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Mr. Lynn R. Detlor
April 30, 2002
My professional career in health care began in 1972. Group purchasing in hospital health care was in its infancy.
Hospital medical supply costs averaged 6 to 7 percent of annual expense budget as compared to today in a hospital where the expense for medical supplies could range anywhere between 23 to 28 percent depending on the acuity of care delivered. The growth in new technology has helped to expand the growth in supply costs
The political impact of Medicare legislation in the mid 70's on operating expenses had a direct impact on hospital executives targeting areas to lower expenses. Salary impact as a potential target caused adjustments in nurse-patient staffing ratios and supply costs reduction through material management were the major targets. This drove the rapid growth of state and local group purchasing organizations to emerge.
Price of products was implied by medical manufactures to be linked to the largest compliant customers. This in turn led to consolidation of the market place. Local and state group purchasing organizations began consolidating with larger national organizations in the quest for lower prices for their members. Today, less than a dozen group purchasing organizations represent the majority of the nations hospitals. Two, Novation and Premier represent over 60% of the nations hospitals.
In 1995 American Healthcare Systems and Premier (A group purchasing organization out of Chicago) merged and 6 months later Sun Health merged to form what today is the new Premier. Novation was formed by a linking of the University Hospital Consortium and the Voluntary Hospitals of America.
The outcome of the mergers has led to larger organizations with operating budges in excess of $300 - $400 million dollars. Diversity, to be more than just a group purchasing organization, has led to program expansions in e-commerce and data mining, business development, physician practice management, etc.
Today, working as a consultant at "GPO Concepts" we hear the same questions from two sides of the market place, the medical manufacturers and the hospitals.
The medical manufacturers are concerned about the value they receive from the fees paid. How much makes its way down to the hospitals is also a major concern. The hospitals are questioning where and how the fees are spent and yet hospitals face even more pressure to continue to lower costs. Are the hospitals now competing for the same dollars that today goes to the group purchasing organizations?