I was at a conference on medtech key account management, pricing and contracting when the announcement of the Novation MedAssets deal became public. Private-equity firm Pamplona Capital Management will pay $2.7 billion for MedAssets, a group purchasing organization (GPO). No better place to spend a few minutes contemplating the future than in this setting.
First, we talked about the risks that come from even greater visibility into pricing differences. Many in the group were well aware that their companies had relatively “shotgun” price/volume curves without a great deal of rationale and a lot of risk for uncomfortable discussions as the differences become more transparent. Of course, that’s a first-order implication and pretty obvious. Yes, it’s important, but it’s only the tip of the iceberg.
But when that tactical fervor settles down, we start asking more fundamental questions: With so few horses in the race and the combination of organizations previously thought to be incompatible in strategy and member approach, can they still function as the contracting entities that they intended? Credibility was already a bit questionable with so many hospitals playing on multiple contracts and often striking their own on the side. In fact Novation and MedAssets reported the numbers: Novation VHA had 5,200 hospitals and MedAssets reported 3,300. Therefore, 5,200 plus 3,300 equals … a lot more than 6,000 hospitals. Of course we knew this—hospitals pick and choose among overlapping paper, often buy off contract or strike their own separate arrangement. A GPO contract is just a license to hunt, and sometimes you didn’t even need that license, as Medtronic set out to prove in 2011. Serious credibility questions abound.
The purpose that GPOs serve has become less and less about gaining leverage on suppliers, at least in many categories. They have built out revenue management services, analytics services, benchmarking, consulting, even data providers. In my view, this is essential to evolve and remain relevant. The original concept has been deeply eroded when the choices for the traditional GPO partner becomes so concentrated and homogeneous in approach.
So it seems like we need a new name to refer to these entities to reflect the role they are playing. GPOs are now focused on so many others services to advise, consult and better manage revenue and costs for their members. It would be nice to emphasize the value-added services over the zero-sum negotiation strong-arm tactics. As the services they provide become more and more slanted toward making the provider organizations run better, leaner and smarter, I can’t help but to ask: What does this mean for the future of the manufacturer admin fees?