Suppose for a moment that you wanted to install a fence in your backyard. As you obtained project bids from various businesses in your area, you begin to realize that the cost for the fence would exceed your budget. Then you have a brilliant idea—you call 5 of your neighbors and ask if they’d also be interested in getting fences in their yards. Two of your neighbors say they are interested.
When you call your favorite fence company and explain that there will be 3 neighboring homes getting fences, they lower the cost substantially for each of you. After all, they will already have all their equipment and installers onsite, and they’ll get a discounted price on the vinyl fence pieces because they’ll be buying it in bulk for this project.
If you’ve ever experienced a scenario like the one described above, you have successfully leveraged group buying power and secured a better price for yourself and others. A group purchasing organization (GPO) uses the same approach to empower doctor’s offices, hospitals, and other healthcare facilities to work together to get better prices for the products they need.
According to research from the Healthcare Supply Chain Association (HSCA), a trade association for purchasing organizations, the strength-in-numbers effect of GPOs helps save the healthcare system about $55 billion a year.
In addition to the immediate cost savings, you should also consider the value of opportunity cost because time is money. If there had already been a GPO in place to help you get a discounted price on your fence, it would’ve saved you more than the sticker price. Think about all the time you would have spent on the phone talking to fence companies and neighbors, trying to negotiate the deal yourself.
So is a GPO right for your healthcare facility? Probably. There is an undeniable benefit from buying in bulk. Otherwise, why would any of us have Costco memberships? It’s obviously not for the beautiful ambiance in those cavernous warehouses.
Just know that not all GPOs operate on the same level. The experts from Healthcare Finance recommend that you reevaluate your GPO relationship about once every 5 years. This practice allows you to confirm that the supply chain spend is still relevant and the GPO is connecting you with the right products. The most effective way to get a bead on your savings is with a “market basket.”
“In healthcare, a market basket measures the pure price change of inputs used by a provider in supplying healthcare services by using price data from the Bureau of Labor Statistics,” explains Healthcare Finance. “If the market basket tops 50% of an organization’s spend, it’s helpful to look through each item to see if the GPO is effectively covering those items under contract. If it isn’t, a healthcare organization may want to look at other GPOs that potentially offer better deals.
Perhaps your analysis will reveal essential values that you’re not currently receiving from your GPO. Truth is, the best fit for your facility might not be a large GPO. Smaller facilities sometimes find that they get more bang for their buck by working with a channel partner, which is a smaller company that belongs to a nationwide GPO.
When a hospital matches up with the right GPO or channel partner, they will likely see 8–10% savings for their supply chain. The potential to save this much money certainly makes it imperative that your healthcare facility considers the GPO model and carefully review your options before signing up with any given organization.
On the flip side, some experts in the healthcare industry have concerns with the GPO model. Research shared by Modern Healthcare reveals that GPOs can contribute to:
- Higher prices
- Drug shortages
- Stifled innovation in medicine
At the heart of these issues is the fact that GPOs generally receive kickbacks and incentives from manufacturers. Just as there’s no such thing as a free lunch, there’s no such thing as a free product placement in a GPO catalog. With manufacturers paying fees to the GPO, the costs of supplies can go up. Ultimately, hospitals could end footing that bill.
Also, the contracting practices used by GPO exclude some suppliers from participating. This practice can limit the supplies available and keep some excellent products from reaching hospitals. This situation is especially true if GPOs make a manufacturer the sole supplier, essentially shutting the door on innovation and quality from other companies.
Despite these concerns, the GPO model still has a lot to offer the healthcare industry. You’ll just need to exercise caution before signing on the dotted line and make sure you understand how the GPO operates and what their supply chain looks like.
Even after you’ve joined an organization, remember to reassess your membership every 5 years. This clear-eyed approach will prevent you from getting stuck in a relationship that mainly benefits the other party.