Fundamentals of GPOs and Healthcare Contracting

Transcription

1 Fundamentals of GPOs and Healthcare Contracting AMS SALES TRAINING

2 FUNDAMENTALS OF GPOs AND HEALTHCARE CONTRACTING OVERVIEW A group purchasing organization (GPO) is an entity that helps its healthcare provider members such as hospitals, physician practices, and nursing homes save money by combining their purchasing volume and using that buying power to negotiate discounts with manufacturers, distributors, and other vendors. GPOs date back to 1909 in the United States. They formed to negotiate the best deal on goods and services for their members. Today, hundreds of organizations in the United States participate in some form of group purchasing. These include a small number of national GPOs, along with more than a hundred regional or specialized groups. Virtually every U.S. hospital is represented by one or more GPOs. Also represented by GPOs, in fast-growing numbers, are nursing homes, physician practices, and other types of providers. And, while their founding purpose to reduce costs is clearcut, the actual GPO contracting process can be very complex. In this course, we ll explore the fundamentals and some of the complexities of group purchasing and contracting. AFTER COMPLETING THIS COURSE YOU WILL UNDERSTAND:»» What drives providers to aggregate their purchasing power»» How complex contracting processes lead to even more complex systems to administer them»» What features you need to understand about GPOs and healthcare pricing contracts»» How GPOs get paid»» How distributors support contracts and help providers get the right price»» What can go wrong with contracting processes»» Why vendors choose to participate in the GPO contracting process 2 Fundamentals of GPOs and Healthcare Contracting

3 Introduction to group purchasing concepts If you ve ever shopped at a big-box warehouse store, you know that when you buy in larger quantities, you can usually get a better price. That s the basic concept behind group purchasing: hospitals and other healthcare facilities and practices combine their buying power in order to negotiate greater price concessions from their suppliers. The overall concept makes sense. If a healthcare facility s purchasing director were to say to a vendor, I m willing to buy all my gloves from you, and quit buying any from your competitor, chances are that vendor would be willing to offer an attractive price discount in return for the increased business. If the purchaser went further and said I ve talked to the purchasers from 100 other hospitals and we re all willing to buy all our gloves from you, the vendor would most likely be willing to drop the pricing even more probably a lot more. The increased business would increase the vendor s market share and probably also allow the factory to decrease per-unit manufacturing costs based on efficiencies gained from the higher volumes. The real world is more complicated, with more players and processes, but the basic idea is that GPOs help healthcare providers aggregate (combine) their volume and use that leverage to negotiate discounts with vendors. GPO functions Every GPO is different, but most have several functions in common: Offering a way for members to pool their buying power to access better pricing on medical products Providing purchasing-related services including evaluating products and suppliers, preparing requests for proposals, comparing bids, and negotiating contract terms Offering data-related services to help members identify savings opportunities GPOs often offer many other services as well, but in this course we will focus on the group purchasing-related functions. Fundamentals of GPOs and Healthcare Contracting 3

4 It s important to note that there are hundreds of GPOs serving healthcare providers (although less than 10 control the majority of volume). Each organization is different and it s helpful to understand the financial model, membership base, and the often-complex contracting processes for the GPOs your customers work with. Complications in the process What s so complicated about it? Here are a few examples of the complexities: 1. Manufacturers typically negotiate thousands of contracts per year across different GPOs and providers. 2. A GPO contract is just a starting point. GPOs generally do not actually buy or sell products. They negotiate contracts that members can use when making their own purchases. After a group purchasing contract is created, it is still up to the GPO member to decide whether to buy products used in the negotiated pricing. (In other words, in general, a GPO contract is not a contract in which anyone actually agrees to buy something.) 3. Most GPO contracts have many price points. GPOs negotiate multiple pricing tiers to allow manufacturers to provide more attractive pricing to individual customers based on their purchasing volume or volume commitment, class of trade, or other factors. Providers who purchase greater volumes will qualify for a better pricing tier. 4. Contract prices are often below the wholesale price to the distributor. Often the GPOnegotiated price is less than what the distributor paid. That means the manufacturer must pay a rebate (also called a chargeback) to the distributor to make up the difference. 5. There are often multiple layers of negotiations and negotiating organizations. Providers often organize together into regional purchasing cooperatives or alliances to try to aggregate their purchasing further and qualify for better pricing tiers. These cooperatives may or may not be affiliated with a national GPO. 6. An individual provider may participate in GPO contracts for some products but locally negotiate pricing for other products. It can be an enormous challenge to figure out what contract the provider wants to use, for what product, at what pricing tier. 4 Fundamentals of GPOs and Healthcare Contracting

5 Factors impacting pricing levels The vast majority of the healthcare manufacturers you work with participate in GPO contracting. They do so because it would be difficult to compete for many providers business if they didn t. Hospitals, in particular, tend to be loyal to their GPOs and have a strong preference for vendors that already have contracts in place. Many factors play into manufacturer decision-making about how much to discount their products when negotiating with a GPO: The number of vendors selected for a particular type of product: GPOs usually prefer to offer their members different options, so many contracts are dual-source or multisource not single-source. For example, the GPO might write contracts with three different manufacturers of rapid strep tests. That means the vendor has more competition for the business and less guarantee of market share growth. Contract compliance: Some GPOs are very effective in persuading or requiring their members to buy from contracted vendors. Greater levels of contract compliance are very attractive to manufacturers and therefore tend to result in lower pricing. Similarly, some healthcare providers are very effective in standardizing on selected products through formularies and other methods to discourage the use of non-contract products. Contract duration or term: A GPO can often obtain greater discounts from manufacturers if contracts extend for longer periods. GPOs revenue model Most GPOs derive a large part of their operating revenue from contract administrative fees that are paid by manufacturers and distributors for any contracted business done with the GPO s members. Administrative fees are commonly calculated as a percentage of the price of the products sold. Typically, a sizeable portion of administrative fees are returned to member providers to encourage contract compliance. Most administrative fees paid by manufacturers do not exceed 3%. However, there is no legal limit on admin fees; and under certain conditions they can and do exceed this amount. Fundamentals of GPOs and Healthcare Contracting 5

6 Distributors typically also pay administrative fees when they serve as the authorized distributor to a GPO member facility. Distributor administrative fees are generally lower, typically 1% or less of the product price. In addition, many GPOs also charge distributors fees on non-contracted items that they sell to GPO member facilities. Fees on non-contacted items are typically lower than those on contracted items. Safe harbor Giving a healthcare customer a financial reward for buying products is usually considered a kickback, which is illegal. However, GPOs are mostly exempt from the Medicare anti-kickback restriction as a result of a safe harbor granted by Congress in It allows GPOs to collect admin fees and to provide their members with financial returns and incentives, such as sharing in a portion of those fees. A closer look at the processes Explaining how contracting processes work is a bit like explaining how the weather works: you can provide some information about what often happens, but it won t necessarily predict what happens in any given instance. A group of contract administration experts from HIDA member companies attempted to map out the most common processes into a simple graphic. As you can see below, it s far from simple, but it s still an oversimplification. The experts viewed the processes from the vendor perspective, and divided the processes up into four major steps: 1. Contract creation: The GPO and the vendor negotiate the contract, include all the pricing tiers. 2. Member eligibility: Members request a specific pricing tier and manufacturers approve (or disapprove) that particular tier and the associated pricing. 3. Contract management: Contract information is communicated to all parties and loaded into software systems; the customer begins buying products at the contracted price. 4. Chargeback processes: The distributor requests chargebacks (also called rebates) from the manufacturer based on contract sales. 6 Fundamentals of GPOs and Healthcare Contracting

7 Note that the brown circles in the images highlight inefficiencies and potential slow-downs that can occur in the process. Fundamentals of GPOs and Healthcare Contracting 7

8 Contract creation When a GPO (or any other entity doing the negotiating, such as a health system or regional purchasing cooperative) identifies a product it wants to contract for, the following steps are typical: The GPO identifies manufacturers of that type of product. The GPO may collect and/or analyze data about its members usage of these products and preferred manufacturers. The GPO may have committees which evaluate product alternatives, such as weighing evidence about product effectiveness or even having end-user staff test out new products. The GPO may issue a formal request for proposal (RFP) or simply open negotiations with manufacturers. Manufacturers submit proposals with product information and pricing. Sometimes the RFPs require extensive amounts of data and other information. The GPO and manufacturer(s) agree on terms, items, tiers, and prices. The distributor is notified about the new contract. This is the manufacturer s responsibility, since the manufacturer is relying on the distributor to administer the prices it has agreed upon in the contract. However, the GPO may send a notification to the distributor as well. 8 Fundamentals of GPOs and Healthcare Contracting

9 Member eligibility Ahh, the contract is signed, so everyone is set to start selling products at the new price, right? Not yet: since most contracts have many tiers, each with a different price, GPO members first must be assigned to the appropriate tier in order to be eligible for the pricing. This is typically done through a letter of commitment (LOC) process. The term comes from pre-internet days when GPO members would literally sign a letter committing to a particular purchasing volume. Nowadays this is generally an electronic process. The GPO notifies its member that a new contract is available. The GPO member goes to the GPO website and signs up for a tier based on expected purchasing volume. Fundamentals of GPOs and Healthcare Contracting 9

10 The tier request is sent to the manufacturer to approve or reject: If the tier level is consistent with the provider organization s purchasing history, the tier request is likely to be approved. If the provider organization s past purchasing is not high enough to qualify for the tier level, the manufacturer may either reject the request or follow up for more information (for instance, is the provider committing to convert more of its purchases to this brand?) Once tiers are approved, the manufacturer is responsible for sending tier information (also referred to as member eligibility) to the distributor. Contract management Once the tiers are selected and eligibility information is sent to distributors, everyone loads up the pricing so that the customer can begin purchasing the contracted products at the new price. In an ideal world, everyone receives the new pricing well before the effective date of the contract so that there s time to load and check the pricing. Distributor notifies customer of price changes and loads pricing. Customer loads pricing. Purchasing and invoicing begins. In the real world, this doesn t always happen, which can result in price mismatches. Customers often won t pay an invoice if the pricing on it doesn t match the price they expect to receive for the product. 10 Fundamentals of GPOs and Healthcare Contracting

11 Chargeback/rebate process After the distributor sells the product to a customer at a contracted price, the chargeback process begins. Recall that the distributor s wholesale price is typically higher than the price on the GPO product, meaning that the distributor has just sold a product for less than it paid to acquire the product not a great strategy for profitability. The manufacturer makes the distributor whole through a chargeback. (The term rebate is also frequently used, but because manufacturers often use other types of rebates, we ll use the term chargeback here for clarity.) The chargeback is the difference between the manufacturer s price to the distributor and the contract cost to the provider. A typical mid-sized manufacturer will process hundreds of thousands of chargeback requests per year, and transfer hundreds of thousands of dollars per year in chargeback payments. Distributors submit chargeback requests to manufacturers on a regular basis (daily, weekly, or monthly), and each request may contain thousands of line items for review. Manufacturer reimburses distributor for difference between GPO member price and distribution acquisition cost. Manufacturer may reject chargebacks based on: Price mismatch Class of trade ineligibility Late rebate application GPO roster mistakes (for instance, the manufacturer s database shows that the customer is not a member of the GPO) Other Fundamentals of GPOs and Healthcare Contracting 11

12 If you re wondering why the manufacturer doesn t just give the lower pricing to the distributor to begin with, the answer is that most manufacturers want to control end pricing to customers. Many manufacturers don t want to offer the same deep discounts to small customers, such as physician practices, that they offer to big hospitals, for instance. Using the chargeback process, the manufacturer is able to control those decisions rather than letting the distributor decide who gets what price. In fact, some manufacturers put class of trade restrictions in their contracts. That means that one category of customers, such as hospitals, have access to different pricing tiers than another class of trade, such as surgery centers. (Today, most health systems and most GPOs are pushing for price parity across all classes of trade.) 12 Fundamentals of GPOs and Healthcare Contracting

13 PROGRESS CHECK 1. True or False: GPOs provide rebates to distributors. 2. Describe some of the complexities in the GPO contracting process. 3. Name three factors that can impact the pricing discounts manufacturers are willing to offer when negotiating GPO contracts. 4. GPOs have to disclose the admin fees they collect to their members if they exceed of the product price. 5. Greater levels of contract from the GPO members tend to result in lower pricing offered by manufacturers. 6. Name two reasons why manufacturers may reject distributor chargeback requests: Fundamentals of GPOs and Healthcare Contracting 13

14 PROGRESS CHECK ANSWERS 1. False. 2. Answers may include: Manufacturers typically negotiate thousands of contracts per year across different GPOs and providers. A GPO contract is just a starting point it is not a contract in which anyone actually agrees to buy something. Most GPO contracts have many price points. Contract prices are often below the wholesale price to the distributor. There are often multiple layers of negotiations and negotiating organizations. An individual provider may participate in GPO contracts for some products but locally negotiate pricing for other products. 3. (1) The number of vendors selected for a particular type of product, (2) the level of contract compliance, and (3) contract durations or terms. 4. 3% 5. Compliance 6. Any two of the following is correct: Price mismatch Class of trade ineligibility Late rebate application GPO roster mistakes (for instance, the manufacturer s database shows that the customer is not a member of the GPO) Other 14 Fundamentals of GPOs and Healthcare Contracting

15 Implications of GPOs and contracts for distributors Distributors are right in the middle of these complex contracting processes and their role is especially challenging. That s because the price the customer will pay is determined primarily through a negotiation between the manufacturer and the GPO. But it s usually the distributor who sends the invoice to the customer and the customer expects the price to be right every time. Cost vs. price Note that we said above that the price the customer will pay is determined primarily through a negotiation between the manufacturer and the GPO. To be more specific, that negotiation determines the cost the customer will pay for the product. The distributor s margin will be added to that cost, usually as a cost-plus calculation (for example, cost plus 5%), to determine the price the customer will actually pay. Authorized distributors In order to access GPO-contracted costs for customers, the distributor must be authorized by the GPO to service a particular member facility. This is typically a two-step process: 1. The company must become an authorized distributor with the GPO. Often, this happens through an RFP (request for proposal) process. The GPO s RFP may require information about the distributor s service levels, geography, and other features, and it will typically spell out terms such as allowed mark-ups and returned goods policies. The distributor must send a proposal in response to the RFP. 2. The GPO member facility (hospital, doctor s office, etc.) must designate the distributor as its primary or secondary distributor. Fundamentals of GPOs and Healthcare Contracting 15

16 If the distributor is not authorized by the GPO and designated by the account as its primary or secondary supplier, it will probably be ineligible to access the lower GPO costs for the customer. In many cases, this is a significant competitive disadvantage and may essentially lock the distributor company out of certain accounts. What could possibly go wrong? The inherent complexities involved in GPO contracting make the flow of information and finances difficult at best. For GPO contracting to run smoothly, everyone manufacturer, distributor, and GPO member should ideally have the same information at the same time. This requires data synchronization in various areas: membership rosters, price negotiation and contract terms, payment schedules, price tiers, and more. If data is not synchronized, prices don t match up and rework is required. For instance: If the provider customer gets an invoice with a product price that s different from the one in their system, they will usually refuse to pay the invoice until the issue is resolved. If the manufacturer receives a chargeback request and the data doesn t match up, again the payment is likely to be held up while the issue is investigated. Let s take a look at some common sources of problems. Customer identification Often, when pricing or chargeback mismatches occur, the root problem is that the trading partners can t agree on who the customer is. Sound crazy? Just imagine how many healthcare providers have St. Mary in their name. There s the St. Mary s County Health Department in Maryland, St. Mary s Hospital in Richmond, Virginia, Saint Mary s Hospital in Waterbury, Connecticut, and well you get the idea. Sometimes one location can have multiple addresses: for instances, a facility located at the intersection of Main Ave. and First Street might be listed as 101 Main Avenue and 350 First Street, and both could be correct. 16 Fundamentals of GPOs and Healthcare Contracting

17 A standard system for identifying healthcare providers could solve this problem. GS-1 Healthcare is one such system. Providers can use GS-1 s global location numbers (GLNs) to enumerate their various locations so that all their trading partners identify a particular organization and location the same way. However, both providers and suppliers have been slow to adopt these standards. What can happen? Let s say, for instance, a distributor sells products to County Hospital, part of the Extragood Health System. The manufacturer denies the rebate, saying that County Hospital isn t part of the system and doesn t qualify for their pricing. After much research and back-and-forth communications, the contract administrators from the two companies realize that they are talking about two different facilities with similar names. The difference is resolved and the distributor finally gets the chargeback payment. Bill-to/ship-to issues Many healthcare organizations have multiple locations. For instance, a hospital system may have multiple hospitals, urgent care centers, and physician practices. Sometimes, purchasing for all of these happens through a single location, such as the supply chain department for the health system (the bill-to address), but deliveries are made to each location. This frequently leads to pricing issues. For instance, the manufacturer may look at the ship-to address say a physician practice and say the customer doesn t qualify for the health system s price tier. Sometimes the disagreements are based on confusion about who the customer is, what the address is, and so forth. Other times, the problem is that the manufacturer doesn t want to offer acute care pricing to a non-acute location. GPO membership rosters and eligibility Another common area of data mis-sychronization is GPO membership and tier eligibility. Changes happen all the time and if the distributor doesn t receive the updated information in a timely manner, price mismatches will occur. Changes or areas of mismatched information can include: Fundamentals of GPOs and Healthcare Contracting 17

18 Additions or deletions from a GPO s membership Providers moving to a different pricing tier Providers changing ownership and therefore qualifying for different pricing through the parent organization Multiple GPO memberships Many healthcare providers belong to multiple group purchasing organizations. Sometimes, they belong to a national GPO and a regional group within that GPO, and sometimes they belong to more than one group at each level. So how does the distributor know which GPO contract price to use for these multi-gpo providers? Processes vary. Some providers want their distributor to use whichever contract has the lowest price. This practice, sometimes called cherry-picking, is difficult to administer, and some manufacturers put terms in their contracts to prevent it. Some distributors require their customers to pick one primary GPO, and agree to administer pricing from that contract only unless the primary GPO doesn t have a contract in place for the same product. Late notification An enormous number of price mismatches come down to timing. New contracts often mean price savings for customers and they are understandably eager to realize those savings right away. Customers will often press their suppliers to make the new price active very quickly, but this rush can lead to mistakes and rework. For this reason, some contracts specify a certain amount of advance notification for contract changes. For instance, a health system may require its distributor to provide 30 days notice in advance of any price change. If the distributor receives information about a given price change that is supposed to go into effect the next week, it can t provide the required 30 days notice to the customer. 18 Fundamentals of GPOs and Healthcare Contracting

19 There are many types of contract changes and all suffer when there isn t enough notification time prior to the effective date. A few examples of types of contract changes: New GPO award the GPO has negotiated a new contract with a manufacturer GPO extension or renewal the term for an existing GPO contract has been extended New local contract a customer and manufacturer have negotiated an agreement for customer-specific pricing New product additions new products are being added to a contract Price changes products on a contract have prices that are increased or decreased Tier changes the manufacturer has moved the customer to a different pricing tier, usually based on changes in purchasing volume Roster changes a healthcare provider joins a GPO, or drops out of one What can happen? Let s say St. Joe s is buying new surgical gowns on a GPO contract. The distributor list price for a box of gowns is $14. The GPO has an agreement with the manufacturer for deep discounts: Tier 1 has a $12 price, on Tier 2 it s $10, and so forth. The distributor buys the box at $14 from the manufacturer and sells it to St. Joe s, which company records indicate is on Tier 1. However, St. Joe s recently requested and received approval for Tier 2 pricing based on its commitment level. The distributor has yet to receive confirmation of this change, and requires time to update its system so that the proper price is loaded and St. Joe s is notified of the update based on a contractual notification requirement negotiated by the GPO (typically 30 days). In the meantime, the distributor bills St. Joe s the $12 Tier 12 price. St. Joe s disputes the price and short pays at the Tier 2 ($10) rate plus the distribution fee. The distributor must now work with the manufacturer to get the new contract price, request a new chargeback, and issue a credit to the customer for the difference in price. This is often a lengthy process, and drives extensive re-work costs. Fundamentals of GPOs and Healthcare Contracting 19

20 Optimizing your contracted business If your company is adept in servicing GPO contracts, know how to take advantage of this status. You may be able to use your access to this discounted pricing to grow your business in the GPO member accounts, and to educate and encourage your customers to gain the full benefits from these contracts. To optimize your contracted business, it s also important to know how to help your company administer GPO pricing in an efficient way. Helping customers take advantage of GPO pricing Acute care If you sell primarily to hospitals, it s likely that GPO-negotiated pricing is a fact of life. As a salesperson, you may interact heavily with your company s contract administration team to ensure that customers get the best pricing they qualify for. For example, many distributors actively work with accounts to identify opportunities to standardize products, thus increasing their volumes for selected brands. This can enable them to move to better pricing tiers and thus achieve significant savings. Non-acute If you sell mainly to non-acute providers, particularly smaller independent practices, you probably have customers who do not belong to a GPO, and others who do belong to one but don t even know it. And that can lead you and your company to a strategic decision as to whether to encourage these customers to join a GPO. Here s the dilemma: You will likely be able to access better pricing for your customer if they join a GPO. That can help you defend business you already have, and can lead to growth as well. But Your company most likely makes a better margin on non-gpo business. Once the customer joins a GPO and names your company as its distributor, your company will start paying administrative fees on all contracted products sold and possibly on non-contracted items as well. Talk with your manager about your company s strategies regarding when to encourage GPO participation. 20 Fundamentals of GPOs and Healthcare Contracting

21 Helping your customers efficiently use GPO contracts Ensuring that provider customers are charged the correct contract price requires price synchronization between all the different entities involved: the manufacturer, the GPO, the distributor, and the provider. To make sure customer invoices are correct, distributors and manufacturers make enormous investments in contract administration. For example: People. Almost every company, even small ones, has a staff personn or department solely devoted to contract administration. And large companies have dozens if not hundreds of staff members in their contract management departments. Technology. Distributors also invest in sophisticated software systems like EDI (electronic data interchange) to facilitate contract administration. To maximize your company s success with business that s on contract: Educate your customers about timing requirements. Make sure they understand that a new contract or price may not be available the instant it s negotiated and that it s worth the time required to allow all parties to load pricing information accurately. Understand that the manufacturer, not the distributor, owns the contract price. The GPO may be the one that announces the new contract award, but it s the manufacturer who decides what tiers customers are eligible for, and who ultimately approves your company s chargeback. Help your contract administration department stay up-to-date on customer changes, as they can affect the pricing for which the customer qualifies. Pass along information such as: Ownership changes. Two hospitals combine into a single system, a practice is sold, a nursing home changes ownership all are changes that can impact pricing and must be tracked. Address changes. Similarly, let your contract department know if the customer location changes, additional locations are added, etc. Ship-to locations. Share information about your customer s bill-to and ship-to locations, and in particular any changes. Fundamentals of GPOs and Healthcare Contracting 21

22 Staying informed Understanding GPOs and contracting is challenging but crucial for your healthcare sales success. GPO contracts are often prerequisites to competing for a particular customer or market. Healthcare providers value their GPOs and often consider the GPO their most important business partner. Being able to access and administer GPO pricing allows distributors to offer their customers better deals, crucial to today s cost-conscious healthcare customer. To prepare yourself to succeed in the world of GPO contracting, gather information from your managers and colleagues. Find out what GPOs your customers work with. Know your company policies with regard to the GPO contracting process. If you have the opportunity, talk to GPO managers and find out if there are ways to work together to serve your mutual customers. Stay abreast of changes: the GPOs your customers belong to, the sub-groups they participate in to access better pricing tiers, the contracts that are available to them, and more. GPOs and healthcare contracting can be complex, challenging, and frustrating, but they allow you to bring competitive pricing to your customers, so the effort will be worth it. 22 Fundamentals of GPOs and Healthcare Contracting

23 PROGRESS CHECK 1. What are GLNs and how can they improve customer identification issues? 2. What are the differences between contract price changes, tier changes, and roster changes? 3. True or False: Private-label products are items that are produced and supplied by a distribution company, and are sometimes priced lower than GPO-contracted items. 4. Some providers want their distributor to use whichever contract has the lowest price. This practice, sometimes called, is difficult to administer, and some manufacturers put terms in their contracts to prevent it. Fundamentals of GPOs and Healthcare Contracting 23

24 PROGRESS CHECK ANSWERS 1. GLNs are global location numbers, part of the GS-1 Healthcare standards system for identifying healthcare providers. GLNs can be used to differentiate between various provider locations, particularly within a single IDN/health system--so that all trading partners are able to identify a particular organization and location the same way. 2. Price changes occur when product contract prices increase or decrease for a purchaser. Tier changes occur when a manufacturer moves a GPO customer to a different pricing tier, usually based on changes in purchasing volume. Roster changes occur when a new healthcare provider joins a GPO, or existing provider drops out of its current GPO. 3. True 4. Cherry-picking 24 Fundamentals of GPOs and Healthcare Contracting

25 GLOSSARY Administrative fees, or admin fees Manufacturers and distributors pay these fees to GPOs in exchange for business done with the GPO s member facilities. Admin fees fund the GPO s operating costs and are calculated as a percentage of the price of the product sold. Most GPOs return part of the admin fees they earn to their members. Chargeback Also referred to as rebates, these are payments the manufacturer makes to the distributor to make up the difference between the higher product list price that a distributor pays and the lower product price that GPO members pay. Cherry-picking Refers when providers want their distributor to use whichever contract has the lowest price. Class of trade Class of trade restriction means that one category of customers, such as hospitals, have access to different pricing tiers than another class of trade, such as surgery centers. Clinical or physician preference This refers to a healthcare provider s preference for one type of product over another to deliver care. Commitment level Refers to the unit volume or dollar volume of product that a GPO member agrees to buy on a contract. Contract creation The GPO and the vendor negotiate the contract, include all the pricing tiers Contract management Contract information is communicated to all parties and loaded into software systems; the customer begins buying products at the contracted price Data synchronization For GPO contracting to run smoothly, everyone manufacturer, distributor, and GPO member should ideally have the same information at the same time. EDI Electronic data interchange refers to the computer-to-computer exchange of machinereadable data in a standard format. GLNs Global location numbers, part of the GS-1 Healthcare standards system for identifying healthcare providers Fundamentals of GPOs and Healthcare Contracting 25

26 GPO Group purchasing organization. GPOs are predominately made up of member hospitals, but also include nursing homes, physician/alternate site facilities, etc. IDN IDNs are healthcare systems that generally include more than one hospital along with other providers such as clinics, surgery centers, and physician offices. LOC Letter of Commitment. A letter committing to a particular purchasing volume, signed by GPO members. Member eligibility Members request a specific pricing tier and manufacturers approve (or disapprove) that particular tier and the associated pricing Multi-source contract When a GPO writes contracts with multiple manufacturers on the same type of product Price tier The level of pricing a provider customer qualifies based on his purchasing volume, class of trade, or other factors Private label A generic version of a product instead of a brand name. Distributors, manufacturers, and sometimes GPOs can all have private label items. Rebate Another term for chargeback. Regional purchasing cooperatives Groups of providers that band together to aggregate their purchasing volumes and thus qualify for better pricing tiers. RFP Request for proposal. Roster A GPO roster is simply a list of all of the GPO s members. Safe harbor This term refers to the status that the federal government grants to GPOs that allows them to collect fees from manufacturers and distributors. Safe Harbor exempts GPOs from most federal antitrust and anti-kickback regulations, with specific limitations. Standardization A process or approach for decreasing variation in products purchased. Hospitals that decrease the number of different items purchased, and instead increase usage of a limited number of products, can usually obtain lower pricing for the standardized products. Standardization also makes it easier to manage inventory, decreases education and training requirements, and can reduce the number of vendors and associated transaction costs. 26 Fundamentals of GPOs and Healthcare Contracting

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