers or are there efficiencies that come about from using a GPO?

Rooney:            There is actually a dramatic amount of efficiency.  Just imagine if you’re a supplier. You’ll have to go to 5,000 hospitals individually or alternatively you can go to the 16 GPOs that I mentioned to have your products brought to market and put on contract.  GPOs don’t distribute the product, they just contract and aggregate the purchasing power of the hospitals. It’s up to the hospital to buy the product but it certainly is a lot more efficient for suppliers and hospital staff to meet that way.

Williams:            If I am a small manufacturer of a medical device or some kind of supply, would working with a GPO be a good idea? Under what circumstances would it be successful in terms of launching a new product or product line?

Rooney:            GPOs are always looking for ways to find innovative and diverse suppliers. They’re working with small suppliers to find new entries into the market. The primary benefit for a small supplier is that it would leverage the power of the GPO to get their product into markets that they would not normally have access to.

Williams:            Everyone is talking about health care reform –whether implementation or repeal– depending on the day. What does health care reform mean for the GPO industry overall?

Rooney:            For both GPOs and for hospitals it means a lot of the things you’ve been reading about in the newspaper: consolidation, cost containment and value based purchasing. We have seen that in the GPO industry. The primary customer for a GPO is the hospital, so the GPO is looking to assist the hospital community in the transition.

Williams:            As you mention health care reform is leading to consolidation on the provider side. When you see that kind of consolidation on the provider side does it mean that there’s more direct contracting by these larger systems that have the scale or do they still tend to use GPOs in the same way?

Rooney:            There has been some change with the larger integrated delivery networks.  They certainly do their own share of purchasing and tend to use the GPO contract as a basis for negotiations.  About 70 percent of the products bought by hospitals are bought off the GPO contract, but that other 30 percent is bought directly. When buying direct they’ll talk about the GPO price and sometimes they’ll even create regional GPOs, which is another trend that we’ve been seeing.

Williams:            And why does that trend come into play?

Rooney:            It’s kind of a midway point between the national GPO and national contracts and the trend of IDNs, integrated delivery networks, doing their own purchasing.  It’s another way for entities to make the supply chain more efficient.

Williams:            At one point Medicare had a pilot program to let hospitals share savings with physicians if there was some standardization of physician preference items, specifically orthopedic implants. Are you familiar with that effort? Is it the sort of thing GPOs might be involved with?

Rooney:            GPOs certainly have been involved with what I think you’re referring to as gain sharing.  A number of GPOs have been focused on that. One GPO in particular has actually purchased a gain sharing company and has been offering that service as a part of their overall package. In the health care reform legislation there were more provisions having to do with gain sharing. I do think it will be a trend that you’ll see as consolidation and physician alignment become more of a prevalent practice in health care.

Williams:            How successful are those programs?  There seems like there’s a lot of money on the table but then again you’ve got people, especially the orthopedic surgeon example, who are not so easy to move along into a standardized way.

Rooney:            People who have really examined gain sharing realize that it’s not going to be the silver bullet, that it’s going to be one more piece of the arsenal in terms of cost containment. There are savings but I think there is a diminishing return at some point. So while that’s going to be something that people will be promoting I don’t think it will be a vast trend.

Williams:            GPOs focus mainly on group purchasing as the name would imply but I know GPOs have also looked at opportunities to serve their hospital customers on the revenue side.  I’m thinking about things like revenue cycle management. I wonder whether you’re seeing that occur to a large extent and if that’s a distraction from what would be their core or their founding mission.

Rooney:            Revenue cycle management became more popular in the last few years.  As you’re probably aware the GPO industry is incredibly competitive.  The whole model, because there’s a limited number of hospitals, is to eat the other guy’s lunch. So offering “front office” services such as revenue cycle management is one more way that GPOs use to differentiate themselves in comparison to the other GPOs.  I do think that trend is either hitting its peak or will hit its peak soon. I expect that a number of GPOs will be offering that service and finding other ways to differentiate themselves.

Williams:            The hospital industry and GPOs receive a lot of scrutiny from Congress and elsewhere. I understand there’s been somewhat of a push in the GPO space as a result, with a move to shorter contract lengths and more multisource contracts. Is that pressure continuing?

Rooney:            The Government Accountability Office (GAO) recently looked at this question and a number of other questions regarding GPOs in light of health care reform.  There was a report requested by Senator Grassley and I recommend that you take a look at it.

The report was called GPO Services Provided to Customers and Initiatives Regarding their Business Practices.  It was published in September.  I know it’s not a very pithy name but it contains a lot of good information about the questions you have.

What we said to the GAO when they were asking is what I’ll say to you now. All the information that you could ever want on GPO business practices including the length of contracts and multisource contracts is available on a public website The GPO industry has gotten together and posted a questionnaire that each member’s CEO attests to. I think it makes for interesting reading.  It certainly answers the question you asked me.

Williams:            Curtis, any other topics that you would like to cover?

Rooney:            My message today is that the purpose of a GPO is cost savings. We have documented in a number of studies a savings of about $36 billion annually to the private sector and the public sector. As health care reform rolls into implementation GPOs will play an important part in that.

Williams:            I’ve been speaking today with Curtis Rooney.  He is President of the Health Industry Group Purchasing Association.  We’ve been talking about GPOs.  Curtis, thanks for your time.

Rooney:            Thank you.

December 8, 2010

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