Where your medtech GPO contracting strategy goes, your value will follow

Group purchasing organizations (GPO) have been part of medtech and the healthcare value chain in the U.S. for more than a century. Over the past few decades, their influence on provider economics has expanded substantially. The value GPOs deliver to providers and patients may be hotly contested in the media, but there’s no question of the imperative for medtech manufacturers to develop effective GPO contracting strategies that best serve both patients and shareholders.

GPOs in U.S. healthcare grew slowly since their inception, rapidly accelerating in the 1970s with the advent of Medicare and Medicaid. Depending on the analyst, an estimated $300 billion+ in provider spending flows through GPOs. Nearly two-thirds goes to the top three, and 90% is concentrated in the top six. In its annual value report, the Healthcare Supply Chain Association stated that GPOs save members an average of 13.1% compared to providers that do not use GPOs.   

Approximately 70% of GPO revenue is collected as administration fees from suppliers. They’re so named because GPOs take on suppliers’ administrative burden by pooling members’ purchasing under a single general contract. However, additional pressure on medtech suppliers is created when large provider integrated delivery networks (IDN) seek additional discounts with individual purchasing contracts (IPC) using the general GPO agreement as a starting point for negotiations. An estimated one-third to one-half of medtech sales through GPOs flow through IPCs, with the GPO continuing to collect admin fees.

While the value of GPOs has been much debated by a variety of partisans, we don’t take sides. We instead suggest you consider a growing body of research from independent sources that describe a clear value proposition for GPOs in a complex healthcare supply chain. If you’re a medtech supplier, you know competition is alive and well. GPOs are a huge part of your business, so what should you do about it?

Like them or not, GPOs provide clear value to medtech companies and providers alike. For many medtech suppliers, a significant portion of sales run through GPO contracts. At the GPO level, the general contracts are typically negotiated first, followed by IPCs with larger IDNs. Many members are free to move from one voluntary GPO to another, creating transparency for health systems and hospitals across contracts. These and other moving pieces demand that medtech suppliers carefully consider how they construct multiyear agreements to provide the best products and services to GPO members and deliver the best return to shareholders.

To build a solid GPO strategy, medtech suppliers must use business goals as the North Star not only in the design and negotiation of each individual contract, but also when considering the interaction of the GPOs, members and competitors in a dynamic market. 

Your business most likely has a five-year plan with well-defined objectives and useful market information. Start here, before you dive into the GPO specifics.

• Business objectives. List the five-year financial goals for each operating unit, by product category and customer segment if that detail exists. If it doesn’t, add the detail to your plan.
• Competitive landscape. Clearly identify customer and product segments where you are defending established business, where you are attacking and where you have chosen or need to retreat.
• Target customers. Define projected growth by customer segment and identify which are more valuable relative to your detailed business objectives and where you have the best chance to win.
• Product strategy. Be honest regarding product segments. Which are advantaged and disadvantaged? Where are you adding competitive advantage through innovation? What offerings are you or should you be sunsetting? Don’t forget to include plans to build the portfolio through acquisition, if known.

With the detailed goals defined above in the context of the market environment, craft GPO agreements that align with their strengths and weaknesses. Build on information, not intuition. Use analytics to dive deep into the performance of your major GPOs.

• Historical performance. Establish GPO sales and margin performance across your portfolio by product category and customer segment.
• Member profile. Determine how well each GPO covers your targeted customer segments. Determine their level of member churn. In other words, how well do they maintain and grow the most valuable members?
• Compliance. Related to member profile, establish the degree of member commitment based on the agreed-upon terms, which might include share of spend, volume or other types of commitments.
• Value exchange. Quantify all payments to GPOs and members such as admin fees and rebates. Determine if they are in line with the value provided by the contract.
• Opportunities for growth. Use advanced analytics to identify opportunities for margin and sales growth by product and customer segment for each GPO. Don’t forget to assess the feasibility of capture due to competitive advantage, member growth, your internal capabilities and other market considerations.

Rank each GPO in terms of their ability to deliver against primary business goals. Align each GPO’s contract structure and negotiation plan with their strengths and weaknesses.

• Detail matters. Be specific on what will change and what will stay the same relative to the current agreement. For example: Can you drive more commitment from members through deeper discounts or bundling? Can you differentiate products with competitive advantage? Should modify your discount tiers to segment members more effectively?
• Advantage and disadvantage. Understand where you have competitive advantage, supply chain superiority or other sources of leverage for the GPO’s members relative to your competition.
• Innovative value sources. Explore additional sources of value from your GPO contracts in addition to unit volume such as member purchasing data, better payment terms and supply chain efficiencies. Be creative.
• Negotiate with purpose. Structure optimal deal elements using bundles, discount tiers and purchasing commitments from members where possible. Build a negotiation plan outlining where to give in and where to hold fast with clearly defined outcome targets. Don’t forget to involve your legal department in the process.

Finally, identify the IDNs that currently or are likely to negotiate an IPC. Ensure the general contract sets the optimal basis for those negotiations while providing members who will not have IPCs the value they need.

Because large GPO contracts are multiyear and are often negotiated years apart from one another, it’s imperative each is negotiated in the full context of the agreement portfolio.

• Account for contract transparency across GPOs. Each year a significant percentage of GPO members move from one GPO to another and between voluntary GPOs. Using the historical movement of members across GPOs, estimate sales and margin impact and how that will affect upcoming GPO negotiations, assuming a certain percentage of members will migrate. Adjust as needed.
• Assess impact of volume. If actions are taken to utilize leverage, either to gain volume or margin, model potential scenarios modeling potential moves GPOs and competitors could make that could drive volume shift to or from your competitors. Assess if contract changes are worth the potential response.
• Create the blueprint. With your scenarios modeled, risks assessed and each GPO contract approach adjusted, synthesize them into a comprehensive, unified strategy for all your GPOs. This means that you understand how each contract may influence the others and ensures that your enterprise is aligned regarding where to focus limited resources. You will effectively create the blueprint that will guide you when all does not go according to plan and your strategy needs refining—which is most of the time.
• Monitor performance and prepare in advance. Track performance to contract on a regular basis and work together with the GPO if performance is faltering. Use this information to refine your strategy and to prepare for your next negotiation at least six months in advance of the RFP.

You may have a great team with lots of data and tools who just need to be pointed in the right direction. You may run a lean shop and need the cavalry to come in and make sense of the data, build the tools and analytics and train your people how to build better GPO contracts. In our experience, the primary obstacle to building effective GPO contracts for medtech suppliers is the mountain of data they face that seems equal parts daunting and incomplete. As is often the case, the best place to begin is to build a true understanding of each GPO’s impact on your business performance. Form a team that understands the difference between generating data reports and creating information-driven insights that lead to action. Once that foundation is established and ultimately integrated into your business tools and processes, high-performing GPO contracts are not far behind.