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Effects of IDN & GPO Consolidation on the Healthcare Supply Chain

December 5, 2017 BY Kate Shamsuddin, SVP of Strategy

Effects of IDN & GPO Consolidation on the Healthcare Supply Chain

*Updated October 2019

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 continuing threat of physician shortages. This uncertain environment demands a laser focus on overall financial and operational performance, with leading healthcare facilities prioritizing 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.

What is a GPO?

GPOs are not exclusive to the healthcare industry, and these organizations can range in both 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 or 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 sets pricing schedules, providers can use their membership to the 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 the organization’s 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 may enter the market.

The importance of GPOs in today’s environment is highlighted by their growing impact within the healthcare industry. According to most recent Definitive Healthcare data, over 91 percent of hospitals and nearly 70 percent of health systems are affiliated with a GPO. The most significant realization of this GPO impact is in the economic benefit for care providers. In their 2018 cost savings analysis, the Healthcare Supply Chain Association (HSCA) reported that hospitals pay 13 percent less on average when purchasing through a GPO, and that this discounted cost resulted in $34.1 billion total savings last year.

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—aligned 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. Of the 8,157 active hospitals that Definitive Healthcare tracks, over 6,500 facilities—nearly 80 percentare affiliated with an IDN.

Much like a GPO, IDNs can 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.

Top 10 IDNs by Number of Member Hospitals

IDN Name Definitive ID Member Hospitals Member Net Patient Revenue IDN Integration Level
HCA Healthcare 4710 211 $42,213,477,560 System II
CommonSpirit Health 981465 203 $28,543,327,983 N/A
Universal Health Services 7055 172 $9,212,756,052 System II
Department of Veterans Affairs 7265 160   System II
Ascension Health 4695 128 $17,858,985,891 System III

Encompass Health Corporation (FKA HealthSouth)

7277 118 $2,795,074,810 System II
Select Medical Corporation 7013 114 $2,266,475,574 System II
Community Health Systems 542233 106 $10,516,859,767 System II

LifePoint Health                            (FKA LifePoint Hospitals)

7004 85 $8,025,621,851 System III
Tenet Healthcare  4685 83 $13,652,040,731 System III

Fig 1 Data from Definitive Healthcare’s IDNs platform, as of October 2019

Large IDNs, such as HCA Healthcare, have the potential to replace GPOs as the healthcare industry’s price negotiators—impacting supply chain revenue. More than 680 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.

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 most 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 42 and 26 percent of hospital market sales, respectively.

2019-Infographic-Essential-Data-on-Hospital-IDNs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fig 2 Data from Definitive Healthcare’s Hospital & IDN platform, accessed October 2019.

That said, recent activity indicates a bit of tension within the market. 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. Meanwhile, 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 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 factors are important to consider as the market continues to consolidate, and as we evaluate the role of purchasing organizations in an industry that lags behind many others.

Industry Expert Webinar: 5 Proven Tactics Every Supplier Needs to Know When Working with IDNs

Tune in: Thursday, October 17th at 2pm ET

Join Panelists:

  • John Pritchard, President, Share Moving Media
  • John Strong, Co-Founder & Chief Consulting Officer, Access Strategy Partners Inc.

Discussing:

  • Key environmental factors in the industry landscape
  • Top common mistakes suppliers make when interacting with large IDNs
  • Top mistakes IDNs are making
  • Five actionable tactics to use when interacting with IDNs

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