The uncertain healthcare market demands a laser focus on industry trends in order to succeed. This includes understanding hospital financial and operational performance. Healthcare facilities are prioritizing cost-cutting measures, spurred by CMS initiatives and external market factors. This includes the use of price negotiators to lower costs across the supply chain.
The purpose of a GPO is to negotiate supply chain pricing. This could be for medical devices, drugs, or other healthcare products and services. GPOs leverage their market share and member volume to get discounted pricing. GPOs are not exclusive to the healthcare industry, and they can range in both size and coverage.
After a GPO determines prices, member facilities can contract for products and services at lower costs. Suppliers typically pay an administrative fee of 1 to 3 percent of the product price to the GPO involved. These administrative fees are how GPOs generate most of their revenue.
GPOs offer one way for healthcare facilities to reduce supply costs. They also increase member awareness of new products that may enter the market.
The purpose of an IDN is to streamline care delivery and help patients avoid a fragmented experience. This increases the likelihood of favorable care outcomes. IDNs vary in size, operation style, and specialty. Roughly 76 percent of hospitals are IDN members, according to Definitive Healthcare data.
Much like a GPO, IDNs can leverage their size to negotiate price breaks for member facilities and reduce supply costs. IDNs are constantly evolving in response to actual and predicted market pressures. Growing IDN influence is likely a result of the Affordable Care Act (ACA) passed in 2010. The ACA emphasizes coordinated care and providing high-quality care at lower costs.
Large IDNs have the potential to replace GPOs as the healthcare industry’s price negotiators. More than 680 IDNs are currently affiliated with at least one GPO according to Definitive Healthcare data. This allows IDNs to use GPO-negotiated prices as a ceiling to further decrease costs.
Antitrust concerns with GPO and IDN consolidation
Industry experts have voiced concern over the consolidation of IDNs and GPOs. The acquisition of GPOs by an IDN or the merging of GPOs could lead to a conglomerate purchasing group. These groups could control most pricing negotiations through their combined power.
Meanwhile, newer and more specialized purchasing organizations are entering the healthcare market. This includes the formation of Greenhealth Exchange by four major IDNs. The Exchange is a cooperative that focuses on sourcing environmentally friendly products.
Impacts of continued IDN and GPO consolidation
IDNs could have the advantage over GPOs in a system where both have increased purchasing power. Some IDNs generate revenue by doing supply chain work on behalf of other facilities. As a result, IDNs may hold a greater stake in the outcome of pricing negotiations. GPOs may be less invested in pricing negotiations because they are independent of member facilities.
This is unlike IDNs, which manage member facilities. Small and independent providers could be negatively affected in a system dominated by IDNs. There may be less competition and higher purchasing prices than in the current GPO-dominated model. Competition is essential in minimizing and eliminating inefficiencies in purchasing and negotiations.
Moving toward value means that purchasing decisions and trends must also be analyzed over time. GPOs and IDNs house a treasure trove of data, so the value-based challenge is two-fold. One is creating access to purchasing data in responsible ways. The other is turning simple data into meaningful intelligence that influences purchasing decisions.
Both factors are important to consider as the market consolidates and as we evaluate the role of purchasing organizations in an industry that lags behind many others.
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Originally published December 5, 2017
ABOUT THE AUTHOR
Alanna Moriarty is a healthcare industry writer and content strategist. As the Content Marketing Manager for Definitive Healthcare, she most enjoys connecting the dots between data and care delivery. ...