In the healthcare industry, buying through group purchasing organizations (GPOs) used to be a no-brainer. The math is simple. A collection of small, individual organizations bands together in a network to leverage their combined buying power and receive better pricing.

But at a certain point, as an organization grows and gains its own purchasing power, it may find it wants more control over its contract negotiations and more streamlined and customized purchasing processes. Such is the story of Ascension Health, a 65-hospital health system based in St. Louis.

Ascension had long been a proponent of GPOs and was, in fact, part owner of one of the largest healthcare industry GPOs, Consorta, as well as a member of two others, Premier and Novation. But when it's time to change, it's time to change.

Ascension is the result of a merger between the Daughters of Charity Health System and the Sisters of St. Joseph, which created the largest not-for-profit health system in the country. As part of the merger, Ascension made a concerted review of its internal operations, starting with the organization's mission, culture, values, and organization, with a specific eye towards the use of GPOs and its supply chain, according to Arnie Kimmell, CEO of supply chain for Ascension.

"We determined that if we were going to survive, we needed to improve our operational performance and put about more 3% operating margin on our bottom line," Kimmel tells Purchasing. "We tried to determine where that could come from and one of the areas was supply chain."

With this goal in mind, Ascension decided it wanted to move to an online buying and catalog system across the entire enterprise. The move was part of a multi-year strategy to restructure the entire supply chain, reduce supply costs and eliminate inefficiencies. When all was said and done, Ascension figured it could save $64 million in the process.

The GPO model, Kimmel says, gave Ascension only one voice at the table in contracting. "We don't represent the same kind of purchasing power that a GPO represents, but we're big enough that we think suppliers will be responsive to new ways of doing business," he notes. "And, so far, I'd say this has been true. We think we can deliver more compliance than any GPO and therefore exert more leverage with suppliers."

First step in the process was deciding what to do with the eleven different legacy inventory management systems running at the various organizations within Ascension. Instead of standardizing on one system that would require 10 parts of its organization learn a new system, Ascension decided to develop middleware that would tie all of the legacy systems together, allowing users to continue in their familiar ordering systems but connecting them centrally.

"We thought the [middleware] route would be less expensive and faster," Kimmell says. "The key was development of a global catalog and we have done that. We have a catalog that will include all of what we buy in all of our ministries. We developed that in spring and summer of 2001. The catalog enables each of our ministries to continue using their legacy materials management information systems to order in the ways they have been ordering. So, for example, they can continue calling a 4-by-4 gauze pad by the same name, but the catalog says, 'We know what the different ministries call 4-by-4 gauze pads, so we can accumulate the information that centrally no matter what they call it.'"

Kimmel says the lack of industry standards for catalogs led Ascension to develop the product in-house. "We just were not prepared to wait for the development of industrywide standards for a global catalog. So we bit the bullet and took the time and the effort to develop it. Now we own the global catalog and it is implemented in two of our ministries." Actual catalog development work was performed by a combination of Ascension IT staffers as well as some outside consultants brought in for the project.

When the online catalog is fully implemented, roughly 90-95% of Ascension's buying will be done online, encompassing everything except major equipment.

The move back to self-contracting has brought some added duties to the purchasing department. Instead of implementing contracts that were negotiated by the GPOs, purchasing is now negotiating contracts to support the online catalog that end users will buy from.

There are other, less technology-heavy initiatives that have saved Ascension money in its supply chain redesign as well. So far, it has saved more than $5 million by simply renegotiating existing contracts among organizations, using the lowest price found in the Ascension system as a baseline. Contracts for cardiology and orthopedic products, such as stents and implants, were renegotiated first, as they are viewed as high-ticket one-time use items.

Ascension has also leaned on its relationship with Medline Industries, its exclusive distributor, to reduce warehousing costs and improve shipping costs through use of activity-based costing.

Ascension is using three performance measurement initiatives to monitor the benefits. "One is a high-level review that compares costs systemwide and hospital-by-hospital with other hospitals to see how they compare. The second measurement tracks the specific initiatives to find out if Ascension obtains what it thinks it will obtain. The third is an item-by-item tracking to see if prices have changed since the initiative was implemented.

The project is progressing well and purchasing staffers at Ascension have been reacting with "three parts excitement and two parts nervousness" according to Kimmel.

"Healthcare is different from other industries. We often lag other industries in putting our buyers in control of our information and leverage. We are in the process of becoming more buyer-centric, which has some suppliers wondering what we're doing. But we have fielded a fair amount of interest from other health systems interested in what we're doing as well."

Long term, Kimmel believes the GPOs will continue to serve smaller systems and freestanding hospitals better, but larger systems will move to self-contracting models, using GPOs selectively.