How Healthcare GPOs Work and How to Use Them To Your Advantage

 

What a GPO (Group Purchasing Organization) Is

 

       A GPO, or Group Purchasing Organization, has a collective membership base of medical facilities and hospitals. The membership base includes all different types of specialties. All of these facilities are buying medical supplies, pharmaceuticals, business services, office supplies, and many other supplies to run their medical facility. A GPO will take a look at all of its members’ spend, and negotiate a contract for those products or services with that manufacturer or vendor. This price, will be lower than the current market rate for that product or service. 

     The GPO will try to drive more sales to the partnered vendors and manufacturers in return for their discount. That is why the manufacturers and vendors give a discount in the first place so that the GPO contract will become a win for the medical facility, a win for the GPO and a win for the manufacturer/vendor. 

GPO Contracts

There are three main type of contracts: manufacturer contracts, distributor contracts, and vendor contracts. 

Manufacturer Contracts

     Manufacturer contracts are for companies that make a product, such as needles or gloves. These are normally priced at the wholesale level, meaning the price is lower than what the distributor buys them for. The GPO provider is able to secure a better price through buying power and by limiting the number of contracts per category. A GPO may contract with only one manufacturer or a few for a given product category. For example, there are dozens of companies that make exam gloves, but the GPO will pick two manufacturers of gloves to have a GPO contract with them. These are typically the glove that is preferred by the majority of the members.

 

Distributor Contracts

     A distributor contract is between a GPO and a distributor, such as medical supply distributor like Henry Schein. This contract allows the distributor’s customers to access the GPO’s manufacturer contracts. By doing so, the distributor pays the GPO an administrative fee for using the GPO’s manufacturer contracts.

 

Vendor Contracts

     A vendor contract will be with a company who provides a service, such as Verizon Wireless or AT&T. The medical GPO will not be able to lower AT&T’s cost on iPhones, but the GPO will have a contract with AT&T for a discount on monthly wireless plans for the GPO members.

 

Understanding How Distributors Use the Manufacturer GPO Contract

     Distributors use the GPO’s manufacturer contracts to lower their wholesale costs to their customers. For example, a distributor might buy a box of gloves at $20 wholesale and sell them for $22. A distributor, using the GPOs manufacturer contract, can buy that glove for $15 and sell it for $17. As you can see here, the distributor just sold that glove at a loss (selling it for less than their acquisition cost of $20). The distributor does not lose money because the manufacturer reimburses them the difference in cost from their original wholesale price of $20 and the difference of the GPO contracted price of $15. Therefore, the manufacturer will reimburse the distributor $5.

 

GPO Membership Fees and How GPOs Make Money

      Most GPOs are free for medical facilities to use while some charge a membership fee. Are the ones that charge a fee better? Typically, no. The largest GPOs in the world with the most buying power do not charge a membership fee. Why? Because they are more focused on receiving an admin fee and getting more medical facilities to use their program.

      Then how do they make their money? They make it through an admin fee. An admin fee is a certain percentage (up to 3% governed by law) on the total sale of a contracted item. Back to our glove example, if a medical facility purchased a case of gloves for $100 by using the GPO contracted price, then that manufacturer will send the GPO $3 (assuming the admin fee is 3%). With enough volume, the GPO can operate without having to charge a membership fee.

 

Types of GPO Programs: Commitment Versus Non-Commitment

      Few GPOs require a commitment to their program, meaning you have to buy on their GPO contracts and from the vendors that they tell you to. If you have a several brands that your practice loves using, but that GPO does not have a contract on them, you must switch. 

 

However, most GPO programs are non-committal, where you can buy as much or as little on GPO contract as you like. It is important to ask before joining any GPO program.

Tiers - Get More Savings!

     GPO contracts have tiers built into them, meaning the higher the tier, the lower the price. To qualify for a higher tier, it is typically based on spend or brand loyalty. Spend based means your practice has to spend so much per year with that manufacture in order to get larger discounts. Brand loyalty based means having your practice buy a certain percentage of your expenses with that manufacturer. For example, for exam gloves, buying 8 out of 10 boxes, or 80%, from that manufacturer per year.

Buying Direct from the Manufacturers

     Most manufacturer contracts require you to buy through a distributor, but some allow you to buy direct. This is not common, but they are out there. If your practice is buying direct today, then the GPO probably has a contract with that manufacturer for direct purchases as well, so be sure to ask your GPO what purchasing channel you must take in order to use the GPO contract.

 

Finding the Right GPO Program for Your Practice

      First, find out if commitment is required. You may not want to join it if they don’t have your brands under contract. Next, ask if there is a contract involved that locks you into that program for an extended term. If it does, you may want to seek another program.

 

     Finally, make sure the distributor that you are using is an authorized distributor of the GPO. This is very important because not all distributors can use the GPO’s manufacturer contracts, if they are not authorized. Then, you will either have to change distributors or find a new GPO plan. That choice is up to you. Please note, that some small-local distributors may not be authorized by large national GPOs.

You Signed Up! Great! Now How Do You Use a GPO?

Below is an easy guide on the steps to take after joining a GPO to get the most savings out of your membership.

 

  1. Make sure your distributor links your account to your new GPO. You can do this by asking your distributor rep to do so and/or have you GPO request it for you. It is good to check on both sides to ensure your account is linked. 

  2. Ask you distributor to run a one-year usage file of your practice. Then, have either your distributor and/or GPO rep analyze it for tiers. This is to ensure you get the tier that you qualify for to save more.

  3. Are you buying products direct from manufacturers and/or outside of your distributor? Be sure to tell you GPO rep about those purchases so your rep can link your account with that manufacturer to the contract if available.

  4. You medical and pharmaceutical are some of the biggest expenses for a practice. With that covered in steps 1-3, you are now set to move onto your other expenses. These include office supplies, wireless carriers, waste disposable, etc. Give a list of these expenses to your GPO rep so the rep can see what expenses the GPO has contracts with that can save your practice money. If you are willing to switch vendors if there are savings, be sure to let your rep know so recommendations can be made.

  5. Lastly, anytime you are making a new purchase from a vendor, manufacturer or distributor that you don’t have linked to your GPO membership, be sure to let your GPO rep know ahead of time so you don’t overpay. This might be items such as capital equipment, MRI machines or any other type of major expenses that your practice does not order too often.

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