Abstract
Morgan Kendrick, Vice President of Business Development and Patient Safety at BuyPro Health group purchasing organisation (GPO), contemplated his options regarding the IT infrastructure project he hoped to champion as he took his new position in January of 2017. BuyPro was a prominent Canadian healthcare GPO. Kendrick hoped to leverage BuyPro’s prominent industry position to promote adoption of global standards for procurement and service delivery purposes. In order for BuyPro to adopt global standards and use them as effectively as Kendrick wished, the company would need to invest substantially in upgrading internal systems to make them standards-ready. However, investment in the required systems upgrades would not directly facilitate negotiating for lower unit pricing on supplies purchased by member organisations. As he considered the future needs of the company and its industry, Morgan considered how best to promote his vision and build support for the necessary precursor investments.
Keywords
Morgan Kendrick, Vice President of Business Development and Patient Safety at BuyPro Health group purchasing organisation (GPO) (see Figure 1), contemplated his options regarding the IT infrastructure project he hoped to champion as he took his new position in January of 2017. BuyPro was a prominent Canadian healthcare GPO. He hoped to leverage BuyPro’s prominent industry position to promote adoption of global standards for procurement and service delivery purposes. In order for BuyPro to adopt global standards and use them as effectively as Kendrick wished, the company would need to invest substantially in upgrading internal systems to make them standards-ready. As he considered the future needs of the company and its industry, Morgan considered how best to promote his vision and build support for the necessary precursor investments.
BuyPro Health GPO Chart.
Company history
The formation of BuyPro traced back to the 1980s when three hospital organisations sought to collaborate in order to better manage purchasing activities and costs. The idea was to form a GPO to coordinate and leverage purchases from multiple entities from across Canada in order to obtain more attractive purchasing terms, in particular pricing. The GPO would manage contract negotiations, while individual members/customers would be responsible for their own purchasing activities. Consumable supplies such as medical and surgical supplies, pharmaceuticals, equipment, and food and nutrition often comprised 20% or more of a facility’s operating budget. Only salaries and facilities and maintenance were routinely a larger proportion of organisational operating costs. Thus, the opportunity for procurement cost savings was substantial, particularly for smaller facilities with limited purchasing power. These issues were exacerbated by the fact that Canadian healthcare procurement was much smaller than in the United States. In fact, historically, the entirety of Canadian healthcare procurement was smaller than the three largest US GPOs individually (Goodhand, 2001).
BuyPro’s mission was to help healthcare providers address the many challenges they faced, including rising costs, limited resources, and changing conditions. Since it was involved in the healthcare delivery system, patient welfare mattered (as Kendrick’s title demonstrated), but it had been created in large part to help deal with the costs of providing quality medical care. By 2015, BuyPro had surpassed a billion dollars in supplies purchased under the contracts it had negotiated and was coordinating the contracting for thousands of items across hundreds of facilities and more than one hundred distinct suppliers. This scale gave BuyPro significant power in negotiating prices with the suppliers of many products. Not all products were equally amenable to price negotiation, however. While many medical and surgical supplies were available from multiple sources in competitive markets, pharmaceuticals were a different story. Kendrick’s earlier position managing pharmaceuticals and pharmacy services at a rival company and his prior training as a pharmacist gave him particular insight into the pharmaceuticals market.
Pharmaceutical supplies
The market for pharmaceuticals in important categories was often monopolistic. One common situation in which monopolies arose was in markets for drugs based on molecules still on patent. Drug manufacturers had little incentive to negotiate pricing on such pharmaceuticals and often incurred significant expenses for advertising and promotion aimed at increasing awareness and thus usage of these patented products. These ‘single-source brand’ (SSB) drugs were generally highly profitable for manufacturers in terms of net operating revenue.
Drugs typically became substantially less costly to purchase once the underlying patents expired. Multiple competitor manufacturers typically entered the market to produce generic equivalents of drugs no longer covered by patents, driving prices down as they competed for share. Market prices for these drugs often declined for several years, routinely falling well below the cost of production. Competing manufacturers left the market over time as the likelihood of future profitability declined and losses began to mount. Eventually, for many drugs, all competing manufacturers save one would exit the market, resulting in a second monopolistic supply situation, called ‘single-source generic’ (SSG). SSB drugs faced no direct competition, but SSG drugs, if priced too highly, could potentially invite competitive entry. Nonetheless, drugs did typically increase substantially in price when only a single manufacturer remained in active production.
This situation left little room for unit cost savings through group purchasing negotiation. However, Kendrick was convinced that opportunities for broader cost savings remained, and that other, more important service demands could also be better served.
Global standards
Recent developments in global standards regarding product identification and bar coding (in particular GS1) represented a significant development in global supply management for healthcare. However, such global standards took a very long time to develop (see Table 1) and adoption might be slow to take hold. Although machine-readable product identifiers had existed since the 1970s, global healthcare-specific applications did not arrive until the GS1 Healthcare User Group (GS1 HUG™) was formed in July 2005. By March 2009, the Global Traceability Standard for Healthcare had been finalised. In January 2010, the new GS1 Product Identification Standard was released, with specific design to improve patient safety and supply chain management, helping to integrate worldwide bar code, radio frequency identification (RFID), and traceability systems for healthcare.
BuyPro Health GPO – GS1 and DSCSA timeline highlights. a
Item description and barcode standards opened the possibility of managing supply in a more automated fashion than was previously possible. One potential advantage for GPOs such as BuyPro was the opportunity to gather data regarding detailed purchasing behaviour in member organisations. Such data could then be analysed in order to identify opportunities for switching purchases to functionally identical products that were covered by contractual rates. Switching to contracted products almost always resulted in immediate cost savings for members while also increasing the volumes from which BuyPro was able to negotiate, providing opportunities for future incremental cost reductions. However, there were other aspects of healthcare, including patient safety, for which universal product identifiers should prove useful.
Safety implications
Consistent with his training as a pharmacist, one of Kendrick’s top priorities was patient welfare. The global product identifier keys developed by the GS1 HUG™ presented the opportunity for healthcare organisations to leverage automated product identification to improve patient safety. One significant potential benefit of adoption was in drug recall efforts, a benefit explicitly anticipated in the traceability element of GS1. In fact, the United States had recently passed the Drug Supply Chain Security Act, which would eventually mandate unit-level traceability, 1 and Kendrick expected that Canada would implement similar requirements.
Kendrick was aware of studies showing that advances in medical practice such as computerised physician order entry (POE) had shown decreases in the rate of adverse drug events by more than 50% (Bates et al., 1998). Although GS1 implementation for supply management was not necessary for the adoption of POE systems, there was potential for the two to be utilised together. For example, in future drug delivery processes, drug dispensing and administration might be facilitated through computer systems in much the same way as order entry and transcription had been impacted by computerised POE. Such integration would allow for automated checks and monitoring to be implemented in all stages of drug delivery in healthcare facilities.
In addition, the tracking of pharmaceuticals at the unit/dose level would facilitate the management of controlled substances in hospitals. Schedule I pharmaceuticals, including opiates such as codeine and morphine along with other opioids, 2 were of particular concern. The Canadian Centre on Substance Abuse (CCSA) reported in 2015 that almost 15% of the Canadian population used prescription opioids, while 2% admitted to abusing them. 3 Although the CCSA showed a decline in prescription and abuse statistics, The Globe and Mail reported on the rising cost such drugs represented to Canada’s healthcare system (Howlett, 2017). There were also cases of health professionals stealing narcotics to feed their addictions (Eichenwald, 2015). As Kendrick put it, addicts can work anywhere.
Unfortunately, none of these benefits provided unit-price purchasing cost reductions such as those promised by the additional data detail, and it might prove very difficult to make a business case for the required infrastructure and systems support on the basis of the potential for incremental cost reductions.
IT systems support
In order to facilitate adoption of GS1, BuyPro would need to expend IT resources in two ways. First, there was the necessity of a significant investment in developing an internal systems architecture compatible with the new GS1 keys. The existing organisational Enterprise Resource Planning (ERP) system could not accommodate the key length required for full functionality. For example, the Global Trade Item Number (GTIN) in the GS1 standards could be up to 14 digits, while BuyPro’s legacy system was designed to handle shorter keys. Given the broader functionality requirements of the organisation, development of an architecture capable of providing full GS1 compatibility would require replacement of the ERP among other enhancements. Such a project was a very large and fraught undertaking for any organisation. BuyPro staff had estimated implementation costs, including some necessary infrastructure enhancements, at between 10% and 25% of revenues for an organisation of their size.
In addition to the potentially large systems development expenditures, BuyPro would also need to buy access to regular GS1 updates in order to ensure that their system maintained its compatibility with changes in the standard. While these expenditures might provide greater system flexibility, there had been no major systems failures to create a sense of urgency around major change efforts. There was also the risk of a ‘white elephant’ project with extensive problems, disrupted operations, and potentially dramatically higher costs. 4 The existing systems architecture was able to support the operational status quo relatively well.
Complicating factors
One issue complicating initiatives such as the one Kendrick was contemplating was the potential for conflicting incentives across the oversight mandates of different government bodies. For example, in Ontario the recently passed Broader Public Sector Accountability Act (BPSAA) introduced new reporting requirements when it went into effect in April 2011, including specific expectations regarding procurement activities. The Ministry of Finance Ontario Buys Division could be seen as focusing solely on unit acquisition costs (though broader lifecycle cost could theoretically justify higher up-front expenditures), while the Ministry of Health was tasked with managing overall cost of healthcare delivery. A GPO such as BuyPro could be argued to have responsibility primarily for minimising unit acquisition costs.
Competition in the GPO marketplace might also present problems. Expenditures for systems architecture redesign efforts that did not promote unit acquisition cost savings could be seen as reducing the cost competitiveness of a service primarily tasked with contracting to deliver the lowest possible unit acquisition costs. If competing organisations were able to deliver lower pricing per unit, BuyPro might be unable to acquire business from new members or, even worse, might begin to lose existing customers.
Conclusion
As new member of the executive team, Kendrick was responsible for overall organisational performance. Given BuyPro’s broader mission as a participant in the healthcare supply chain and his own vision for the organisation from his wide purview as Vice President of Business Development and Patient Safety, he was contemplating the most appropriate path forward.
Suggested questions for case discussion
Who are the critical stakeholders interested in the IT systems architecture Kendrick would like the organisation to adopt?
What might BuyPro estimate for ERP implementation costs, and what implications might such costs have on the organisation’s cost reduction mandate from members?
How should Kendrick think about and promote the advantages of the changes and IT development he would like to see?
What potential opposition or counterarguments might he encounter? How should he deal with these issues?
Footnotes
Declaration of conflicting interests
The author declared no potential conflicts of interest with respect to the research, authorship and/or publication of this article.
Funding
The author received no financial support for the research, authorship and/or publication of this article.
