National Healthcare Group Purchasing Industry Likely to Top $2 Billion in Revenues and $110 Billion in Purchase Volume in 2010
Revenues for the U. S. healthcare national group purchasing industry will exceed $2 billion in 2010 for the first time and total purchase volume will grow to more than $110 billion, predicted Chris Peasner of Peasner Healthcare Research and Advisory, which tracks the GPO industry and provides a range of consulting services to healthcare industry firms.
Plano, TX (PRWEB) January 5, 2010
According to data compiled by the firm, revenue for national group purchasing organizations (GPOs) will show a 3.1 percent increase over the $1.98 billion expected in 2009. There are currently seven large GPOs providing national group purchasing services in the United States. Other local and regional GPOs provide similar services but their purchase volumes are dwarfed by the national GPOs.
“While the likely $2 billion in revenues in 2010 is historic, it is important to note that GPOs will post a relatively small increase in their revenues from the previous year,” said Peasner. “We believe that their revenue growth will be constrained by a combination of factors, including industry cost pressures, increasingly influential regional GPOs, supplier pressures, self-contracting by hospitals, and limited admissions growth at hospitals and other facilities. Furthermore, even if sales rise to $2.1 billion, pressures from hospital customers to receive more value and more of the fees received from suppliers will drive GPO operating margins down.”
GPO revenues are mostly comprised of administrative fees paid to GPOs by suppliers when healthcare providers purchase goods and services using GPO-negotiated contracts.
Peasner noted that a number of economic factors could make it difficult for GPOs to achieve even modest revenue growth during the year. Those factors include a possible double-dip recession leading to continued high unemployment that would increase the number of people without health insurance – and thus cut hospital admissions.
He said that any healthcare reform enacted in 2010 would not impact GPO financial performance this year because of the likely lag time for such legislation to be fully implemented. However, he noted that the long-running investigation into GPO practices by a Senate subcommittee is expected to gain momentum in 2010, putting added pressure on the GPOs.
On a brighter note for GPOs, Peasner said that national GPOs are seeing an improved uptake of non-administrative fee programs and services as a result of significant investments made in previous years to diversify their revenues. He predicted that revenues from these ancillary services, such as consulting, analytics, procurement and clinical utilization services, would increase 12 percent to reach $356 million in 2010. “This should help support the industry during a protracted period of relatively modest sales growth,” Peasner said.
Peasner said that administrative fees received from GPO vendors would continue to dominate industry revenues in 2010, accounting for 84 percent of top-line revenues. On average, he predicted, 59 percent, or $972 million, will be returned to hospitals in the form of contractual obligations and what the industry terms patronage dividends.
Peasner predicted that the two GPOs not owned by hospitals – Broadlane and MedAssets (MDAS) – would feel significant pressure to share more revenue with their hospital customers. “While these non-provider-owned GPOs make up just 24 percent of the total market,” said Peasner, “their average revenue share with customers is significantly less than the provider-owned GPOs – 37 percent for the non-provider-owned versus 65 percent for the provider-owned.”
Peasner noted that in order to combat the pressure to share more revenue with their customers, these non-provider-owned GPOs are creatively introducing fee-for-service programs and ROI-priced products and services and investing heavily in new product development. While helping to preserve gross margins, the costs of deploying these additional services will weigh down net operating margins, he added. The non-provider-owned GPOs are being forced to look outside of their core business in order to maintain the top-line revenue growth expected by their investors. Peasner also said that he expects some of the GPOs, particularly the non-provider-owned GPOs, to pursue strategic acquisitions in 2010 to help bolster their revenue growth.
The largest provider-owned GPOs – HealthTrust Purchasing Group, Premier, and VHA – return nearly 70 percent of the fees they receive from vendors to their hospital owners but are still being challenged to deliver more value to their customers.
“We expect that they will continue with their long-term strategies of investing in clinical utilization programs, safety initiatives, consulting services and regional service centers to create the necessary value to retain their current customers and provide incentives for new hospitals and systems to become members of their GPOs,” said Peasner.
According to Peasner Healthcare Research and Advisory market statistics, during 2009 10 hospital and health systems, representing just over $1 billion in supply spend, changed their GPO affiliation. The largest transaction occurred early in the year when Baylor Health Care System chose not to renew its GPO affiliation with VHA and instead signed a multi-year contract with MedAssets, the only publicly traded GPO.
Over the next 18 months, some of the largest and most coveted hospital systems will be making the decision to either renew their relationship with their existing GPO or move to a competitor as their current GPO relationships terminate. “Considering the zero-sum market conditions and the significant investments made over the last decade by GPOs in value-added services, these large hospitals and health systems are positioned nicely to find a GPO partner that will fit well with their supply chain strategy and return substantial value to them in the form of vendor admin fees, account support, value-added services, and sourcing expertise,” said Peasner.
In short, while there may be modest growth in top-line revenues, Peasner said that both gross margins and net margins will be pressured downward due to problems with the economy, hospital customers demanding more value in the form of higher fee sharing arrangements and discounted valued-added services, and increasingly intense competition among the national and regional GPOs.
Peasner Healthcare Research and Advisory provides clients with customized research, data, analysis and forecasting about the healthcare group purchasing industry. For more information visit www. peasnerhealthcare. com
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