How to cultivate the best relationship with GPOs as a small distributor
Medical wholesale suppliers and distribution companies will also be able to expand their product offerings with GPOs, which are now, more than ever, welcome in healthcare due to various factors. For example, the current United States federal healthcare reform, PPACA, requires hospitals and other medical facilities to reduce their spending on medical items.
GPOs save the healthcare industry up to $34.1 billion annually and will reduce healthcare spending by up to $456.6 billion over the next ten years. As a result, GPOs are a win-win opportunity for both wholesale medical suppliers and healthcare providers.
By joining a GPO, suppliers' profit margins go up because they can access more clients in the industry they operate in but might not be able to access independently. And hospitals benefit by saving the time, money & resources of finding, organizing, and contracting with distributors on their own.
What is a GPO?
A GPO or group purchasing organization uses the collective buying power of its members to negotiate discounts for products bought in bulk from medical supply distributors and manufacturers. In 2019, a study reported that GPOs in healthcare saved the medical system a total of $34 billion.
The Healthcare Supply Chain Association (HSCA), which represents group purchasing organizations (GPOs) in healthcare, has announced a new data analysis from the CMS reporting that GPOs reduce supply-related purchasing costs to nursing homes and hospitals by 13.1 percent compared to providers who do not use GPO services.
Savings were related to hospital size, however: larger hospitals could negotiate 20% lower prices on their own, while smaller hospitals were more likely to obtain lower prices using GPO contracts.
History of GPOs
The first healthcare GPO was established in the healthcare industry in 1910 as a means for medical providers to save money on supplies and medication. Initially, the number of GPOs grew slowly to 10 in 1962 and 120 in 1974. Today, there are around 600 GPOs serving medical providers in the US.
GPOs value in the medical supply chain
A healthcare consultancy firm analyzed National Health Expenditure data published by the Centers for Medicare and Medicaid Services (CMS) and data collected from a survey of healthcare providers using GPO services. As a result, the firm reached the following conclusions about the value of GPOs to the U.S. healthcare system:
- GPOs save the entire healthcare industry up to $34.1 billion annually and will help cuts costs to the healthcare industry by $456.6 billion over the next ten years (2017-2026).
- GPOs reduce supply-related purchasing costs to hospitals and nursing homes by 13.1% compared to providers who do not use GPO services.
- The Medicare Payment Advisory Commission projects that GPOs will generate $8.7 billion in Medicare cost savings and save Medicare $116.3 billion over the next ten years.
- A HSCA case study found that one hospital achieved $3 million in annualized savings through working with their GPO to optimize cardiac rhythm management purchasing and utilization.
*Self-reported, Data was accessed on 6th Feb 2017
Benefits of working with GPOs
Besides the apparent improvement in cost performance, many hospitals reported these additional benefits when purchasing medical goods through GPOs:
- investment in research & development
- high-quality guarantee
- data analysis and benchmarking
- easy communication
- shared market knowledge
- direct relationship with big-name suppliers
A survey of healthcare providers that use GPO services asked hospitals and other medical providers how they'd rate their satisfaction with their GPO and found the following. The results of the survey show that trends in GPOs are remaining steady. 68% of respondents were either satisfied or extremely satisfied with their GPOs; the prior year's figure was 62%. Only 10% were unsatisfied or highly unsatisfied. The survey participants were asked whether they considered changing their GPO strategy (bid out the services, convert more GPO contracts to regional agreements, etc.). Again, most of them opted for "none of the above." This leads to two potential conclusions—the survey respondents are comfortable with the status quo, or supply chain leaders cannot impact change.
On the other side of the medical supply chain, medical distribution companies also reported some benefits from working with GPOs:
- consistent and predictable contracting
- efficient sales & marketing channel
- value analysis
- automated supply chains
How do GPOs make money?
By charging vendors a membership fee. This can be as a set percentage deducted from every GPO contract or by charging an annual flat rate. Contract fees differ depending on the type of contract used but on average; they range from 1.22% to 2.25%.
A GPO contract is an agreement signed between either a GPO and a medical distribution company or GPO and a healthcare provider.
Vendor-paid administrative fees allow healthcare providers to focus their financial resources on purchasing health care products, not on the support of a GPO.
Vizient, one of the biggest national healthcare GPOs, has reported an estimated annual revenue of $2.1B. Intalere, another big GPO, has an estimated yearly income of $218.2M. It's worth mentioning, in April of 2021, Vizient acquired Intalere. The Vizient member companies represent the most significant healthcare purchasing group in the United States with a combined annual purchasing volume of almost $110 billion.
How does the GPO, hospitals, and distributors' supply chain work?
GPOs have become a valuable part of the medical supply chain in the US.
A healthcare provider will pay a membership fee to a GPO to purchase certain products and services in bulk at a lower price. A distributor will also pay a membership fee to the GPO to have their products included in the list sent to hospitals and other medical providers.
When hospitals request a product from a GPO, they go through a qualification process which can include criteria like location, size and type of medical unit. Once they receive the green light, the hospitals get a GPO contract with the distributors with that particular product in stock and can supply the requested amount.
Hospitals often have the upper hand when negotiating deals with smaller medical distribution companies as they operate as a larger financial entity. Medical supply wholesalers usually accept deals as they are.
What is a GPO contract?
A GPO contract is an agreement signed between either a GPO and a medical distribution company or GPO and a healthcare provider. A GPO contract usually has a 4–5-year expiration date, if hospitals don’t opt out of the agreement.
Are hospitals required to use GPOs?
No. Contracting with a GPO is entirely voluntary. Suppliers are not required to contract with GPOs, nor are healthcare providers required to use the contracts negotiated by GPOs with suppliers. It should be noted that virtually all hospitals, nursing homes, clinics, surgery centers, etc., belong to at least one GPO. A 2010 GAO report found that, on average, hospitals belong to 2-4 GPOs.
What is a GPO report?
Every product sold and every GPO contract signed for a specific product must be written on a document and sent back in the form of a GPO report at the end of the month. Even though GPOs handle the contracts and sales themselves, the never-ending order list uses up time and energy for wholesale medical suppliers.
The same goes for hospitals, which also must create a GPO report for every product they receive and send this data back to GPOs to centralize.
How to automate GPO reports?
To address this issue, Naologic has designed an entirely automated computer software that manages and creates GPO reports, optimizes workflow, and manages product data.
"With Naologic, I now have full control over my inventory, and I'm fully integrated with NDC enabling me to generate GPO reports automatically. Compared to the offline processes we used to conduct, having an online storefront with automated reporting has saved us countless hours!"
Jason Villela, CEO of DirectMed
Pros and cons of distributing products through GPOs
Let's go into more depth on the GPO – distributor relationship and explore how both sides can benefit from this bond.
1. Volume of sales
The most obvious benefit to a distributor is the potential for a larger volume of sales. By getting their list of products sent to hospitals, more and more customers are aware of their business and are more likely to close a deal with them through a group purchasing organization.
2. Simplified contracts
However, there are additional advantages, such as simplified sales and contract processes. For example, if a vendor sells one product to 1,000 hospitals, that's 1,000 negotiations that need to take place to determine prices. Group purchasing virtually eliminates that time and effort on the medical distribution company's part.
3. GPOs don't compete with distributors
Suppose GPOs don't cultivate healthy business relationships with medical supply distributors. In that case, they can't keep the promise of a constant and high-quality supply of goods to hospitals. Because hospitals are not required to work with GPO contracts, the latter must demonstrate the value they provide through the vendors they offer access to. As discussed above, group purchasing organizations grow their business by attracting more members that buy more products from more vendors.
4. Better pricing than the free market on some categories of products
In order to keep healthcare providers happy and coming back, GPOs must maintain strong relationships with the distributors.
Competing in the free market as a distributor can be challenging, especially when obtaining the best price. Working with a GPO can ensure distributors are paid higher prices for some products.
5. Higher revenue through rebates
GPO rebates aim to offer hospitals better deals on healthcare products and services. GPOs do this by purchasing products in bulk from distributors, which in turn order large, continuous quantities from manufacturers. To maintain this profitable flux of sales, manufacturers usually offer rebates to distributors. Which distributors can keep or pass on to GPOs to maintain low prices for every player in the medical supply chain.
6. Compete with big distributors
All distributors play at the same table in the GPO medical supply chain. That means GPOs don't care if distributors are big or small in order to close a deal with them, as long as they supply the products ordered. This is a huge benefit for small medical wholesalers who don't have the same access to customers as big distributors.
7. No warehouse or inventory management
Distributors are the middlemen between manufacturers and GPOs. When a GPO orders a certain amount of products from a distributor, they leave the manufacturer's warehouse and are delivered to the GPO warehouse. Another positive implication of not having your own warehouse is not having to manage your inventory. This saves costs and time for distributors and brings in more profits than not working with GPOs.
8. Better delivery times
Because of the bulk amount of products ordered by GPOs, distributors can ensure that manufacturers deliver the products on time. This means distributors benefit from accurate delivery times.
9. Predictable pricing
A big benefit to distributors is price predictability. GPOs publish a distributor price list that all hospitals in their members can access. As a result, hospitals order products at the set price and distributors know that their products will stay at the same price and won't fluctuate due to changes on the free market.
The importance of small distributors
The presence of small distributors is essential to the efficiency of the GPO - hospital supply chain. Small distributors usually niche out on certain types of products, and they can offer the best solutions for specialized hospitals. Also, hospitals prefer ordering from regional distributors to ensure fast delivery time and better understand hospital demands.
We've compiled a list of small distributors that work with the group purchasing organization NDC:
- Direct MedSupplies
- SNK Medical
- 4 MD Medical
- ABC Medical
- DC Dental
- Elim Preferred Services
- Nashville Dental
- PMR Newkirk
- Preferred Medical
Cons of working with GPOs as a small distributor.
Distributors have long had a complicated relationship with group purchasing organizations (GPOs), especially national GPOs. GPOs offer the opportunity for more excellent market coverage and efficient contracting, both of which benefit vendors and their provider customers. Yet, at the same time, there is pervasive and not-so-subtle grumbling about the marketplace influence GPOs can wield and the level of reciprocal value realized by distributors.
Distributors have started saying that the national GPOs' ability to return value to manufacturers has diminished markedly over time. Key factors contributing to this deterioration include the spread of multisource contracting and the Walmart-like array of manufacturers and contracts listed. Additionally, as health systems have gotten larger, they are applying significant pressure on suppliers and using GPO contracts as a benchmark for further negotiations. This undermines the utility of GPO contracts.
This means that sometimes small distributors are left on the sidelines to fend for themselves, which is less than ideal for a vendor trying to climb the ladder on the GPO shortlist sent to hospitals and other healthcare providers.
Hospitals and other healthcare providers are also starting to question the value of GPO contracts. In recent years, more and more large hospitals are moving towards one-to-one contracts with distributors and negotiating better prices, timely delivery, and more overall efficient distribution. Even though that's the case for bigger hospitals more than half of the market belongs to smaller healthcare providers that depend greatly on GPO contracts for supplies.
Lack of digital tools
In an everchanging technological world, digital tools for businesses have seen a huge increase in development and overall efficiency. However, a big con of working with GPOs is the huge amount of data management that distributors must carry out through GPO reports.
GPO contracts helped the healthcare industry take advantage of massive cost savings reflected in everyone's medical bills. GPO create and maintain relationships with large manufacturers and offer small distributors unprecedented access to healthcare supplies they can distribute at competitive prices.