Virtual Integration

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A six-organization cooperative helps hospitals cut purchasing costs and centralize supply chain operations.

Why buy when you can get many of the same savings through collaboration? Kansas City's Saint Luke's Health System may not have intended to create a virtual merger with five smaller hospitals in its region, but effectively, the formation of Mid-America Service Solutions LLC does much the same thing.

The hospital supply chain company is owned by six hospital groups in Kansas and Missouri, of which Saint Luke's is by far the biggest organization with 11 hospitals. It's designed as a "virtual integration," according to Chuck Robb, Saint Luke's senior vice president and chief financial officer, and allows the cooperative to obtain "several percentage points" of discounts to supplies they all order, over and above the prices they were getting in their respective group purchasing organizations. Combined, the six organizations spend more than $520 million in supplies annually.

Saint Luke's and the other hospitals—CoxHealth in Springfield, MO; Freeman Health System in Joplin, MO; Stormont-Vail HealthCare in Topeka, KS; Hays (KS) Medical Center; and Salina (KS) Regional Health Center—will centralize supply chain contracting, procurement, distribution, and logistics initially into a central facility operated under contract with Owens & Minor, a nationwide distributor of medical and surgical supplies. As the partnership develops, Mid-America may develop its own warehousing and distribution solution, says Robb.

Hospitals have long been familiar with the GPO concept, under which a large group of hospitals band together to obtain volume discounts on a variety of supplies, but the Mid-America concept goes much further. "This is the next level," Robb says. "We're not just putting in fixed orders that are larger—it's one order, and we pay one bill."

The Mid-America group will buy and own the goods sent to its member hospitals. Supplies will either be shipped to a centralized warehouse or directly shipped to the institution that will use them.

The new group requires coordination and standardization of a level that GPOs don't require, Robb says. Tom Nikeil, vice president of custom supply networks at VHA Inc., which helped the hospitals set up Mid-America, says the combination really amounts to an "integrated delivery network absent common ownership," although Robb says there are no plans further down the road for any true acquisitions of member hospitals by Saint Luke's, for example.

"There's plenty of additional opportunity for other kinds of joint activities, but I wouldn't speculate it would go any further than that," Robb says.

As the organization grows, Robb says it's possible the group will take on other responsibilities for its owner-members. For instance, it could establish a pharmacy operation where individual dosing would be put together for all hospitals or shared laundry services. Members have committed to spend 90% of their individual supply chain budgets through the new company.

Philip Betbeze

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