Consider reaping benefits of group purchasing

by Russell Libby, M.D., FAAP

Medical practices that want to respond to the increasing cost of supplies used to run their practises should consider aggregating their purchasing power to get better pricing through a group purchasing organization.

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Single specialty groups in private practice provide most of the pediatric care in our country. Their viability depends on balancing the economics of a small business with the goal of providing high quality, socially responsive medical care for children. They work on a very slim margin of profitability that is easily upset by changes in overhead and reimbursement. The expense of providing medical services has increased significantly in recent years with payment barely keeping up. One way pediatricians can respond is by aggregating their purchasing power to get better pricing on office products, medical supplies, insurance, telephone service, Web hosting, and other products and services through a group purchasing organization (GPO).

GPOs gain influence

Group purchasing started in the United States in the late-’60s as hospitals began forming purchasing alliances to negotiate better pricing and terms from manufacturers and suppliers. It became clear that it was not possible to get the best deals without committed purchasing volume. As they discovered better discounts through disciplined buying, GPOs gained influence and now are the standard operating model for hospitals, accounting for more than 85% of all hospital purchases. Other health care organizations such as nursing homes, pharmacies and home care providers have adopted the GPO model. However, due to a variety of factors, the GPO model has not filtered down to physician practices, especially the small independent practices that could benefit most.

Leverage to negotiate

Small practices are used to grabbing the “deal of the month” hawked by middlemen and manufacturers. They cannot realize the greater long-term savings available through disciplined purchasing. Sole source of supply or single source products is minimally discounted even for large orders. The other factor that can affect discounts is competition among manufacturers and suppliers. Price negotiation is most effective when there is product choice. As competition increases among manufacturers, physician group purchasing can evolve from a standard discount to a negotiated model. Group purchasing depends not only on competition among suppliers but also committed volume purchasing from physicians. The first level of organization involves physician buying groups, usually comprised of 10 to 50 practices. There are a large number of physician buying groups that are offered discounts and terms by suppliers, but these groups are not likely to achieve the leverage of a GPO to negotiate better pricing and terms.

How GPOs operate

There are some important concepts to understand about how GPOs work, how they differ and how you can best take advantage of the opportunities they offer. GPOs generally take a small percentage of the sales volume to cover their operating costs. The manufacturers and distributors not the physician practice pay this. The GPO also may negotiate additional discounts and rebates for member practices through specified product purchasing goals, timely payment and promotional programs. Some GPOs offer other services or products such as office supplies, IT elements, insurance products or after-hours phone triage. They also may have Web sites that can be a resource for a variety of office functions. Subtle factors differentiate GPOs. In addition to specific product/vendor discounts and resources, service and responsiveness can be important considerations.

Vendors, may offer more incentives and discounts through GPOs if they can get product loyalty, increased market share, marketing support and other promotional opportunities. The GPO can broker stability in supply and a reduction in cost for products and services, which can translate into an advantage for the manufacturer as the marketplace becomes more competitive. A GPO can provide the physician, from solo to large group, the ability to use the aggregate purchasing power of a large group while being able to order and routinely pay on a monthly, as needed basis.

Dr. Libby is a member of the AAP Section on Administration and Practice Management