GPOs and Supply Chain Management

OCTOBER 01, 2004
James C. McAllister III, MS, FASHP, Pharmacy Times Editor, Health-Systems Pharmacy Section

The Group Purchasing Organization (GPO) industry has been in turmoil for some time. These organizations have been changing through merger and acquisition, but their focus has been on volume purchasing, member recruitment, and their own profitability. Otherwise they have been relatively stagnant.

Although it is easy to take cheap shots at GPOs, officials of hospitals and health systems and their organizational units (pharmacy departments included) have not demanded much more. If their aggregate supply costs have increased at a slower rate than national benchmarks, hospital executives have remained relatively satisfied. Given that supply costs are the second-highest expense for hospitals after labor, officials have been lulled into considering themselves successful based on aggregate figures, without examining which segments have been more successful than others in holding down supply costs. Hospital executives receive periodic reports on contract compliance by department (pharmacy, radiology, etc), but it has been challenging for hospitals to affect compliance or utilization for supplies used throughout the hospital.

Supply chain management has been the watchword of GPOs for years, but I am not sure that the officials of these organizations understand the complexity of the concept, especially with respect to pharmaceuticals. Their focus is usually on standardization for identical pharmaceuticals and supplies and member compliance. Regrettably, their narrow focus results in a "one-size-fits-all" approach for member organizations through volume-purchasing agreements that benefit lower-volume organizations preferentially.

GPOs have done a reasonably good job of the contract-management, vendor-negotiations, and inventory-management functions, including the development of tools to measure compliance and enhance performance. Utilization and outcomes measurement functions, however, have been largely ignored and deferred to the member organizations. Individual hospital pharmacies have been performing drug utilization reviews for decades and have begun to measure outcomes, but comparing institutional data among similar hospitals is rare.

I would argue that examining utilization and outcomes measurement is essential to determining the real value of pharmaceutical use. Comparing the results of one's institution with those of others would likely result in learning from each other, determining best practices, and driving out unnecessary costs in a sustainable fashion. Given pharmacists' expertise and experience in performing these functions, GPO officials should consider starting with pharmaceuticals and then replicating successful strategies in managing supply consumption.

GPOs have recently come under fire from the federal government for some of their business practices. It seems to me that they have an excellent opportunity to reinvent themselves. This industry needs to redefine its role and create innovative relationships with wholesalers, drug manufacturers, and individual customers. Services offered must be prioritized globally and tailored for individual accounts, depending on a customer's needs.

True value can be optimized if GPOs develop expertise in partnering with hospitals to mine their own data and then provide true benchmarking data for comparison. GPOs need to resist aggregation of data by hospital type or size and instead focus on benchmarking narrower business segments. Service lines examined could begin with an institution's centers of excellence and those with high-volume or high-cost pharmaceutical care.

GPOs must pay attention to their customers' needs, despite the diversity of these needs, and bring sustainable added value to the clinical enterprise. In my opinion, this additional value will come through developing partnerships with pharmacy and collaboratively improving supply chain management that is all-encompassing.

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