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Effects of IDN & GPO Consolidation on Healthcare Supply Chain

December 5, 2017 BY Kate Shamsuddin, SVP of Strategy

Effects of IDN & GPO Consolidation on Healthcare Supply Chain

Understanding shifts in the healthcare market means analyzing the industry at all levels. Some of the most prominent issues facing the healthcare industry are regulatory changes from Congress and from the Centers for Medicare and Medicaid Services (CMS), as well as the threat of physician shortages in the near future. This uncertain environment demands a laser focus on overall financial and operational performance, with leading healthcare facilities prioritizing and scrutinizing cost-cutting measures across the board. Ultimately this includes the utilization of purchasing price negotiators to lower costs across the supply chain.

Group Purchasing Organizations (GPOs) and Integrated Delivery Networks (IDNs) specifically aim to lower operating costs for healthcare facilities by negotiating purchasing prices.  However, high medical supply costs and compressed margins across the industry are leading to the consolidation of GPOs and IDNs. This consolidation has the potential to disrupt how medical device, pharmaceutical, and other companies sell into the healthcare market.

Top 10 IDNs by Number of Member Hospitals

IDN Name Member Hospitals Member Net Patient Revenue (M) IDN Integration Level
HCA Healthcare 205 $35,497 System II
Universal Health Services 176 $8,337 System II
Catholic Health Initiatives 153 $16,022 System IV
Community Health Systems 133 $12,885 System II
Ascension Health 132 $17,662 System IV
HealthSouth 130 $2,816 System II
Select Medical Corporation 110 $1,982 System II
Tenet Healthcare 90 $14,228 System III
Kindred Healthcare 84 $2,213 System II
Trinity Health 74 $16,516 System IV

Fig 1 Data from Definitive Healthcare

What is a GPO?

GPOs are not exclusive to the healthcare industry and can range in size and coverage. The purpose of a GPO is to negotiate pricing, whether that be for medical devices, drugs, or products and services utilized by hospitals and other care facilities. GPOs leverage the size of the facilities and the number of providers they represent in order to get discounted pricing. After a GPO determines and sets pricing schedules, providers can use their membership to the respective purchasing organization to contract for products and services at reduced costs. Suppliers typically pay an administrative fee of 1 to 3 percent of the product price to the GPO involved. This is how most of a GPOs revenue is generated. GPOs offer one way for healthcare facilities to reduce overall spend on necessary products and services while also increasing awareness of new products that enter the market.

The importance of GPOs in today’s environment is highlighted by their ever-growing rosters. In 2017, over 90 percent of hospitals and more than 83 percent of health systems are affiliated with a GPO according to Definitive Healthcare data.  The Healthcare Supply Association reports that, on average, hospitals pay 16 percent less when purchasing through a GPO, and approximately 72 percent of all healthcare purchases in 2016 were through GPOs.

Competition between IDNs and GPOs

Unlike GPOs, an IDN is not solely responsible for pricing negotiations. An IDN is a partnership among healthcare facilities—including hospitals, ambulatory surgery centers, long-term care facilities, physicians and other providers—aligning them under one management system. The purpose of an IDN is to streamline care delivery and help patients avoid a fragmented experience, which increases the likelihood of favorable care outcomes. IDNs vary widely in size, operation style, and specialty.

Much like a GPO, IDNs are able to leverage their size to negotiate price breaks for member facilities and minimize operational costs throughout the supply chain—from shared decision making to shared best practices. IDNs are constantly evolving in response to actual and predicted market pressures, with their growing presence considered to be a direct result of the Affordable Care Act (ACA) passing in 2010. A key component of the ACA is the emphasis on coordinated care and the provision of high-quality care at lower costs. Nearly 75 percent of hospitals belong to an IDN according to Definitive Healthcare data.

Large IDNs, such as HCA Healthcare, have the potential to replace GPOs as the healthcare industry’s price negotiators, impacting the $600 million supply chain. More than 770 IDNs are currently affiliated with at least one GPO according to Definitive Healthcare data, allowing them to use GPO-negotiated prices as a ceiling to further decrease purchase prices.

Hospital IDNs (1)

Fig 2 Data from Definitive Healthcare

Antitrust concerns: GPO and IDN consolidation

Industry experts have voiced concern over the consolidation of IDNs and GPOs, citing that the acquisition of GPOs by an IDN or the merging of GPOs could lead to a conglomerate purchasing group that controls a majority of pricing negotiations through their combined power. Currently, no single GPO controls a large enough market share to significantly challenge competition, with the top two GPOs controlling approximately 33 and 27 percent of the market respectively.

That said, recent activity indicates a bit of tension within the market. On one hand, Vizient—one of the largest GPOs—was recently shaped by the combination of the VHA Inc., University HealthSystem Consortium (UHC), and MedAssets. Vizient is now estimated to capture more than $100 billion in annual spend. On the other hand, newer and more specialized purchasing organizations are entering the healthcare market. This specifically includes the formation of Greenhealth Exchange, a cooperative that focuses on sourcing environmentally friendly products, by four major IDNs.

IDNs could have the advantage over GPOs in a system where both players have increasing purchasing power. Some IDNs generate revenue by doing supply chain work on behalf of other facilities, including those they may be affiliated with. As a result, IDNs are thought to hold a greater stake in the outcome of pricing negotiations. GPOs may also have less investment in pricing negotiations as they are independent of member facilities, unlike IDNs that manage member facilities.

Small and independent facilities could also be negatively affected in a system dominated by IDNs, as there may be less competition and higher purchasing prices than in the current GPO-dominated model. Ultimately, competition is essential in minimizing and eliminating inefficiencies as it relates to the purchasing of products and services across the supply chain, particularly in the healthcare market.

Driving toward value means that purchasing decisions, patterns, and trends must also be analyzed over time. GPOs and IDNs house a treasure trove of data, so the challenge is two-fold: creating access to that purchasing data in responsible ways and turning it from simple data into intelligence that meaningfully influences decisions around the purchasing of goods and supplies. Both of these factors are important to consider as the market continues to consolidate, and also as we evaluate the role of purchasing organizations in an industry that lags behind many others.

For more information on the impact of GPO and IDN consolidation on the healthcare industry, download Definitive Healthcare’s free webinar.

Visit the Definitive Blog to read more about the role of GPOs and IDNs in purchasing.

Definitive Healthcare is the leading provider of the most up-to-date, high-quality, and integrated data on the healthcare market. Our database tracks financial, clinical, and newsworthy intelligence on over 8,800 hospitals and IDNs, 1.5 million physicians, 600 payors, and dozens of healthcare industry players.