Real Support of Local Businesses Requires Vision, Removal of Safe Harbor and End to GPO Obstructions

Many community hospitals and other organizations are to be commended for considering the impact of their purchasing decisions on the community that supports their mission.  In our experience, many such commitments tend to stay in the Board room and rarely extend to where the rubber meets the road.  Most organizations that understand the dynamic impact of the state and local tax base on healthcare funding seem to quickly lose their resolve if their philosophy inconveniently increases prices by a penny or two.

The chafe of a “buy local” philosophy comes when factors less tangible than price must be quantified.  The approach of many organizations is to take their low-service prices to high-service vendors and say, “we really like your service; if you can beat this price, we will give you our business”.  Not exactly a visionary notion.  Those stopping so far short of the mark expose any “buy local” philosophy as a sham. 

Years ago, I was impressed by the suggestion from a supplier competing with a local company that if I felt too guilty about moving the business, I could take the substantial savings from the conversion and give half of it back to the local guy.   So don’t count me among those that think the survival of our endangered community hospitals is so unimportant as to throw money away just to appease a few Rotarians.

Some buyers will recognize the wisdom of paying a premium for local service, though the economically justifiable amount may be elusive.  Some organizations have identified “minimal premium”, but some go further – saying that 5% to 10% is generally reasonable.  This may be minimal for office supplies, but it certainly isn’t minimal for medical/surgical products where overall gross margin is in the same range.  Logically, this premium percentage would go down as the dollars spent go up.  Still, the key is for any premium to be objectively derived and not just an amount that the hospital’s transient financial condition can absorb for the sake of local good will. 

Everyone would agree in principle that support of local businesses is a good thing.  Too often, that local support is limited to the companies owned by board members and other community movers and shakers whose oxen stand to be gored.  Yet the logic and economics supporting “buy local” extend further to the county, the region, the state, and then the multi-state region most proximal to the buyer. 

The buyer’s location naturally affects the proximity of viable suppliers across the range of products and services.  There are many more locally owned office suppliers than medical distributors, and fewer still local MRI manufacturers.  Yet, “the closer the better” generally applies to any supply relationship.

But, why exactly is it that local suppliers are often perceived as not being competitive with the national “suppliers” from the “Group Purchasing Organization (GPO) Alliance?  After figuring out what your local supplier may really be “worth” in dollars, that is the next best question that is too rarely asked. That can of worms bursts open with economic, political, financial, and even legal questions.

In each competitive category, there is a critical mass of investment and volume required to be “competitive” at the highest level.  Where that mass is lacking, the business had better define their niche and be content to serve it or else get out of the business (often by selling to a national company).  In some businesses, assumption of the risk level required to be fully competitive is unattractive to local ownership.  In others, there is an emotional reason (wanting to stay “small”) or Peter Principle (the business grows to a point just above the owners’ level of competence) at work.  Still others may be very willing and very able, but face questionable, perhaps illegal, structural obstacles to remaining “competitive”.  Those that are willing and able warrant more in-depth dialogue that could lead to partnerships giving the healthcare provider the best of both worlds.

It is not coincidental that, for hospitals, this “buy local” issue has a “Safe Harbor” and “GPO Abuse” angle.  Many GPO initiatives to contract with small and disadvantaged businesses are smoke screens to deflect media criticism and gain “diversity” talking points.  The truth remains that for many GPO’s, there is financial benefit in cramming the large national suppliers, particularly distributors, down the docile throats of their members.  

It has long been the habit of GPO’s to pressure their manufacturer contract holders (those that typically sell through distributors) to restrict access to the discriminatory pricing they have negotiated to the distributor(s) handpicked by the GPO (and paying fees for the privilege).  With access blocked by the manufacturer to these discriminatorily low “contract” costs, the disfavored distributor (who is not paying fees to the GPO) that is otherwise fully authorized to distribute the manufacturer’s products finds they are blocked as well from being allowed to compete for the customer’s business.  Though Section 2(a) of the Robinson-Patman Act guarantees similarly situated and competing resellers access to equal cost from manufacturers when competing for the same customer’s business, some GPO’s have persuaded their manufacturing partners to risk violation of the law, or so it would seem.  The mothers of the manufacturers’ legal advisors must have forgotten to ask them at an appropriately early age: “If Johnny robbed a bank, would you do it too?”.

This is a complex issue that defies sound-byte explanation, but it is our tolerance for payment of administrative fees resembling sales commissions (or bribes) that fuels the GPO obsession to limit the choice of distributors available to their members.  Without the Safe Harbor to protect them, and in virtually any other industry, such fees would be seen as improper or illegal kickbacks that serve the interests of the GPO at the expense of their members.

Community hospitals have enough problems without their GPO partners standing in the way of a balanced and reasoned support of local businesses whenever practical.

Everything is still local and nothing is more local than healthcare.  Community hospitals and community businesses are both endangered species.  In many ways they will sink or swim together.