GPOs Rethink Diagnostics

As major GPOs come under pressure from a variety of sources they are refining their approach to laboratory purchasing, with ramifications for suppliers. Groups are getting tougher on compliance and contracting with fewer lab vendors but the trade-off is less choice for lab members. The more the purchasing process restricts vendors, the more it benefits a few at the expense of many.

As major GPOs come under pressure from a variety of sources, they are refining their approach to laboratory purchasing, with big ramifications for suppliers.

By Wendy Diller

• Industry mergers, platform technology consolidation, and pressure from IDNs are forcing GPOs to rethink the way they contract for laboratory purchasing.

• Groups are getting tougher on compliance and contracting with fewer lab vendors, but the trade-off is less choice for lab members. In addition, they are emphasizing value-added services in order to encourage member participation.

• GPOs seem resigned to the influence of IDNs on purchasing but are trying to contain them. In doing so, they are caught in a balancing act between tightening compliance to demonstrate to the newly merged suppliers that they can deliver on contracts and at the same time, trying to limit the defection of IDNs by giving large members some latitude in purchasing.

• The more the purchasing process restricts vendors, the more it helps a few at the expense of many. The large suppliers who have benefited the most from these trends have learnt the value of critical mass, low-cost operations, and breadth of product line; they also understand the politics of working with large buying groups and the art of corporate partnerships.

More than 100 hospital laboratory executives are sitting in a Dallas hotel room listening to key Premier Inc. executives explain the hospital alliance's laboratory programs and strategic initiatives. The meeting is billed as an open forum for Premier and its laboratory members to exchange comments and gather ideas for improving services. Buzz words like benchmarking, tiered pricing, and compliance are tossed about.

Some of the members' comments are harsh. But Premier executives aren't flustered—they are looking for candid input as they initiate a large-scale review of their company's laboratory strategy. The meeting itself—the first formal gathering of its kind for Premier—and the nature of the discussion highlights a key dilemma for them, as well as all GPOs: how to be relevant in a rapidly changing health care environment, one in which pricing constraints depend on many variables and, deep discounts earned in earlier contracts aren't as readily available and therefore may not be the key driver of purchasing decisions.

The dilemma is alive in many areas of hospital procurement, but it is assuming an urgency in laboratories because of industry-wide trends, including massive consolidation of suppliers and customers, the emerging clinical utility of several long-talked about new technologies, and the maturation of integrated delivery networks (IDNs). Moreover, continued pressure on labs to cut costs is forcing them to grasp any tools that make them more efficient, even if it means radical changes in their operations. In the past year or so, laboratories have been hit hard by both Medicare's aggressive program to curb growth in testing volume (Medicare cut routine chemistry profiles from 20 to just 8-12 tests.) and HCFA's medical necessity requirements, which place certain high-volume tests under increased scrutiny, and denied payment if the tests don't match the doctors' diagnosis and Medicare's list of allowable diagnoses. Yet, the goal of improving the economics of operations is tougher now than ever, however, because laboratories, having struggled since the mid-1990s to reinvent themselves, have made the obvious modifications.

GPOs, for their part, are also facing challenges and their new focus on diagnostics is a response to this pressure. Consolidation in diagnostics, among both suppliers and laboratory customers, is changing the lineup of players, as well as the demands they place on each other. Laboratories, having reorganized as part of large IDNs, are looking to GPOs for help in procuring a different mix of instruments from fewer vendors. They want, among other things, a less costly infrastructure and affordable access to new technology platforms, such as front-end automation, which have long been talked about but only now seem to be clinically and commercially viable.

Even more important, after half a decade of trying to assess the influence of IDNs on purchasing, GPOs seem intent on trying to contain the rising tide, rather than eliminate it. They acknowledge that IDNs will always do some contracting on their own—but aren't likely to take over the role of national contractors. This realization requires groups to do a balancing act by tightening compliance to demonstrate to the newly merged suppliers that they can deliver on contracts and at the same time, limit the defection of IDNs from the fold by giving IDNs some latitude in purchasing.

Groups have responded by offering programs that, through a variety of techniques, appeal to a more diverse, demanding constituency. The large GPOs, having significantly increased membership through consolidation (Novationhas 1,400 hospital members, Premier has 1,800 and AmeriNet has 2,000), are turning their attention to offering members innovative services and convincing them to utilize more of their existing services. "GPOs are all trying to figure out how to behave in this new market," says one diagnostics supplier executive. "Since Premier and Novation [a two-year-old joint purchasing effort by VHA Inc. and University Health System Consortium (UHC)] negotiated their contracts, a lot of new products have come out and put certain suppliers into new markets, which make them more attractive. It's tough to structure contracts to accommodate that kind of change."

Getting Tough on Compliance

Whatever strategies GPOs adopt will have strong ramifications for suppliers. GPOs have been paring the number of vendors they deal with for some time, but in the early-to-mid-1990s, their focus was on med-surg and pharmacy. Only in recent years have they turned their attention to the laboratory, not only choosing to work with fewer vendors but also getting tougher on member compliance. The process has been gradual, slowing impacting suppliers, but not squeezing anyone out of the market. Although the GPOs had compliance requirements, they didn't enforce them well; in many cases, they gave dual-source or triple-source awards, pitting vendors on contract against each other. Thus, suppliers on contract didn't see the agreements as guaranteed sales but rather as "hunting licenses" giving them access to a base of potential customers. They still had to convince those customers of the value of their products or risk losing the sale to a competitor. And diagnostics companies that had trouble winning GPO contracts weren't necessarily doomed because many hospital laboratories were willing to buy off contract.

Premier was the first major voluntary GPO to tackle the inherent problem of compliance in the laboratory forthrightly and stake its success on its ability to bring non-compliant members into the fold, allowing few exceptions. When it was formed in 1996, it very publicly announced that it would kick out any hospital that didn't participate in its purchasing program—but left a lot of unanswered questions such as what does compliance mean, and whether it would actually ask a hospital to leave.

Nevertheless, the results have been rewarding for Premier and for selected suppliers, the group's executives say: chemistry sales incorporated into contracts that come through Premier have increased 53% since it awarded chemistry contracts in 1997, while micromedia contract sales are up 41%, figures that are bound to have an impact on suppliers. But even Premier, by granting mostly dual or triple source awards, offers members a choice of vendors within its programs. The implications for suppliers get greater still when members then standardize further on one vendor. The Chicago-based health system, Advocate (a member of Premier), for example, recently selected Dade Behring Inc. to provide all of its chemistry needs, eliminating opportunities within its system for the two other Premier chemistry vendors, Roche and Johnson & Johnson .

The uproar Premier caused when it excluded Beckman Coulter Inc. from its chemistry and hematology contracts indicates just how much importance vendors place on getting onto large, highly committed purchasing agreements. Many Premier-affiliated hospitals have Beckman-Coulter hematology systems—which they ordered before the formation of Premier or got after Premier signed a hematology contract with Coulter Corp. Two years later, many of these laboratories are still irate about Premier's decision not to award chemistry to Beckman Coulter. Even more so, they are furious about Premier's decision to terminate the Coulter contract early because group executives found that Beckman Coulter was violating the contract's marketing rules—displaying a passion that some speculate is being fueled by the manufacturer's efforts to create a groundswell of local support. And these contracts stand to have an even greater impact on vendors if new technologies allow laboratories to eliminate the traditional distinctions between segments. Some GPOs, for example, are thinking of combining their immunoassay and chemistry contracts in order to accommodate consolidated workstations and modular systems.

The VHA/UHC joint venture, Novation, is more flexible than Premier and offers both optional and committed programs; its committed program, called Opportunity, is popular among laboratories, requiring them to maintain 95% compliance on covered products. The program has increased sales of selected products going through Novation from $180 million to more than $300 million, Novation executives say. Dade Behring realized a 20% growth in hemostasis reagent sales following the launch of Opportunity, says Doug Berg, Dade Behring's Corporate VP, Health Systems. AmeriNet, yet another leading GPO, maintains an emphasis on choice but has several new programs for laboratories that offer better pricing in exchange for greater commitments.

The IDN Dilemma

In theory, group purchasing is a straightforward business. Its purpose is to negotiate better discounts for GPO members who buy as a group from selected vendors. The GPO keeps a small percentage of contract revenues for itself and passes on savings to hospitals. The trade-off is limited choices of supplies and equipment for participants.

But this model has several flaws. Volume discounts can save only so much money, particularly since suppliers have been under pricing pressure for years. Utilization and process controls are just as important for savings. Columbia/ HCA Healthcare Corp., which took a controversial, hard-nosed approach to bargaining at its zenith, made a splash with its initial sole-source chemistry contract with EI DuPont de Nemours & Co. Inc. in 1994 (See "The Shakeout In Diagnostics: Implications for Survivors," IN VIVO, June 1994.) But it achieved most of its savings not from squeezing suppliers on price—although it tried—but from better control of test and product utilization and the implementation of an electronic information system, which handled accounts payable and other previously manual tasks, says Christine Diehl, VP, network development and compliance, MDS Lab Services and formerly director of laboratory operations, at Columbia. It could, for example, electronically replenish the supply of reagents as they were used up. GPOs traditionally haven't offered those kinds of services.

Moreover, the reality is that GPO pricing is related to compliance levels, not size of organization. GPOs do best if they can maintain discipline so that members purchase only products that are included on their contracts. But because they are voluntary, GPOs can't force members to buy from their contracts. Thus, although they have the potential to deliver larger volume orders, their negotiating clout is limited compared with large IDNs or for-profit hospital chains, which, in theory at least, can guarantee compliance. The result is friction between smaller GPO members—which joined to get better pricing—and large members—which believe they can often do better on their own. The problem has been exacerbated by the growth of IDNs because GPOs are no longer willing to challenge large IDNs for their exception pricing.

The dilemma has been addressed, in part, by tiered pricing. Suppliers have been reluctant to give their best pricing to large, undisciplined, non-compliant groups. Instead, they set up tiers, which treat GPOs as a series of GPOs within GPOs—the more hospitals participated, the higher up the discount ladder they could move. But tiered pricing acknowledges that big groups don't get great pricing. And relying too heavily on tiered pricing based on the volume of individual members' orders defeats the GPO's purpose. Thus, groups aren't too keen on the concept. As IDNs get their organizations in order and increase their demands on GPOs, tension is growing. "For a small laboratory, life is clearly better in a GPO because vendors can't afford to service small accounts as much as big ones," says Ronald Laessig, PhD, director of the State Laboratory of Hygiene in Madison, WI and a speaker at the Premier meeting in Dallas. "But if you really are a big customer of Abbott Diagnostics , you can get a better deal on your own than through a GPO." The value of face-to-face meetings can't be underestimated, he says. Once, when he felt he was not getting a fair price during contract negotiations with one of the largest instruments manufacturers, he simply had his staff stack $10,000 worth of a competitor's products against the wall to show the manufacturer's sales reps when they came by.

The Independent Contractor

Despite the advantages, most IDNs, even large ones, find the process of contracting too burdensome to do on their own and prefer to work through GPOs, which have more infrastructure, time, and data to handle complex negotiations. Long Island's North Shore-Long Island Jewish Health System, one of the largest IDNs and a Premier member, doesn't want to build the infrastructure and information systems it would need to do contracting on its own, although it could probably get comparable or better pricing on its own, says the system's Joseph Burns, VP, materials management. Sisters of Providence, a 19-hospital IDN in Oregon, on the other hand, which is a member of Novation, has compromised. It continues to use a GPO for 80% of its contracting needs, but does high-tech, physician preference items internally.

Still, as a handful of IDNs begin to look for ways to work outside of GPOs, the pressure on GPOs to address the needs of IDNs intensifies. Saint Barnabas Health Care System in NJ is one of the only IDNs in the US that doesn't use group purchasing. It jettisoned several groups when it formed nearly three years ago from the merger of six hospitals. As the largest IDN in New Jersey, with supply and equipment purchases totaling more than $400 million a year, it was certain it could get better pricing on its own, says Robert Carretta, VP, Saint Barnabas. More importantly, it wanted control over vendor selection, and was unhappy with GPO requirements that it make commitments to buy certain items without knowing the vendor in advance. It didn't want to dismantle the good relationships it had with its existing vendors, many of whom it treated as partners. In short, the cost of switching from current vendors to those on GPO contracts was simply too high. "I couldn't see rationale of a 50-bed hospital in Iowa getting the same pricing as St. Barnabas with 3,500 beds," Carretta says.

In two years, Saint Barnabas has overhauled its laboratory contracts and standardized on particular instruments and supplies in all of its laboratories. It has streamlined the number of vendors it deals with for laboratory supplies from more than 50 to approximately a dozen. The vendors are bound to a tough contract, which requires them, among other things, to maintain 98% up time on instruments but, in return, they can get 93% compliance. The hospital system has saved $5-7 million in this time. While most hospitals balk at the cost and complexity of doing their own contracting, particularly for low-technology supplies, Carretta says that Saint Barnabas' effort doesn't require a huge new infrastructure. "I am a large network in one region and I don't need GPO materials contracting," he asserts.

Race to Consolidate

If GPOs have to grapple with the growing clout of IDNs, they are also challenged by industry consolidation and the advent of new technology. As a result of mergers, the top seven diagnostics vendors now control 75% of the market, up from 60% a few years ago. Incumbency becomes a key asset for success in a market where most new product placements are upgrades and most revenues are tied to reagent streams based on instrument placements. Thus, having a large installed base is a tremendous asset; Beckman Coulter has an installed base of 75,000 systems, while Abbott has more than 50,000 and Dade Behring has 40,000. Large, global players can also better afford new products with hefty R&D price tags. Labs are now catching up to other sectors of health care and prefer to deal with fewer vendors, which they know will be around in 5-7 years. In fact, points out Dan Lemaitre, an analyst at Merrill Lynch, as in med-surg and other areas of health care, laboratory purchasing decisions now are a matter of corporate relationships, which can attack cost and quality issues, more so than technology and system design.

Consolidated vendors with broad product portfolios cater to consolidated customers. Hospitals, GPOs, and laboratories are also merging, although the trend seems to be stabilizing. Premier and Novation are the products of mergers—and as they combine programs, the new groups will ultimately need fewer vendors. In the immunoassay segment, Novation, for example, replaced UHC agreements with Bayer Diagnostics , Beckman, Abbott, and a VHA agreement with Abbott with one sole-source agreement for all members with Abbott. Over the next few years, it plans to combine many UHC and VHA contracts into sole-source agreements in each segment of diagnostics, leaving an option to go to dual-source contracts if circumstance warrant, says Robert Benson, VP, contract programs. In chemistry, for example, VHA had agreements with J&J, Dade-Behring, and Beckman Coulter. UHC had contracts with Beckman Coulter and Olympus America Inc.Novation has consolidated the Beckman Coulter contracts so that members of both groups can use it, is allowing UHC members to continue to use the Olympus contract until it runs out in December 2000, and the VHA hospitals to have access to Dade Behring and J&J products until those contracts end in December 2000 and December 2002, respectively.

Laboratories, too, are restructuring according to several key models. Perhaps the most common is the core-rapid-response laboratory concept, in which IDNs set up one or two core laboratories to handle high-volume routine tests, leaving only rapid-response laboratories on site at hospitals to handle tests that need quick turnaround times. These new organizational formats create two challenges for suppliers. First, they require a different mix of equipment than traditional hospital laboratories, in which each hospital had every kind of laboratory instrument. Second, as laboratories consolidate within IDNs, they no longer have the freedom to make their own purchasing decisions. Instead, hospital administrators, materials management executives, and laboratory committees are more involved in the process. For suppliers, the evolution of these new laboratory structures means a more rationalized approach to laboratory purchasing including, in many cases, fewer equipment sales and a decrease in the influence of clinicians on product selection.

Platform Consolidation

If corporate consolidation has forced GPOs to rethink diagnostics, so too has platform consolidation, notably automation (reflex testing and sample prep), modular systems, and consolidated workstations. These technologies, long talked about, are finally coming to the market, addressing key laboratory concerns about cutting labor costs and improving efficiency. A number of companies are introducing semi-automated and automated sample prep instruments, which affect a part of the testing process that is largely manual and complex. Abbott, Roche, and Bayer are in the initial phases of introducing modular systems, which can combine instruments, in some cases different kinds of instruments, or separate them to increase or decrease throughput according to demand without increasing the labor load.

Manufacturers are also working on consolidated workstations, which analyze immunoassay and chemistry tests on one system. The concept isn't entirely new. GPOs already have to consider that a fair number of homogenous immunoassays can be done on immunoassay or chemistry analyzers and that some microbiology tests get processed on immunoassay or DNA probe systems, situations currently handled on a case-by-case basis.

But both workstation consolidation and modular systems are blurring the distinction between traditional immunoassay and chemistry tests to the point where combining chemistry and immunoassay contracts makes sense. Premier and Novation executives say the move is likely to come sooner rather than later as the first consolidated workstations come on the market and are finding success. Dade Behring already has placed hundreds of Dimension RxLs, chemistry analyzers with an option module for processing a limited menu of heterogeneous immunoassays. "The pressure is on now to reduce labor costs, and wherever we go customers are looking for something far different than before, things that will make people rethink how to go about contracting," says Richard Aderman, SVP, corporate accounts, at Roche Diagnostics. "Three years ago, they didn't see a large push to reduce labor and increase automation."

Lab automation, which offers robotic arms and tracks to process and test specimens without the need for human intervention, also is likely to require greater contract coordination. GPOs haven't yet addressed automation, either front-end systems or total laboratory automation, but these systems aren't typically offered on a standalone basis since they affect many facets of the laboratory and depend, in part, on their ability to automatically link processes which are now done on separate instruments or manually.

The disruptions in the laboratory marketplace have been apparent since Premier formed in 1996 from the merger of three smaller GPOs, SunHealth, Premier, and American HealthCare System. They were likewise visible when VHA and UHC combined purchasing programs in early 1998, creating Novation. Both unions clearly aimed to increase their participants' clout in the marketplace by vastly expanding the number of buyers they could bring to the table in negotiations with vendors. At the same time, both Premier and VHA/ UHC executives recognized the need to develop for members value-added programs that offer more than just pricing advantages. To this end, they have initiated consulting components that aim to help members improve their financial and operating performances. Premier has a separate unit devoted to this goal, while VHA and UHC have their own programs, which aren't part of the Novation joint venture.

Over the years, however, the top GPOs have developed different approaches to serving this market's needs. If Premier executives talk more about corporate partnerships and compliance and AmeriNet champions flexibility, Novation's efforts fall somewhere in between. Certainly, Premier and Novation/ VHA/ UHC have evolved different laboratory strategies. Premier is emphasizing a corporate approach, which appeals to top hospital administrators, who set strategies for their systems, while Novation has designed its programs to appeal specifically to people making buying decisions at the local level. With its strict policies on compliance, Premier is betting that the economics of highly compliant contracts, in the lab and elsewhere, will appeal to top-level hospital administrators who don't deal daily with clinical equipment and won't have qualms about relinquishing choice the way local managers might have. The task of getting laboratories to adhere to the rules is made easier because Premier believes its members are finally willing to standardize equipment, not only for economic reasons but also to address ease of use, quality control, and data management issues. At the same time, in order to preserve flexibility for clinical departments, it relaxed its initial plan to rely on sole-source awards for each laboratory segment in favor of one that uses dual and triple-source awards.

Novation, which has diagnostics contracts worth about $500 million to suppliers, also believes that labs are more willing to forego the opportunity to select products on a best of breed basis in favor of deals that allow them to work with fewer vendors. But it steers away from corporate partnerships in favor of deals for individual products. Its goal is to provide strong incentives, both corporate-wide and at the clinic levels, to entice members to participate, says John Engles, senior product manager of capital equipment and formerly director of lab programs. This year, commitment is 65% across all contracts, although the figure is lower in the laboratory because the effort there is just starting and because getting compliance on clinical products is tougher than on the low-tech, high-volume products, he says. Novation's incentive to the vendors it selects is, with few exceptions, to give them sole-source agreements.

Premier began looking at laboratory initiatives shortly after its formation three years ago. Setting an aggressive pace, its laboratory team put together 200 contracts in one year. The intent was to send a message to the industry, much as Columbia/ HCA did when it signed a then-ground-breaking chemistry deal with DuPont in 1994. Premier's key message: it wanted full compliance on contracts, much like for-profit hospital systems and IDNs, in exchange for larger price discounts.

But, in its haste, Premier inevitably focused on the near-term, presenting contracts which had limitations, many of which were acknowledged at the Dallas meeting in June and which the group is now trying to address, says Tom Thompson, director of diagnostic laboratory and imaging, Premier Purchasing Partners. His team didn't foresee trends like vendor and platform consolidation; nor did it realize that some laboratories would experience large increases in volume, primarily because they were being reorganized into core labs, which gave them responsibility for processing high-volume routine tests for several hospitals within a network. Nor did the group accurately predict the rapid pace of technological change, or the ways IDNs would change communication patterns in hospitals. It emphasized member compliance but Premier had not—and still hasn't—established an enforcement policy, although it is working on one.

As its first contracts come up for renewal, Premier is reviewing the way it evaluates bids and disseminates information about contracts, the categories of contracts it awards, and its pricing policies. Premier's 18-member laboratory committee, which evaluates bids and makes recommendations to Premier staff, is charged with examining the GPO's overall approach to the lab. But the committee too has been criticized for not being accessible to lab members, for spending too much time—the better part of two years—working on a controversial reference lab contract—and for doing, essentially, what Premier wants and not what members necessarily want.

Enforcing Discipline

Premier's most critical challenge is its ability to enforce discipline among members. While executives are pleased with current compliance levels, they don't have many options for dealing with those who don't adhere to contracts, since most members are part-owners in Premier. With vendors who abuse Premier policies, the GPO can be tough, as it has been with Beckman Coulter. But it is less likely to kick out a member. Premier is working on a new, organization-wide policy (not just for laboratories) which will motivate rather than punish members who aren't in compliance, says Thompson.

One issue it has to consider in promoting high compliance is the source of resistance. Premier is hoping that hospital administrators can convey the importance of buying off Premier contracts to various departments—that they can demonstrate how Premier programs benefit the system overall, even if they aren't the best for any one product. But laboratories and other individual departments, which are responsible for making the actual conversion to a contract, sometimes don't see direct benefits and therefore balk at using a group contract. This is in part because while Premier awards bonus discounts for participation, the money sometimes goes to hospitals' general administration, rather than to the department which achieved compliance. Premier believes that the hospital system is best equipped to address this kind of local resistance; Premier itself will step in only if resistance is at a higher level, says Thompson.

Still, Premier is working to ensure more loyalty. First, it is trying to improve its communications with laboratories. In their haste to get the organization operating, Premier executives admit that they didn't establish clear-cut lines of communications with laboratory members. In part, this is because they were used to working with materials managers, not laboratorians; and laboratorians tend to buy a lot of their own supplies. Indeed, Premier regularly sends out newsletters and announcements to materials managers, but these never got to laboratories because materials managers typically don't pass the information on. Now, Premier is starting several communication programs aimed directly at laboratories. Also, it is increasing its 11-member US sales force by several fold in order to educate members about the benefits of being on contract. And, it urges its vendors to talk to members as local contracts expire.

Premier is also reviewing the way it evaluates bids. Initially, the laboratory committee reviewed vendors' proposals and made recommendations. This committee kept a low profile because Premier didn't want it to get too much pressure from vendors. But as a result, many members didn't know about it or the work that it does and felt they didn't have enough input into the vendor selection process. Premier is working on ways to allow members to have more input without swamping the lab committee, which consists of volunteers who hold full-time lab jobs.

The lab committee itself faces several dilemmas—such as whether to favor vendors that Premier already works with or look at all companies when it evaluates bids, in short, whether labs are willing to work with fewer vendors or want more choices. The issue is bound to arise as the organization considers covering new areas like front-end automation, says Cheryl Vance, a VP at Advocate Health System in Chicago, and the committee's new chairwoman. She believes, although others within Premier disagree, that members, at least for now, prefer working with existing vendors who are likely to know them better, pay more attention to them, and provide broader solutions to problems, rather than fragmented buying.

The lab committee is also studying the controversial issue of tiered pricing and considering customizing certain contracts for large systems. Premier generally has steered away from tiered pricing, but some of its large IDNs are urging it to reconsider. Cherry picking for some contracts and neglecting others ruins the concept of a GPO, but the real issue isn't whether tiered pricing should exist, says Laessig of the state laboratory in Wisconsin. The issue is how big the gaps in the tiers should be. "I think the 30-bed hospitals understand they won't get the same level of service as large members, but how big should the discrepancy be?" he asks.

Being Flexible

If Premier has been aggressive about adopting a new laboratory strategy and getting members to adhere to it, Novation, has been no less active, albeit conveying a different message. While Premier has charged directly into new initiatives, Novation has preferred a compromise approach, blending what it believes are the best attributes of its two owners—the high compliance standards of UHC and the more liberal stance of VHA. The new Novation policies allow members to pick and choose the contracts they want—but they lose access to the best pricing if they can't meet certain volume requirements, says Benson of Novation. The programs reward members who achieve high levels of compliance while allowing hospitals to go off-contract when that best suits them.

Novation is initially keeping UHC and VHA contracts separate and putting them out to bid for a simple, unified contract when they expire. It is consolidating overlapping contracts as well; by year-end, 70% of its total laboratory portfolio will consist of VHA and UHC combined contracts or new agreements. It is also planning to expand coverage to include new technologies that members seem interested in, such as DNA probes and flow cytometry, Benson says.

Novation has made small changes in how it solicits input from laboratories—UHC in the past allowed members to vote on vendors, but Novation wants them to provide input on their preferred criteria for suppliers before it puts out bids. It then plans to use a laboratory leadership council to review the bid evaluations and recommendations made by the Novation staff. The awards are based on the size of the installed base in member labs, the response of companies to the value of the bid, including the pricing, length of product lifecycle, service charges, warranties, etc., says Benson. Even more than pricing, members want assistance in optimizing their operations, he says. A particular piece of equipment may not be the lowest price, but members may accept it if it provides overall benefits to the hospital.

And while Novation has talked less than Premier about across-the-board compliance, it recognizes the value of getting members to adhere to contracts. While it doesn't have corporate partners, it provides a chance to participate in the Opportunityprogram, which demands high commitment and has attracted a lot of interest from laboratories. Introduced in February 1998 strictly to VHA members, this offering requires hospital CEOs to guarantee that their institutions will purchase 95% of covered laboratory products from participating manufacturers and 90% of all available products through Allegiance Healthcare Corp. 's Scientific Products Division. Once a hospital gets 95% compliance in all products, it gets a bonus discount. The program includes reagents but not more technologically complex instruments. "It's been wildly successful for us," says Doug Berg of Dade Behring, which sells coagulation reagents through Novation's Opportunity program. "Lab Opportunity is the single best example of a successful compliance program."

Novation is also looking to address the needs of IDNs by building incentives for them to participate into general contracts. The incentives affect pricing, but also include programs that assist with standardization and special services. This way, Benson believes, IDNs will remain involved with Novation rather than compete with it. At the same time, he notes, it is helping suppliers it works with to maximize the business they do within Novation by awarding sole-source contracts when feasible and sending its 80 member field service organization out to members.

The Value of Value-Added

Novation and Premier gained market clout through mergers but future growth for groups is more likely to come from relationships with existing members than from the widespread influx of new ones. Pricing alone is unlikely to ensure the strong participation needed to fuel growth; Premier and VHA are therefore developing internal consulting services for laboratories, which help them improve business operations and expand outreach programs. Despite the formation of Novation, VHA continues to be responsible for value-added and consulting services for its own members.

As they move into consulting, however, the GPOs face a different set of challenges. Can they get labs to use these services? Do they have an advantage over existing consulting firms? Will members perceive a conflict of interest if the consulting component helps GPOs drive their contract utilization? AmeriNet has chosen, partly for these reasons, not to pursue internal consulting, relying instead on networks of outside consultants to help members with performance and organizational issues. AmeriNet felt enough good consultants exist that it was not necessary to develop its own program, says Todd Ebert, an EVP at the group.

Premier, perhaps more than any other group, is moving aggressively into consulting on the premise that it has data and expertise which can help members be competitive, both in their operating performance and in their ability to garner managed care contracts. It aims for its laboratories to be in top quartile in operational performance in their markets. Because it represents so many laboratories, it has an unusual opportunity to bring change to them, according to Robert Hamon, VP, marketing of Premier Clinical Laboratory Services, and a speaker at the Dallas meeting in June. Premier has several clinical initiatives under development for laboratories, all of which would involve voluntary participation.

A year ago, it introduced an alliance with Quest Diagnostics Inc. that enables members to obtain Quest's help in improving their operating efficiencies. The idea was for Quest Diagnostics to bring its expertise to the labs, aiding them in sorting out which tests to do internally and which ones to outsource. "It is an option for hospitals who want to do strategic sourcing, that is, determine the appropriate location for testing," says John Biggers, senior director, Premier Clinical Laboratory Services, a division devoted to developing and providing value-added services for laboratories. Although a number of hospitals are considering the service, not one has signed up for it in the year since it has been available, Biggers says. Many laboratories are skeptical of the program because they view Quest as a competitor to their own outreach programs; moreover, hospital labs traditionally are wary of commercial reference labs, which they deem to not offer as high-quality service.

Another initiative, benchmarking, provides member laboratories with a perspective of how they are performing in comparison with others. Premier found that laboratories weren't happy with the comparative data they were receiving from other sources, believing it to be inaccurate or too broad for their specific needs, says Biggers. Premier has an alliance with Chi Laboratory Systems, a consulting firm, to use its benchmarking data for Premier members. Chi's data is more refined than other comparative data; for example, it adjusts comparisons based on the complexity of testing done at a particular site and has a system for classifying laboratories with similar operating profiles. The organizations are incorporating data from nearly 100 Premier hospitals into the Chi system and plan to introduce the product late this year. "Hospital labs need to do something because they aren't making a lot of money. If laboratories think of us only as a GPO, it is a shame," he says. "The data we aggregate works hand-in-hand with purchasing and we want to share it with hospitals."

These programs compete with traditional consulting services but Premier has a long-term commitment to laboratories, says Biggers, and can help them implement strategies in a way that independent consulting firms aren't set up to do. Consultants, he notes, tend to offer plans and leave but Premier's relationships are ongoing.

But the programs are getting off to a slow start. Collecting the data for benchmarking within hospital systems is taking longer than expected, as is the analysis. IDNs still don't perceive Premier or other GPOs to be leaders in benchmarking, although they are eager for that kind of information, as well as anything that integrates best practices and data about total costs of providing health care within a system, suggests Larry Dixon, corporate director of materials management for the Sisters of Providence (SOP) health system in Oregon. No GPO has data that can tie the cost and utilization of contrast media in diagnostic imaging to blood workups in the lab, for example.

SOP in fact belongs to VHA, which also has a performance consulting service for laboratories. VHA is working with Mayo Medical Labson benchmarking and other programs, which it could offer for lower fees than independent consultants. The idea isn't to focus on cost cutting and operations efficiencies, which labs are already working on, but to help members expand their revenue base by providing more outreach programs to a community. Laboratories that use the service have seen a 25-50% improvement in economics within 6 to 8 months, says VHA's Benson.

Implications for Vendors

While GPOs are learning to live with IDNs nipping at their heels, so too must vendors, for whom the threats are even greater.. For the reality is that the more the purchasing process restricts vendors, the more it benefits a few at the expense of many. The large suppliers who can capitalize best from consolidation trends have learnt the value of critical mass, low-cost operations, and breadth of product line; they also understand the politics of working with large buying groups and the art of corporate partnerships. They know the importance of being able to demonstrate their long-term viability and ability to keep up with technological change. And they are being rewarded for their savvy. Premier has better than 80% compliance for its immunoassay contracts; likewise, it has strong compliance in microbiology, where an agreement helped Becton Dickinson & Co. move its market share within Premier from 80% to 90%. The same is true for Roche in chemistry, says Aderman. "We spent a lot of time and resources to get the Premier contracts but they have more than paid off."

As GPO policies become more restrictive and as IDNs look to fewer vendors, small manufacturers lose out. The drawback of using small suppliers isn't just lack of product line breadth, but their ability to service comfortably large buying groups. Some GPOs, unwilling to add to the workload of their purchasing committees, and concerned about the ability of smaller vendors to meet their broad needs, are considering limiting the vendors allowed even to participate in the bidding process. With labs and IDNs more receptive to the idea of reduced choice in exchange for lower prices and better service, the stage is set for another round of consolidation in diagnostics, particularly among mid-sized to small cos.

Still, no matter what product portfolio the companies have, the process remains very political. Abbott CEO Miles White reportedly has lunch with Premier executives several times a year, but other companies aren't as attentive. Companies that don't play by the rules lose out, as has been the case with Beckman Coulter's relations with Premier.

As the marketplace changes, GPOs are redoubling their efforts to gain control of the purchasing process in the laboratory. Just as with med-surge and pharmacy, they face challenges from IDNs, but ultimately, both kinds of organizations are likely to have to live with each other. Suppliers are likely to be less of a power struggle, unless consolidation progresses so far that only two or three vendors are left.

From a vendor's perspective, IDNs and GPOs each have their advantages and disadvantages: Groups, at least until recently, arguably aren't as disciplined and therefore leave more doors open for companies that don't get on contracts. IDNs are more compliant, but they are smaller and more of them exist; once a vendor gets on a contract they require less of a selling effort. Whether GPOs or IDNs predominate, the system is likely to favor a small group of broad-based suppliers.

Large vendors, by and large, offer products that many customers view as technologically similar. What's not yet clear is how the new landscape will accommodate truly innovative technology, especially from small companies. All signs indicate that small or new companies are likely to have a tough time, unless they have some excessively original technology or are directed at a niche that is very focused. While the decks look like they are stacked against narrowly focused and small companies, however, some have had surprising success. Ventana Medical, which makes automated slide staining equipment for histological analysis is one; Cytyc Corp. and Digene Corp. are others.

Still, the game is at this point one of marketing savvy and execution prowess. It's certainly not for the faint of heart.