Self-contracting, where a hospital contracts directly with the supplier rather than through a group purchasing organization (GPO), is accounting for an increasing proportion of hospital supply spend in the U.S. As hospitals consolidate, gain greater scale, and become responsible for longer-term outcomes and costs, it makes sense that they should implement modern procurement practices and manage the supplier network more strategically.

As purchasing migrates away from GPOs to self-contracting for many supply categories, a number of questions arise for suppliers. Is this an opportunity? How do suppliers take advantage of this change? What are the risks in the changing market and how do suppliers prepare?

The Movement to Self-Contracting

According to researchers at Wharton, hospitals reported routing 70.6% of purchases through national GPOs in 2005. By 2014, purchases routed through national GPOs declined significantly to 55.9%. In 2014, the majority of purchases that did not go through the national GPO agreements were believed to be self-contracted.

This doesn’t mean GPOs will go away. With tens of thousands of supply items to purchase, hospitals need GPOs to gain leverage in some cases and streamline purchasing – especially in commodity items. In fact, the Wharton study indicated that 86% of GPO members use their national GPO contract to purchase 50% or more of commodity items.

Self-contracting should, however, be an important means for hospitals to be more nimble in sourcing and customize contracts to meet their unique needs. It is also an opportunity to be more strategic about supplier relationships. Collaborating with select suppliers has the potential to create much more value than simple price savings through GPO aggregation.

Technology Is Enabling Self-Contracting

Technology is a key driver of the trend to hospital self-contracting. While the right procurement resources and skills are important, technology has and will help accelerate the trend to self-contracting. New solutions are helping hospitals gain greater visibility to spend, improve the efficiency and effectiveness of procurement, and better manage supply costs.

Premier, Aptitude, Curvo, Coupa, and others have technology solutions to bring visibility to supply costs and utilization, make sourcing more efficient and effective, and enable the movement to self-contracting.

For example, Curvo, a recent start-up, has an algorithm and fuzzy logic tool to enable providers to quickly cross-reference supply items, perform analyses, and conduct bid events for many categories. This replaces many highly error-prone and laborious spreadsheet-based tasks of cross-referencing and doing analyses.

Coupa has an entire suite of solutions they promote as “savings-as-a-service.” Coupa just recently announced helping a hospital system save 20% on supply items through an 80-minute reverse auction. Technology should be a key enabler of hospital self-contracting, and help hospitals drive greater value from suppliers.

5 Risks and Opportunities

For suppliers, this hospital movement to self-contracting should present both risks and opportunities. Here are 5 key risks and opportunities:

  1. Relationship Management:  Buyer-seller relationships can be defined along the continuum from transactional to cooperative to collaborative to alliance. Suppliers with an unprepared key account organization or poor key account strategy may be pushed into transactional relationships, and miss the opportunity to engage in collaborative value-creating relationships.
  2. Price Discipline and Transparency: Price transparency will accelerate as technology makes conducting spend analysis, price comparisons, and competitive bidding events much easier. In addition, love them or hate them, one thing GPOs do help to do for many suppliers is to provide an excuse for having a pricing structure and discipline. With the movement to self-contracting, there’s a risk that suppliers could end up with undisciplined and messy market pricing that will be discovered with new transparency tools.
  3. Increased Bid Frequency: If market prices are declining for a supply category, it makes little sense for a hospital to stay locked into a 3 or 5-year agreement. For those larger supply categories under pricing pressure or reaching the mature stage of the product lifecycle, new sourcing technologies will enable self-contracted hospitals to “test the market” more frequently through competitive bidding events. Many large supply categories in the cardiovascular and orthopedics areas already face short-term contracts and frequent bid events. This will likely accelerate.
  4. New Business Models: Self-contracting will open up new ways to engage suppliers to meet the unique needs of the hospital system. This could include new business models, relationships, and outsourcing strategies. The rep-less medical device sales model is one example of a model of “unbundling” an offering into its components to reduce costs. While “unbundling” is new to healthcare, it’s a supply strategy that has been used successfully in many industries. Self-contracting should open up more opportunity to develop alternative relationship and business models.
  5. Re-think Admin Fees: The 5 largest GPOs collected $2.3 Billion in administrative fees in 2012. One of the key arguments for the existence of GPOs is the efficiency created for both hospitals and suppliers in the contracting process. With the movement to self-contracting, suppliers should re-assess how and why they pay administrative fees. Many suppliers have outdated practices and processes for paying administrative fees to GPOs. This could be an area of opportunity.

The trend to self-contracting will be interesting to watch. It’s likely to be uneven across providers. More sophisticated buyers with the resources, expertise, and vision will take the lead.

Likewise, the ability to successfully leverage the trend will be uneven for suppliers. It could be a margin death spiral for unprepared suppliers. On the other hand, for suppliers ahead of the curve, the trend should be a real opportunity to collaborate with customers to make a difference.

If you enjoyed this article, please take 5 seconds and share it with your social network.