Every health center buys the same basic medical supplies in order to provide quality healthcare to their patients. Brands may differ, but syringes, exam gloves, table paper and bandages can be found in health center exam rooms and supply closets across the country. Despite purchasing the same or similar products, health centers – and many other health care providers – seldom pay the same price for those medical supplies and equipment. Why? This article will explain how prices are built and how the Delta Purchasing Alliance (DPA) standardizes and discounts those prices.
There are two main components that make up the prices of medical supply products and equipment: Acquisition Cost and Distributor Markup. These two pieces combine to create the final price that a health center sees on their invoices.
Acquisition Cost is the price at which a medical supply manufacturer sells their products to a “distributor.” To keep their costs low, manufacturers rely on the national network of distributors to warehouse and deliver their products to hospitals, physician offices and health centers.
For example, Becton Dickinson may sell a box of syringes to McKesson for $5.50. That $5.50 accounts for BD’s research and development, raw materials, overhead, and, hopefully, a fair profit.
Distributor Markup, or cost-plus, is the additional cost that the medical supply distributor applies to a product in exchange for delivering the products to purchasers. For example, McKesson may apply a distributor markup of 26% to that box of BD syringes when it’s purchased by a health center. That 26% accounts for logistics in procuring the item, how often the item is ordered, warehousing, and, hopefully, a fair profit.
Acquisition Cost + Distributor Markup = Health Center Price. So the $5.50 acquisition cost plus the 26% markup equals $6.93. That $6.93 is the price that a health center sees on their invoice.
A Group Purchasing Organization (GPO) has great influence over one component of price: Acquisition Cost. A GPO may have thousands of members that spend billions of dollars through the GPO’s contracts. The GPO membership’s combined purchasing power is leveraged to secure discounted Acquisition Costs directly with manufacturers. Discounted Acquisition Cost, leveraged through the collective purchasing power, provides a benefit that no single organization would secure on their own.
For example, the GPO Provista-Vizient may negotiate an Acquisition Cost of $4.50 directly with BD for that same box of syringes. So the price that a Provista-Vizient health center would pay for the syringes is built using the $4.50 Acquisition Cost plus the Distributor’s Markup.
At one time GPOs also affected Distributor Markup, the second component of price. GPOs would negotiate a limit on the markup that a distributor could apply to contracted products. However, large GPO members like hospital systems, who have large procurement staffs, began negotiating their own aggressive markup limits directly with distributors. As these large members evolved and undertook the responsibility themselves, GPO markup limits fell away.
While many health centers are sophisticated with very well-run operations, the Delta Purchasing Alliance recognized that a markup limit would still assist in controlling expenses for many health centers across the country. The DPA addresses this gap.
To control Acquisition Cost, the DPA partnered with the Value in Purchasing (ViP) Program, which is powered by the Provista-Vizient GPO. Vizient’s membership spends more than $100 billion through their contract portfolio, making it the largest GPO in the country. In the aggregate, Vizient provides the most aggressive Acquisition Cost benefit to health centers.
DPA then leveraged the combined purchasing power of its own membership and negotiated with the large, national health center distributors. DPA secured an aggressive markup with McKesson Medical Surgical on behalf of its members. Each health center that works with DPA receives this same discounted markup on their McKesson purchases.
By partnering with both ViP/Provista-Vizient and McKesson, DPA affects both Acquisition Cost and Distributor Markup. Acquisition Cost is aggressive through the Vizient portfolio and Distributor Markup is aggressive with McKesson’s leveraged cap. And it’s working. Delta Purchasing Alliance health centers save an average of more than 16% per year, over and above GPO discounted pricing, on the medical supplies and equipment they buy. Addressing each component of price is making the difference.