Introduction
The premise of using a Group Purchasing Organization (GPO) is cost savings. But is that promise fulfilled? When was the last time you’ve considered whether your relationship with your GPO is still working for you?
A common belief of organizations we speak with at Healthcare Margin Specialists is that working with a GPO means the best prices. We aren’t a GPO, but we can work with them. And we normally find cost savings for organizations using a GPO.
It's a shame when money that could be going to improve the experience of your residents and your staff is going to big healthcare companies instead.
We believe in helping you to be an informed and educated consumer – which is why we’ve written a series on GPOs. This second article* is intended to outline the true costs of working with a GPO to help you discern if it’s a good option for your organization.
*This is part 2 of a series. For the rest of the articles, see the end of this post.
Understanding GPOs
GPOs aggregate the purchasing power of their members in order to secure better contracts with suppliers. Originating about a century ago, GPOs have become synonymous with procurement. They began in the healthcare sector and have expanded into other industries like manufacturing, hospitality, and education.
There are multiple types of GPOs that cater to the differing needs of local businesses vs. large national businesses vs. niche organizations.
For a deeper explanation on the types of GPOs and their origin, see “How Do GPOs Work?”
How Do GPOs Make Money?
As discussed in “How Do GPOs Work” there are two main streams of revenue for GPOs: membership fees and supplier administrative fees.
Membership Fees
GPOs typically make money by collecting fees from their members. This may be a one-time cost paid upon joining, a set fee collected on an annual basis, or both.
A membership fee is often variable, depending on the amount of product or service purchased the prior year. However, the dues are usually capped, meaning the organizations that spend the most end up paying a smaller percentage of their spend in fees.
This is a more transparent revenue stream for GPOs and allows members to better compare potential cost savings because true costs are clearer upfront.
Some GPOs do not charge membership fees at all. While this may sound appealing at first glance, this doesn’t mean the cost is less. Why is that?
Supplier Administrative Fees
Some GPOs are not paid directly by their customers. Instead of charging their members fees to join, they make their money from the other end of the supply chain. A percentage of purchases is paid to the GPO directly from the suppliers and vendors, and is commonly referred to as an “administrative fee.”
Administrative fees can range dramatically, from a fraction of a percent to 3%. Since these fees are built into individual products, it’s unclear how much members are actually paying. This lack of transparency makes it difficult to determine the cost of the product vs. what goes to GPO overhead and profit.
While the Safe Harbor regulations from the 1980s effectively cap administrative fees at about 3% of purchasing volume, there are plenty of loopholes. In other words, it’s possible for GPOs to have found ways to legally collect additional fees.
For instance, estimates indicate supplier fees (AKA kickbacks) can range anywhere from 6 percent to 18 percent of purchasing volume. According to the Health Industry Distributors Association (HIDA), distributor’s fees regularly exceed 11 percent, despite an acceptable standard of about 1 percent.
The reality is that these fees – no matter how high they are – are not absorbed by the vendors or suppliers. Instead, they get passed along to the end user – you and your long-term care organization.
The True Hard Costs of a GPO
The way so many industries work today, it’s probably not a surprise to you that someone is getting a cut. There are always layers to the final cost of goods and services.
But if you’re a member of a GPO, you should understand the costs and be able to see the benefits of membership. If you were promised savings, you should see that reflected.
In summary, when evaluating the true costs associated with using a GPO, consider these three components:
- Membership Fees
- Admin Fees
- Cost of Goods
While there are technically three components, it is rare to see the cost breakdown spelled out clearly. For the vast majority of GPOs and contracts, the fees are all baked into the costs of the product and will be nearly impossible to parse out. But remember, you need to evaluate the cost savings on the full costs you’re paying.
Financial Benefits of GPOs
After you evaluate the true hard costs of a GPO, it is also prudent to consider the soft costs. Perhaps the GPO membership is saving you on labor costs? Or providing you peace of mind? Are there other benefits? These are all worth considering as well.
One-and-Done Decision Making
One of the top benefits that many members report is that they have one place to go to get the supplies they need. GPOs offer a one-stop-shop, which means you have a simplified procurement process. This can save valuable time and human capital.
Instead of making hundreds or even thousands of decisions around procurement, you make one big decision, and many others fall into place.
For some people, taking away the mental load and constant decision-making process is enough savings to make the GPO membership feel worth it.
However, it’s likely that the GPO isn’t always giving you the best price on each line item, and you could be missing out on significant savings by shopping around.
Access to a Wide Supplier Network
In addition to potential volume discounts and collective purchasing strength, GPO membership may appear to provide access to a more diverse supplier network. This could mean broadened procurement options for member organizations. Of note, this was more important decades ago before online research was possible – meaning it’s not always the case these days.
Value-Added Services
Some GPOs provide ancillary services such as data analytics and business consulting. GPOs may help organizations to leverage data analytics to enhance decision-making processes, or guide them through complex procurement landscapes.
However, not all GPOs provide these services and of course it is possible that their recommendations are biased towards GPO-centered solutions. On the other hand, a third-party consultant is more likely to provide an unbiased approach to find the best solution for your organization.
The Financial Limitations
Limited Pricing Negotiation
GPOs provide efficiency but limit individual negotiation opportunities. While consistent, standardized pricing may not accommodate the unique needs of every organization. We will discuss this more in the third part of this series.
Transparency Practices
Remember, that the variability among GPOs on pricing transparency means that it can be hard to truly understand your costs or compare different options. At HMS, we believe that transparent disclosure of contract details is critical for an organization’s ability to have informed decision-making.
Weighing the Pros and Cons
There are a number of factors to consider when weighing the pros and cons of a GPO, especially through the lens of “Will a GPO Save Me Money?” The answer isn’t as straightforward as it might seem.
Push your GPO to share the true costs associated with their membership and individual line items (pro tip: start with high-cost and high-volume items).
Also, take note of how your GPO calculates (and presents) the savings you experience. Usually, the calculated savings is based off of the list price, not what your organization is currently paying.
For instance, if your organization is currently paying 33% less than the listed price on something, and the GPO quotes you a 30% savings – you’d actually be paying MORE by switching to them. Be sure to read the fine print!
Conclusion
Will working with a GPO save your organization money? Seeking the answer to that question might be more complicated than you think.
At HMS, one of the ways we seek transparency around our pricing is through a gain-sharing partnership. We only make money when you save money. We’re so focused on your success that we actually like to refer to our model as a “success-sharing model.”
Our model is the opposite of the GPO model, where the more you spend, the more they make. At HMS, our model is gain-share so we are motivated to save you the maximum amount.
When we work with you, we’ll ensure you’re not paying more than you should. With over 30 years in financial analysis and healthcare-related contract negotiations, we bring the strategic counsel and hands-on experience needed to help you thrive.
Ready to see how much you can save – with or without a GPO? Schedule a FREE Revenue and Margin Assessment Call with our team or email us at [email protected].
This article is 2 in a 3-part series on GPOs. Please check out the other articles below.
Part 1 - How Do GPOs Work?
