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  1. 1. Health Care Contracting GPO, IDN and Locally William McIlhargey October 17, 2007
  2. 2. A WORD ABOUT ME Since 1978 I have been building experiences in strategy development, organizational placement and national contracting. Starting out by “walking the halls” in a provider environment, I was able to obtain a working knowledge of hospital infrastructure and process interdependence. Having developed National Account Platforms for three Fortune 500 Corporations, I provided contracting activity and implemented price-discounting strategy for products spanning the influences of commodity to highly technical. I have further developed “umbrella programs” for multi- division companies that leverage synergies under a shared service profile. My background includes business relations with national, regional and IDN organizations and produced successful agreements in a wide array of products and services. William McIlhargey Confidential 2
  3. 3. Session Overview Market awareness health care supply chain, industry premise contributing issues Starting the contract process who is influencing, flow of funds and position in the mix National vs local what should you be thinking about Maintain and/or expand your position develop a customized platform for collaboration A comment on negotiations reactive versus proactive Open discussion William McIlhargey Confidential 3
  4. 4. Healthcare Supply Chain Dynamics Key Stakeholder Business Relationships Wayne Thompson 2006 Health Policy Forum William McIlhargey Confidential 4
  5. 5. INDUSTRY PREMISE Supplying Health Care requires an understanding of market segmentation strategies and the ability to corroborate clinical and economic selling activities. Lack of financial alignment within the System hinders collaboration among the stakeholders, while promoting price inelasticity. Continued growth of specialty hospitals and ambulatory surgical centers siphon off profitable procedures from the community hospitals and add to their financial concerns. High profile expenses for medical devices & biologics continue to elude cost restructuring, nurture the rift between clinical and administrative factions, and enhance the natural tension during the buying & selling process. William McIlhargey Confidential 5
  6. 6. CONTRIBUTING ISSUES Clinical liability of physician Installing best practices Validating the value contribution of new technology Supply chain implications Industry movement toward early disease state treatments No underlying platform for harmony Buyers ill-equipped to balance costs and clinical needs Supplier’s shielded from industry financial plight William McIlhargey Confidential 6
  7. 7. BUYERS POSITION Historically, the clinical value of medical devices is not accompanied with an economic justification that embraces their financial viability to buyers entrusted with containing costs. Suppliers are viewed as utilizing clinical relations to undermine hospital efficiencies, expanding buyer/seller tension and turning a “deaf ear” to the financial crisis within the Health Care System. The resulting impact on purchasing decisions and related efforts to standardize clinical techniques has been greatly underestimated, furthering the rift between administration and physicians. William McIlhargey Confidential 7
  8. 8. SUPPLIERS POSITION Suppliers with a traditional focus on procedural issues, struggle with the perceived inefficiencies of hospital economics and become further entrenched in their primary mission. With distribution channels geared toward education, delivery and physician/surgeon acceptance, suppliers are not enamored with the prospects of retooling their sales forces. Recent history has indicated a lack of volume movement through price concessions and make suppliers leery to “throw good money after bad”. William McIlhargey Confidential 8
  9. 9. Resulting in a POLARIZED ENVIRONMENT This fragmented and seemingly hostile environment continues to intensify, providing an opportunity to innovative companies willing to advance the relations, understanding and creditability needed to effect resolution William McIlhargey Confidential 9
  10. 10. Group Purchasing Organizations Segmenting the Market National, Regional, Proprietary and Voluntary Groups
  11. 11. What is a GPO “an entity that helps health care providers – such as hospitals, nursing homes and home health agencies – realize savings and efficiencies by aggregating purchasing volume and using that leverage to negotiate discounts with manufactures, distributors and other vendors” HIGPA Role in the supply chain is limited to establishing and administering contracts for the selection and pricing of products – do not take either title or possession Initially formed to obtain best bottom-line pricing for medical supplies, now adopting business models to deliver further value: Contracting services Experience sharing and networking Information technology services Operational, clinical and safety improvement initiatives Technology assessment and advisory services William McIlhargey Confidential 11
  12. 12. Progression of Contract Selling Traditional sales approaches initiate at the local level: Facility => IDN => Regional Group => GPO Important to understand the impact of “overlapping” and the “glass house” effects William McIlhargey Confidential 12
  13. 13. Segments for Contracting GPO Anchor Groups (9) Accounts having national corporate offices with enough purchasing volume and member support to disrupt the selling process at the local level. Generally they will have their own sales and marketing teams and always involve marketing, administrative or rebated fees. Secondary Groups (<50) Regional Groups representing geographical or Groups with offices in a regional local affiliation or subgroups to larger organizations. Typically they will have a common affiliation with local geographic focus. IDN/Local Facilities (~500) The most susceptible to clinical influences, IDN”s and some community facilities are increasingly interested in negotiating agreements that meet the needs and wants of their physicians, which will be benchmarked from national contracts. William McIlhargey Confidential 13
  14. 14. Mechanics of Contracting & Financial Flows GPO Agreement for Membership pricing of goods dues Administrative Surplus fund fee (% of sales) distribution Agreement for distributor fee Hospital Manufacturer Rebate “Dealer into Distributor fee stock” price Contract price Chargeback for goods Distributor William McIlhargey Confidential Group The Lewin 14 May 2003
  15. 15. Membership Savings Financial Benefits of GPO Relationship Financial Benefit to Average Value, as Hospital/Health Percent of Purchases System Price Savings 7.72% Dividends 1.85% Labor Savings 0.84% Combined Benefit 10.41% William McIlhargey Confidential 15
  16. 16. Degrees of Pricing Flexibility Manufacturer List Price Baseline GPO Contract Price Price with Volume Commitment Price with Market Share Commitment The Lewin Group May 2003 William McIlhargey Confidential 16
  17. 17. Administrative Locations NATIONAL GROUPS NATIONAL GROUPS REGIONAL GROUPS REGIONAL GROUPS 1 FFS/DAPA – Government FFS/DAPA – Government VISN --Government VISN Government William McIlhargey Confidential 17
  18. 18. VOLUNTARY Location – St. Louis, MO. A voluntary GPO stated to be second in the number of member hospitals with 1,900 hospitals and 33,000 non-acute care facilities. Members are generally from more rural in nature than other voluntary groups Shareholders AmeriNet Central - Warrendale, PA Intermountain Health Care - Salt Lake City, UT Vector - Providence, RI Annual Purchasing volume = $6.5 billion with $35 million in share-back funds, placing Amerinet fourth in total purchasing volume Divided into five product development units that develop agreements in 12 contract areas William McIlhargey Confidential 18
  19. 19. PROPRIETARY Investor Location – Dallas, TX Privately held GPO with Tenet as its flagship System. Has had some success in attracting other proprietary groups and highly visible IDNs. Representing nearly $10 billion in spend, their most notable members include; Advocate, Ascension, Christus, Continuum, Kaiser Permanente, Kindred, Universal, US Oncology and The Health Alliance of Greater Cincinnati These services are focused on contracting, purchasing, clinical and pharmacy cost management, labor, capital equipment and information management. William McIlhargey Confidential 19
  20. 20. Health Maintenance Plan Location – Oakland, CA. Kaiser Permanente is the largest nonprofit health plan in the United States, serving 8.2 million members in 9 states and the District of Columbia. They are an integrated health delivery system, providing the entire scope of care for members. Kaiser operates 38 owned, not-for-profit hospitals in California, Oregon and Hawaii. Kaiser Permanente is composed of Kaiser Foundation Health Plans (nonprofit, public-benefit corporations), Kaiser Foundation Hospitals (a nonprofit, public-benefit corporation), and the Permanente Medical Groups (for-profit professional organizations) Kaiser facilities are known for their contract compliance William McIlhargey Confidential 20
  21. 21. PROPRIETARY Location – Brentwood, TN HealthTrust’s (HPG) membership includes nearly 600 Acute Care facilities and 148 Surgery Centers. Unlike many GPOs, there are no membership fees, however HPG does not allow its members to belong to more than one GPO. Their portfolio represents approximately 500 vendor relationships and over 300,000 products with yearly purchases of over $7 billion HPG has eight full-time Advisory Boards comprised of nurses, doctors, clinicians and hospital management providing input on contracts typically for a 3 year term William McIlhargey Confidential 21
  22. 22. PROPRIETARY Religious Location – Chicago, IL With 13 shareholders, representing 520+ acute care facilities and over 54,000 beds, Consorta mainly represents religious sponsored healthcare systems (over 60% of all Catholic hospitals in US) Projected contract volume is $4.2 billion, providing $104 million in cash returns to its members (76.3% fee return) Besides its contracting services, Consorta provides; capital equipment group buys, clinical pharmacy program and custom contracting William McIlhargey Confidential 22
  23. 23. GOVERNMENT Location – Hines, IL The US DVA National Acquisition Center (NAC) is the federal government GPO, located in Hines, IL. NAC has over 1,890 contracts with annual expenditures of more than $5.1 billion for supplies and services. It is one of the largest government procurement and supply agencies, supplying drugs, medical supplies and equipment to VA Facilities and other Government agencies By law, only 20% of any VA facility’s medical supply purchase dollars can be spent through non-contracted sources NAC contracts may be used by VA Medical Centers, Military Hospitals, Dept Indian Affairs and some not-for-profit agencies Confidential William McIlhargey 23
  24. 24. VOLUNTARY Location – Alpharetta, GA Serves more than 22,000 healthcare providers nationwide with purchasing power exceeding $12 billion Medassets is the third largest GPO by purchasing throughput with access to over 1,100 contracts and over 700,000 line items MedAssets, Inc. also operates Aspen Healthcare Metrics (clinical and supply chain consulting) where pricing is shared with its hospital clients across the US . . . “physician preference items, for instance, account for about 40 percent of total supply expenditures, with prices continuing to rise. But through our strategic business partner, Aspen Healthcare Metrics, we can reduce PPI expense by 5 to 18 percent—guaranteed. Has submitted IPO William McIlhargey Confidential 24
  25. 25. VOLUNTARY Location – Irving, TX Is the health care industry’s leading supply services company and serves a total of 2,400 members in VHA and UHC, as well as a select portfolio to Healthcare Purchasing Partners International Novation manages over $26.5 billion in annual purchases and through its affiliations represents: 26% of community hospitals, 76% of academic med centers, 30% of admissions & 29% of total surgeries Voluntary Healthcare Association includes 2,200 “community-owned” health care facilities located in 48 states, while University Healthcare Consortium represents 200 academic health centers William McIlhargey Confidential 25
  26. 26. VOLUNTARY Locations – Charlotte, NC Premier is owned by 198 not-for-profit health care organizations that operate or affiliate with over 1,500 not-for-profit hospitals Alliance members purchase more than $17 billion in contracted purchases and has returned $188 million, 58% of fees collected With over 1,300 contracts for use in all areas, Premier is the second largest GPO by purchased volume Premier’s groundbreaking Hospital Quality Incentive Demonstration Project with the Centers for Medicare and Medicaid Services tracks the performance of more than 270 participating hospitals, receiving financial incentives for best practices William McIlhargey Confidential 26
  27. 27. Trade Associations HIGPA – the Health Industry Group Purchasing Association is the preeminent trade association for GPO’s. Their annual Expo’s traditionally bring buyers and suppliers together under an educational and networking platform. HPG and Broadlane are not members of this organization. HIGPII – responding to recent Senate investigations, the Healthcare Group Purchasing Initiative was created to promote and monitor best ethical and business practices in purchasing for hospitals and other healthcare providers. The goal of the Initiative is to assure ongoing adherence to published ethical and business practices. FAH – The Federation of American Hospitals is the national representative of investor-owned and managed community hospitals and health systems throughout the United States. Along with AHA & the AMA, The Federation is considered one of the most politically influential organizations on health care policy. The Annual Public Policy Conference and Business Exposition is highly regarded in networking the politics and business aspects of healthcare. William McIlhargey Confidential 27
  28. 28. Health Care Contracting Developing a Strategy Maintain or Expand Your Position
  29. 29. Growing in this environment requires a mindset . . . . . . . . . . and a commitment . . . . . . . . . . . to do something different William McIlhargey Confidential 29
  30. 30. Strategy Recommendations Underlying Premise: Nothing happens without a surgeon sale . . . . . FIRST! Contracting is always more effective at the lowest common denominator This in mind: 1. Create a matrix of existing personnel to establish relationships with targeted groups . . . Sls Mgr national/regional . . . Agents local 2. Specific attention to proprietary groups and local religious subgroups 3. Develop a strategy (driving clinical and economic relations) involving a corporate & sales team responsible for integrated groups . . . ie. Kaiser, Mayo, Henry Ford, Cambridge Alliance . . . . 4. Promote business planning within each strategy with; budgeted support, milestones and accountability In short: establish visibility with select national and regional groups and . . . . drive activity at the local level William McIlhargey Confidential 30
  31. 31. Five Key Performance Steps 1. Develop a Strategy for your Territory understand the Rules for Engagement 2. Create a Plan for Price/Contracting customize each approach 3. Simplified Account Planning basis for understanding local influences 4. Nurture contract innovation consider a menu of offerings 5. The Art of Negotiations can not be an emotional issue William McIlhargey Confidential 31
  32. 32. A Word or Two on Negotiations Intuitive selling process Current Sales Behaviors: Position the Sales Process N e g Gather Information Sell o t i Identify/confirm needs a t e Position the product Start Close Submit proposal Behavior modification New Sales Behaviors: Selling and Negotiations are not separate processes but Sell integrated Negotiate Start Close William McIlhargey Confidential 32
  33. 33. Consequences $$ Revenues Flat Missed Margins, Discounts Opportunities (total/partial) Income/Profitability Precedents Set Lost Marketshare for the Future Open the Door to Competitors William McIlhargey Confidential 33
  34. 34. OPEN DISCUSSION Don’t let emotions dictate your contracting outcome! Keep issues in perspective “we all work for something . . . . . or someone” William McIlhargey Confidential 34