Haslam College of Business - Breaking the Chain: GPO Changes and Hospital Supply Cost Efficiency

Procuring, transporting and storing medical supplies and devices can account for up to 40 percent of a hospital’s total operating expenses. In today’s competitive healthcare industry, hospitals are more focused than ever on supply chain efficiency.

To take advantage of cost-reducing economies of scale, hospitals contract with group purchasing organizations (GPOs). Ninety-seven percent of hospitals are affiliated with at least one GPO, and most use two or more to maximize savings. However, hospitals also change GPO affiliations periodically for a variety of reasons, including shifting patient demographics, new clinical service offerings and changing regulations.

Randy Bradley and Bogdan Bichescu, associate professors at the University of Tennessee, Knoxville’s Haslam College of Business, and co-authors Joonwhan In (California State University, Long Beach) and Antoinette Smith (Florida International University) sought to learn how these changes affect supply chain efficiency and to determine whether the type of change is significant. A GPO change may be structural (reducing or increasing the number of GPOs a hospital uses) or it may be relational (switching from one GPO to another). Regarding efficiency, does one change make more sense than the other?

The Approach: Assessing Supply Expense Ratios Over Time

The team measured supply chain efficiency by monitoring supply expense ratios over time using secondary data. They included short-term, acute-care hospitals that were members of GPOs in any two consecutive years between 2009 and 2013 — a data sample producing 2,391 unique hospitals and 7,236 observations.

To formulate their hypotheses, the team made some assumptions. First: structural changes create more disruption than relational changes. They’re strategic and often require cultural, structural and behavioral changes that necessitate organization-wide learning initiatives. Adding a GPO, for example, can make a hospital’s purchasing decisions much more complex. It stands to reason that a structural GPO change will decrease supply cost efficiency compared to no change.

Comparatively, relational changes are less disruptive and tend to produce immediate cost savings. Therefore, relational changes should increase supply cost efficiency compared to no change.

Based on these hypotheses, the researchers predicted that structural changes would result in significantly lower supply cost efficiency than relational changes.

What They Found

The data supported the first hypothesis related to hospitals that dropped GPOs, which showed a significant short-term decrease in supply chain efficiency. Adding a GPO, however, didn’t have a significant effect. The researchers’ theory on this surprising outcome: hospitals may join GPOs simply to acquire pricing information rather than to make purchases, negating any complicating effect.

The second hypothesis also received partial validation. When considering supply expenses relative to net patient revenue, switching GPOs increased efficiency. However, relational changes had no effect on supply expenses relative to total operating expenses.

As predicted, structural changes weighed more heavily on supply chain efficiency than relational changes, but only in overall operating expenses, not net patient revenue. Furthermore, the researchers found no evidence of reverse causality, and confirmed that GPO changes usually are not enacted in response to deteriorating supply chain efficiency.

Takeaways for Hospital Administrators

Whether adding or subtracting GPOs, structural changes are more likely than relational changes to reduce supply chain efficiency. Reconfiguring a GPO network likely creates a ripple effect throughout a hospital’s supply chain as administrators struggle to find the right spending mix.

Hospitals that reduce their number of GPOs tend to experience lower supply chain efficiency, at least in the short term. Subtracting a GPO may limit access to cost-efficient suppliers and require more resources and coordination to reconfigure the supply base than adding a GPO. The researchers advise caution when considering this option.

Relational changes affect only some parts of the supply chain and allow hospitals to realize some savings immediately. This generally affects supply chain efficiency positively.

The team’s analysis suggested that certain variables — such as system affiliation, profit status and business intelligence capabilities — significantly affect a hospital’s likelihood to undergo particular GPO changes. To avoid unnecessary setbacks, the team encourages administrators to explore this research (published in the International Journal of Production Economics, Vol. 218, December 2019) to understand which organizational profiles are more likely to experience which changes.

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CONTACT:

Stacy Estep, business writer/publicist, sestep3@utk.edu