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EUGENES.SCHNELLER,Ph.D.ProfessorandDirectorgene.schneller@asu.eduTempe,Arizona85259@asu.eduor480-965-6334().Dr.SchnellerisProfessorandDirector,SchoolofHealthAdministrationandPolicy,CollegeofBusinessatArizonaStateUniversityTempe,Arizona85287.ThepurposeofthisWhitePaperistoscrutinizekeywritingsandresearchonthecostofhospitalcontractingandtheroleofgrouppurchasingorganizations(GPOs).aArecentseriesofcasestudiesconductedbyNovation,theSupplyCompanyofVHAandUHC,onthevalueofgrouppurchasingwillbeusedtodeterminethefactorsassociatedwithcontractingcost.AtatimewhenregulationssuchastheBalancedBudgetAmendmentandpressuresassociatedwithmanagedcarearereducinghospitalmarginsandjeopardizingtheviabilityofmanyhospitals,understandinghowandwhereefficiencieswillemergeiscritical.Withtheproliferationofnewpharmaceuticalproductsandemergingtechnologies,increasedin-patientacuity,andasustainedcompetitiveenvironment,itisimportantthathospitalmanagementunderstandthepotentialforimprovingorganizationaleffectivenessbyadvancingastrategicvisionforthesupplychainfunction.Grouppurchasingisaprincipalstrategybywhichcompaniesinmanysectors,especiallyhealthservices,havesoughttoachievecostcontainment,improvethequalityofgoodspurchased,andallowstafftofocustheireffortsonotheractivities.TherecentlyreleasedHealthIndustryGroupPurchasingAssociation(HIGPA)reportstatedthatgoodsandpurchasedservicesaccountedforthesecond-largestdollarexpenditure(55%laborand45%non-laborsupplies,servicesandcapitalequipment)inthehospitalsetting.Therefore,achievingabetterunderstandingofthehealthcaresupplychainiskeytothemanagementofahealthcaredeliveryorganization.Itisnoteworthythat72%to80%ofeveryhealthcare(acutecaresetting)supplydollarisacquiredthroughgrouppurchasing.The“bottom-line”rationaleforgrouppurchasingistoachieve:(1)lowerprices,(2)priceprotection,(3)improvedqualitycontrolprograms,(4)reducedcontractingcost,and(5)monitoringmarketconditions.EstimatesplacetheGPOmarketforhospitalsandnursinghomesatbetween$148and$165billiondollarsandgrowingto$257and$287billionperyearby2009.11INTRODUCTIONTOGROUPPURCHASINGaAnorganizationwhoseprimaryproduct/serviceisthedevelopmentofpurchasingcontractsfortheirmembershiptoaccess.GPOsderiveasignificantportion,ifnotall,oftheirrevenuefromsupplieradministrativefees.Theirmembershipmaybecomprisedofaffiliatesub-groupsandhealthcaredeliveryfacilitiesthatarechargedannualormonthlyfeesorbysimplysigningamembershipform(inthesecases,theGPOcoversallofitsexpensesandderivesallofitsincomefromadministrativefees).Theirmembershipistypicallyamixtureoffor-profitandnon-for-profitfacilitiesandtheGPOmaybenationalorregionalinscope.HIGPAhaspointedoutthatGPOscovervirtuallyeverythinghospitals,nursinghomes,andotherhealthcareprovidersrequireofferingdiscountedpricesonsuppliesandequipmentrelatedtoalmosteveryaspectofahealthcarefacility.THEVALUEOFGROUPPURCHASINGINTHEHEALTHCARESUPPLYCHAINWhiletheHIGPAreportdocumentsthemanyproductsandservicesthatGPOsoffertheirmembers,itrevealsthatGPOmemberspurchaseasignificantproportionoftheirgoodsthroughdirectnegotiationswithsuppliers.Theseobservationsaddcredencetothecontentionthattoday’smostpressingsupplychainissue,forsuppliers2aswellasforgrouppurchasingorganizations,3iscontractcompliancebymembers.Atthepresenttime,therearenopreciseestimatesofthecostsavingsgeneratedbyGPOcontractcompliance.Theworkreportedinthispapermakesacontributiontounderstandingthevalueofgrouppurchasingbyscrutinizingthecostsofcontractingwithandwithoutgrouppurchasing.Inmulti-hospitalsystems,thepurchasingfunctioncontinuestohavethefocusattheindividualhospitallevel,withinconsistentapproachestowardsystem-widecorporatepurchasingandnegotiation.Inadditiontocontractportfolios,GPOsofferinformationsharing,clinicalandoperationalbenchmarking,andvalueanalysisassistancethatcouldstrategicallydifferentiateGPOmembersintheirmarkets.MovinghealthcareorganizationstotakeadvantageoftheseGPOproductsandservicesisdependentonrisingabovethebeliefthatsecuringpricesavingsforproductsisthesoleoruniquebenefitofGPOparticipation.A1996surveyof131grouppurchasingfirms(principallynon-health)carriedoutbytheCenterforAdvancedPurchasingStudies(CAPS)atArizonaStateUniversity4revealedanaverageGPOannualdollarsavingof13.43%withanimpressiveaveragereturnoninvestmentof767percent.TheCAPSstudyalsoconfirmedthatexecutivesidentifiedpricesavingsastheprincipalrationaleforgroupBACKGROUNDONGROUPPURCHASINGpurchasing.DatareportedinBusinessWeek5andHIGPA6revealthesubstantialsavingsassociatedwithhealthsectorgrouppurchasing.Itisestimatedthatgrouppurchasingsavedhospitals$12.8to$19.2billionor10%to15%oftotalpurchasingcosts.bThepromiseofgrouppurchasingforachievingcostsavingappearstomeetGPOmembershipgoalsforpricesavings.72bTheprojectedincrementsinhospitalandnursinghomegrouppurchasingwillbefueledbygrowthintheelderlypopulation,newtechnologies,t