Private label wholesaling within health care is not new. Hospitals have been contracting with group purchasing organizations (GPOs) for private label products for years in efforts to contain costs.
The Sisters of Mercy Health System, Chesterfield, Mo., has put a somewhat different spin on the practice of private labeling by leveraging the infrastructure and buying power of its own for-profit group purchasing division, Resource Optimization & Innovation (ROi).
With the goal of lowering costs by increasing product standardization across the system and streamlining inventory, the integrated delivery network (IDN) has added front-end clinical input. This has provided ongoing opportunities for clinical feedback into the mix to maintain or improve product quality, win stakeholder support and meet clinicians’ needs.
Through ROi, Mercy contracts directly with manufacturers for volume quantities of a currently small but steadily growing range of clinical products.
It ships the material from its Springfield, Mo., distribution center via its own fleet of trucks to Mercy’s 19 hospitals and affiliated physician offices in Arkansas, Oklahoma, Missouri and Kansas.
The private label products, which include gauze sponges and Xeroform gauze manufactured by Derma Sciences, Inc., Princeton, N.J., appear systemwide under the brand, “Mercy—the Mark of Quality.” Launched in mid-2007, the branding program nets savings of 5 percent to 40 percent on private label products for each of the IDN’s nine strategic service units (SSUs), according to Vance Moore, president of ROi. “The logic behind this is that if we take responsibility for marketing, sales, distribution and all of these things that ROi already does, why should we pay a branded manufacturer the same price that everybody else does who doesn’t have the infrastructure that we have in place?” says Moore. “We’re just trying to take advantage of our infrastructure to reduce costs.”
According to Moore, that infrastructure is what differentiates Mercy’s program from other GPO private labels.
“What happens in our world is that we can take possession of those goods,” he says. “We don’t require the manufacturer or another distributor to store those goods on our behalf. Manufacturers are often willing to deal with us on that because we’re walking in with our checkbook ready to buy, and others have to work out a more complex relationship. We just don’t have those complexities.
“We’re our own distribution operation, and we’re our own GPO, so we’ve disintermediated the two major intermediaries that exist in health care today. We’ve found a tremendous amount of benefit in dealing one-to-one with the guys who make the goods,” he says.
A different approach
According to Moore, Mercy is paving new paths in the way health systems and manufacturers work together. “We’re getting much closer to the cost drivers of the manufacturers and understanding their business so we can be helpful to them wherever possible,” he says.
The potential is there, for example, for Mercy to achieve new cost efficiencies through the ordering of seasonal items such as cardiology products and orthopedics in larger than normal quantities when demand for those products is lower. “We can afford to carry a little extra inventory because the manufacturer is going to make it worth our while from a price perspective,” he says.
At the same time, the manufacturer benefits by picking up additional business during a typically slower time, he says. “This is the way we play off each other. These are dialogues you do not find normal GPOs or IDNs having with manufacturers.”
Mercy has contracts with seven manufacturers in seven product categories for more than 1,000 products. At present, private label items represent only about 2 percent of Mercy’s clinical inventory. Other wound care items, EKG chart and monitoring papers, and IV start kits are in line for private label consideration.
The health system has deliberately started slowly with the program, at the lower end of the product chain, focusing first on specification-driven products that usually require relatively little clinical input or modification. “We’re going to crawl before we walk,” Moore says. “We’re basically buying the same product that would be manufactured for others under very similar, if not the exact same, specs. In doing so, we already know there’s going to be product acceptance because [clinicians] are already using and buying the same product today; it’s just coming out of a different box. What that does is introduce the product in a way that lets us be successful.”
A clinical nod
Woven throughout the private label program, however, is an emphasis on product quality and user-friendliness that provides opportunities for direct input from clinicians, notes Steve Shockley, executive director of materials management for St. John’s Mercy Health Care, one of Mercy’s SSUs that includes St. John’s Mercy Medical Center, St. Louis, and St. John’s Mercy Hospital, Washington, Mo., an integrated primary care practice and a variety of other health services.
The Mark of Quality label signifies a stamp of approval from the clinical staff, Shockley says, because every product undergoes a 90-day clinical evaluation within the system before it can become part of the private label line.
Clinicians are encouraged to provide suggestions and feedback through clinical resource teams within each of Mercy’s SSUs as well as the corporate office. The teams meet on a regular basis in Springfield with ROi to exchange ideas and discuss possible items for private label consideration.
One of Mercy’s SSUs recently proposed the idea of standardizing surgical skin markers across the system.
“I think we’re using five different skin markers, so it’s a question of standardizing to one SKU and at the same time going out and finding if we can private label this,” Shockley says.
“Sometimes we ask our GPO to do some homework for us, and other times they come to us with some ideas they’ve had, so it’s definitely two-way sharing.”
Private label products are guaranteed to match or exceed the quality and user-friendliness of their predecessors. “The quality [of a private label product] is the same or better because we don’t want to impact anything from a patient care perspective,” Shockley says.
“We can always buy in bulk cheaper, but actually being able to work on the quality of the product is what makes this even better,” he says.
Feedback from clinicians resulted in an improvement in the quality of standard gauze sponges, for example, which come in packs of two, five and 10.
“Typically the 10-pack is used in surgery and the two-packs are more for general floor use,” Shockley says. “When we were evaluating the product during our 90-day trial, the clinical staff came back and said the two-packs are not as absorbent as the 10s. Even though we looked at samples beforehand and the specs are the same, you really can’t tell until you use the product whether they’re manufactured a bit differently. We went back to the manufacturer, and now they’re going to make the two-pack as absorbent as the 10-pack.”
Adds Moore, “When we get feedback from clinicians, first we go back to the manufacturer and see if it’s something they already have in their product offerings that we just didn’t spec originally, or if there are changes that need to be made to the product to meet our expectations. Many times what we find is that the manufacturer has a product that may be a little different, but still meets the clinicians’ needs. We’ll introduce it, and then this becomes the new product.”
The program’s opportunities for clinical involvement and ongoing improvement have helped the private label earn buy-in from staff, Moore believes. “The clinicians have more input, and in having more input they also have a pride of ownership because they kind of feel that they’ve designed the product if there’s been any product change.
“At first we were afraid people would say ‘this is just another generic brand.’ But it’s been just the opposite. This is considered a premium brand because of the input.”
Although the health system’s hospitals and other affiliates are not restricted in product use, “There’s a full expectation our clinicians will use [a private label] product almost exclusively in that particular product line because we’ve gotten the clinical input that this is the absolute best product we would buy,” says Moore. “Why would we deviate from that unless there was some scientific reason to do so?”
In some instances, nurses and other staff have not been happy with the product they were using.
“This is an opportunity to go from a B-tier product to an A-tier product and save money,” says Moore. “So when you see a 5 percent savings, that doesn’t sound like a lot. But when you are dealing with a product that you just upgraded and you’ve saved 5 percent, that’s a whole different equation.”
Susan Birk is a freelance writer based in Wheaton, ILL.
This article first appeared in the January 2008 issue of Materials Management in Health Care.
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