Editor's Note: This is the second part of a 2-part story on group purchasing organizations in the health care market. The first part appeared in the July issue. Click here to read part 1.

This spring, distributors selling to the medical market were heartened by news of a government study that indicated group purchasing organizations (GPOs) may not always offer the best deals to hospitals. But the government study, issued by the United States General Accounting Office, isn't the only reason for cautious optimism by those selling to this evolving market.

Some distributors say changes within the large printing companies awarded GPO contracts have resulted in marketplace shifts unforeseen in 1996, when San Diego-based GPO Premier signed a forms management contract with Moore and UARCO. (Moore and Standard Register currently have a dual-source contract with Premier, the second-largest GPO behind Irving, Texas-based Novation when ranked by members' purchasing volume.)

One distributor told Print Solutions he believes management changes at some of the majors-and, as a result, heightened concerns about profitability-have been good news for independents. Overall, he says, sales reps for the majors have tried harder to redesign products so they are no longer covered by the contracts. At the same time, a former health care executive for one of the majors suggests GPOs have a better idea of how to play the numbers game with guaranteed savings contracts and thus have been more cautious when writing contracts.

Next year, the two largest GPOs will make decisions that potentially could shake things up in the document management industry. Premier's contracts with Moore and Standard Register expire Nov. 30, 2003. Also, Novation will award a contract for ad specialties in 2003.

Bob Juerjens, director of support services with Premier, told Print Solutions Premier will review proposals from forms management suppliers, rather than extend the current contract "unless there's a compelling reason otherwise." If that happens, Premier officials say, it wouldn't be a reflection on Moore and Standard Register, but rather on a movement away from long-term contracts to shorter ones. Juerjens says Premier's support-services contracts typically are written for three years with the possibility of two 1-year renewals. The original contract with Moore and UARCO was effective for five years, from Nov. 1, 1996, until Oct. 31, 2001.

It's too early to tell if the Premier contract with forms management suppliers will remain a "committed" contract, according to Juerjens, who has held his job for a little more than a year. Committed contracts are ones with mandatory compliance. Juerjens hasn't received member input that would sway him one way or another, but notes, "I think whenever you renew a contract or [request new proposals], you should look at every aspect of it."

More importantly for distributors, Juerjens says he hasn't ruled out the possibility of working with regional suppliers, particularly if they form a consortium that would offer broad coverage. He currently works with Network Services Co., a consortium selling janitorial supplies. (According to its web site, www.nsconline.com, Network Services is a $6.7 billion organization that consolidates the "resources and strengths of more than 80 distributors.") At the same time, Juerjens admits, "All things being equal, it's easier to work with a national supplier." With a national contract, he says, Premier can achieve standardization among member hospitals more easily and administer fewer contracts.

Although Novation's contracts with Moore and Relizon aren't up for renewal until January 1, 2005, Novation will begin the contracting process in fall 2003, according to Barry Campbell, senior product manager of business products for Novation. At that time, he'll pay more attention to suppliers of high-end commercial printing (what he calls "marketing printing"), including brochures and annual reports. "Health care is slowly moving away from multipart forms with more emphasis on printing than forms," Campbell says. "[As that happens], there will be less emphasis on the Moores and Standard Registers." Campbell worked for Curtis 1000 and Origami earlier in his career.

Campbell says he can't predict what will happen until the GPO receives member input and studies the marketplace. But, he says, Novation potentially could select a vendor for forms, one for commercial printing and another for "general" printing, depending on the capabilities of potential vendors. What are the chances Novation will use regional suppliers in the future? Campbell says the GPO is more likely to work with regional suppliers in product categories where "major national players" don't exist.

Despite the presence of GPO contracts for forms management, some distributors have thrived in the medical market, in part by selling commercial printing and ad specialties. Historically, GPOs haven't offered members contracts for those products, but that's beginning to change.

Novation plans to award a contract to one or more ad specialty suppliers next year, Campbell says. This month, approximately 50 to 60 companies will receive an invitation to bid on the contract, he says. At least two other major GPOs are considering offering ad specialties contracts; Rolling Meadows, Ill.-based Consorta Inc. signed one in April.

It's too early to tell how many firms Novation will award contracts to, Campbell says, but the GPO is leaning toward a multiple-source contract for promotional products. "In that product area, there aren't a large number of national players that dominate the market," he says. "One of the things we've been looking at are smaller companies and minority companies that are fairly regional and [strong] in major metropolitan markets."

One distributor interviewed for this article said he'd love to read that GPOs were closing their doors. Another, however, boasted that GPOs enhance his business. Because the hospitals in his area are dissatisfied with the GPO vendor, he reasoned, his distributorship increasingly receives more business.

Regardless of perspective, one thing is certain: misconceptions and confusion about medical GPOs exist among distributors. Some people continue to refer to any group buying contract as the "Premier contract." Of course, this isn't the case: Premier is the second-largest GPO out of more than two dozen. The Health Industry Group Purchasing Association (HIGPA), Washington, D.C., says more than 600 organizations in the United States participate in some form of group purchasing. HIGPA defines approximately 30 of those as "true-GPOs that negotiate sizable contracts for their members." The bulk of the 600 organizations "may offer their members access to larger groups' contracts and negotiate agreements with regional vendors for some services," according to HIGPA.

Some confusion about Premier may stem from materials managers themselves. Representatives of GPOs confirm that buyers at hospitals routinely tell vendors "We can't buy from you; we have to use the contract vendor," even if compliance with the contract isn't mandatory. Distributors note that Premier is the strictest GPO about committed contracts, at least in the document industry. From a GPO's standpoint, committed contracts make sense. By promising vendors a certain volume level, they're able to negotiate and tout deeper discounts. Distributors say further confusion stems from the fact that different materials managers within the same hospital chain interpret contracts differently.

Even so, distributors would be wise to learn more about GPOs, their market niches (non-profit, faith-based, etc.) and the contracts between GPOs and printing companies. HIGPA notes on its web site (www.higpa.org), "If you've seen one GPO, you've really only seen one GPO, as they vary greatly in size, type of ownership and the services they offer members." For this reason, it's nearly impossible to make generalizations about the industry. Distributors' experiences competing against GPO contracts hinge on several variables, including the GPO, region of the country, type of contract offered, the particular vendor awarded the contract and the service offered by the individual rep.

The ownership structure of a particular GPO also influences hospitals' buying styles, distributors say. Premier is owned by approximately 200 hospitals, which in turn own, lease or manage hundreds of other facilities. In addition, Premier has several hundred "affiliates." Daniel Siadak, CDC, president and COO of Roanoke, Va.-based distributorship Source4, and PSDA's 2000-01 president, says buyers at Premier shareholder hospitals tell him they receive more pressure to buy from that GPO's contracts to set an example and reinforce the value of contracts to other Premier facilities.

In contrast, Novation officials point out that hospitals using Novation contracts aren't members of Novation. Instead, hospitals are members and owners of VHA Inc. (a nationwide network of community-owned health care organizations and physicians) and University HealthSystem Consortium (also known as UHC, an alliance of the clinical enterprises of leading academic health centers). VHA and UHC, in turn, own Novation. "They [hospitals] tell us what to do. We don't tell them what to do," explains Novation's Campbell. Even so, some distributors say, there's internal pressure on VHA hospitals to use Novation contracts.

A Consorta official says his GPO realizes many hospitals have solid relationships with local printing companies. For that reason, Consorta signed a "preferred" (non-committed) contract with Standard Register for forms, effective Jan. 1, 2001, according to Kevin Soyke, the GPO's director of support services. He said member input helped Consorta officials realize that "a lot of companies.have relationships with regional printers, and we decided we weren't going to break up those relationships. We didn't want Standard Register marching in [to members] and saying 'You have to use us.'"

The majority of Consorta's contracts are committed agreements. But, Soyke says, "A lot of the non-clinical areas [including forms management] aren't committed within Consorta." Standard Register was selected from 14 companies bidding on the contract, including regional suppliers, he says. Soyke believes the contract with SR, which he oversees, "guarantees a lot of savings." But, he says, "I never expect [a hospital] to get on a contract if it will cost [them] money. If they have a better deal than I have, I will not push it." Like other non-committed GPO contracts, Consorta's agreement with Standard Register includes discounts and rebates based on commitment levels.

MedAssets HSCA, a GPO headquartered in St. Louis, doesn't have any committed contracts. The third-largest GPO by member throughput has negotiated contracts with several printing companies, including Moore, Standard Register and Wallace. Small, regional suppliers potentially could be included on CDQuick®, the GPO's proprietary e-catalog, according to Gary Johnson, vice president of marketing and marketing services for MedAssets Inc., the holding company that owns MedAssets HSCA. Johnson says MedAssets HSCA will do so "if a company has a great value proposition" and is recommended by at least one of the GPO's members.

Despite opportunities in the medical market, the niche still poses significant challenges for distributors. Consolidation among GPOs continues, as smaller regional organizations try to gain market share. Also, the recent focus on ad specialties contracts could discourage distributors who concentrate on this area. Furthermore, the hospital industry faces bleak financial conditions, says Charlie Bryant, president of Medical & Industrial Marketing, a distributorship in northern Alabama.

A recent report by the American Hospital Association, "The State of Hospitals' Financial Health," found that 32 percent of hospitals had negative total margins in 2000, and 58 percent had negative total Medicare margins. Bryant says employees' fears about losing their jobs can influence purchasing decisions. In tough times, materials managers are more likely to follow orders about whom to buy from because they don't want to rock the boat, he says.

Even so, many distributors who thought the door to hospital business closed in the late 1990s now recognize a more apt metaphor is the revolving door. Ownership changes among hospitals mean a facility could prefer one GPO today and another tomorrow. During the conversion from one GPO contract to another, confusion may result, making the services of an independent distributor more attractive. Turnover among materials managers and CFOs results in changing opinions about the value of buying from independent distributors.

It's difficult to make generalizations about the medical market, but it's safe to say much has changed since Premier's original forms contract was signed in 1996. In the printing industry, UARCO no longer exists. (Standard Register acquired it in 1997.) Each of the remaining national players has hired a new top manager or reorganized at least once. Overall, distributors say the majors' increased attention to their bottom lines has led to the gradual pull-back of sales reps in rural areas, redesign of products so contracts don't cover them anymore and, in some cases, decreased commitment to serving less-profitable health care facilities.

In addition, turmoil at the majors has resulted in employee turnover, distributors say. It's difficult, however, to gauge how widespread this trend is. Independents often benefit from these personnel changes in two ways: experienced people may be replaced with less-experienced reps who aren't as knowledgeable about health care systems, and independents can hire those who flee the majors. Some distributors contend that mandatory-compliance levels can backfire. They say sales reps can become complacent when they virtually monopolize a market. Patient distributors can benefit by staying close to customers and pitching in when competing suppliers drop the ball.

The GPO landscape has changed, too. The largest GPOs are growing, and some are surprisingly big businesses unto themselves. Purchasing throughput is increasing substantially, and mergers continue to result in changes. Hospital systems aren't immune to ownership shakeups either. For example, when Triad Hospitals purchased Quorum Health Group (now Quorum Health Resources) last year, Quorum's acute-care facilities became affiliated with Brentwood, Tenn.-based GPO HealthTrust Purchasing Group.

Hospitals today have more pressing concerns than forms management contracts, says Denny Dennihan, owner of SourceOne Business Solutions, a distributorship in Leawood, Kan. The entire medical industry is trying to make sense of the Health Insurance Portability and Accountability Act, known as HIPAA. The legislation mandates regulations that govern, among other things, privacy and electronic transactions. Dennihan says hospitals are focusing so much time and energy on the new regulations that materials managers may not care as much about the specifics of forms management contracts or compliance levels in the short term.

In part because of HIPAA, Siadak of Source4 believes distributors can pursue plenty of opportunities in the hospital market. Distributors with expertise in systems analysis should be well-positioned to help hospitals transition from paper documents to electronic ones, he says. Additionally, Siadak believes tough economic times for hospitals mean they'll have to analyze everything they do, including whether GPO contracts make sense for certain product lines. He says, "If distributors can go in and position themselves more as communications consultants.and help [hospitals] be more efficient, [hospitals] can derive far more savings in productivity improvements than in product costs."

Katherine House, a freelance writer in Iowa City, Iowa, is a frequent contributor to Print Solutions. Email us your comments at bholt@printsolutionsmag.com.