Healthcare Cost Reduction: What Can Group Purchasing Organizations Learn From BPOs? (Part 1)

Group purchasing organizations (GPOs) are extremely well engrained in the healthcare supply chain. GPOs are intermediaries that sit between hospitals and other buyers and suppliers, typically taking a percentage of the value of each transaction (which is paid by suppliers). Up until recently, GPOs were largely process and contract driven, relying little on technology from negotiation, contract management and P2P solution areas. A few more advanced GPOs, including Broadlane, Premier and others, however, have made large strides in investing in technology to better serve their members (Broadlane primarily uses SAP solutions based on the Frictionless platform, Premier primarily leverages BravoSolution's software tools). Both organizations rely on e-sourcing and contract management tools to target cost reduction and more effective contract management and compliance. Yet technology is not a panacea to healthcare (and GPO) cost reduction.

Might GPOs better serve their constituents -- and by extension, the ultimate healthcare customer: you -- by focusing on what they can learn from procurement business process outsourcing (BPO) providers including Accenture, IBM, ICG Commerce, Infosys and Genpact? A recent discussion I had with a healthcare industry insider, whose name will go unmentioned, was enlightening and suggests that BPOs could teach GPOs quite a bit. During the chat, my contact suggested that one of the challenges for GPOs is that the value equation is upside down in healthcare. This contrasts with procurement BPOs, which clearly understand the difference between strategic spend and less strategic spend, and typically tackle the latter for their clients which encourage their customers to focus on developing competencies internally to better manage the former.

One of the fundamental challenges with current GPO models is that they absolve providers from pursuing certain initiatives that they should be tackling on their own. Because of physician preference, hospitals and IDNs are not taking control of aggregated volume as efficiently as they should (and they're not taking in-house certain spend areas from GPOs in less strategic categories such as beds, bed sheets, food services and facility services where their own volume leverage could be strong enough to justify an internally-led effort). From a strategic procurement standpoint, healthcare supply chain organizations have largely stepped back entirely from medical, pharmaceutical, construction and other areas where they could have a huge impact if they were to get more involved working closely with physicians and other stakeholders.

In other words, far too many IDN and hospital procurement and supply chain organizations have largely punted on their core job responsibility. In contrast to procurement organizations that work with BPO providers in other industries for their indirect spend (and only in a limited manner for direct materials), healthcare procurement teams have confused what's core and non core. They have made the wrong decision to outsource key areas to GPOs when, in fact, they should take back key categories to manage internally -- while they more aggressively tackle the issue of physician preference. Procurement has also failed to balance the need of maximizing ideal patient outcomes at the lowest possible price point -- and to provide physicians with the type of intelligence that can help them make better decisions based on the quality of product and service that different suppliers offer in strategic areas. What is the best prescription for procurement organizations to successfully reinsert themselves in strategic decisions and create this balance? Stay tuned as we write one of the scripts in the next post in this series.

- Jason Busch

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