Hospital Supplier Flexes Muscle : Medicine: Del Mar-based firm helps hospitals contain costs by changing the way in which they buy supplies.

By GREG JOHNSON

Oct. 9, 1990 12 AM PT

TIMES STAFF WRITER

Suppliers of medical products and services have learned to listen to American Healthcare Systems, a 6-year old, Del Mar-based company that is owned by 40 nonprofit health-care organizations that operate more than 1,100 hospitals and related facilities in 46 states.

That’s because AHS is redefining how the 40 owners of the company--which reported combined revenue of $18 billion during 1989--spend a good chunk of their purchasing dollars.

AHS vice president Jack Bernard on Monday declined to state the value of contracts that AHS has negotiated for its owners. However, during a 1985 interview, an AHS executive said that the company had arranged about $2 billion in contracts for supplies and services. “The number is now in the billions,” Bernard said. “We’re clearly one of the leaders.”

Group purchasing is not a new concept, according to health-care industry experts. Cost-conscious hospital administrators around the country last year funneled a record $10 billion through various group purchasing organizations, according to Modern Healthcare, a Chicago-based industry magazine.

Independent hospitals have long joined state and local hospital groups that have attempted to negotiate contracts for goods and services at better terms than the hospitals can negotiate on the open market. Hospital administrators also have turned to national organizations such as VHA Hospital Supply Co., which in 1989 arranged contracts value at $2.3 billion for its more than 600 member hospitals, according to Sandra Eulberg the Irving, Texas-based company’s manager of marketing communications.

But spokesmen for several large health-care products and services suppliers credit AHS with shaking up the industry by introducing long-term contracts that treat suppliers as “corporate partners.” AHS’ purchasing system borrows heavily from Japanese business practices that stress long-term relationships between suppliers and customers.

“I think the AHS (purchasing) approach has addded a new dimension to the whole concept of group purchasing arrangements,” said Charlie Bearup, a Laguna Hills-based health-care executive with Dupont Corp. “I clearly see AHS on the cutting edge.”

Three years ago, when AHS introduced its first long-term contracts, “Dupont’s business (with AHS) was soft and not growing,” Bearup said. “But with our five-year agreement, we’ve entered a win-win situation with AHS . . . our business is up 150% (with AHS) and we’ve just completed the third year of our agreement.”

Contracts arranged by group purchasing organizations are only effective if member hospitals actually purchase the goods, Bernard said.

Consequently, purchasing groups around the country are developing systems that that track whether member hospitals are purchasing product as recommended by the contracts, Bernard said. Contract compliance is important because contracts increasingly include performance-related price cuts that reward hospitals with lower prices, according to suppliers.

“For Dupont to win, (AHS) has to deliver market share to us and maintain it,” Bearup said. “As long as they can protect (the supplier’s market share) we’re in a position to pass along savings.”

“It doesn’t matter if 50% of our members are buying (through a VHA contract) if they’re all little, itsy-bitsy hospitals,” Eulberg said. “It’s a question of how much market share we can deliver” to the suppliers.

When properly arranged, group purchasing “can be a win-win situation” for hospitals and suppliers--as well as for patients who face ever-increasing health-care costs, said Larry McGinnis, a national account manager for 3M, which has seen a three-fold increase in its business with AHS in recent years. “We can reward our best customers, who use the most products, with the best prices,” McGinnis said.

AHS has, in recent years, arranged contracts for syringes, X-ray film, high-tech equipment used in operating rooms, intravenous fluid and cleaning products. Individual contracts arranged by AHS “range into the hundreds of millions of dollars” and are renewable in five-year options, Bernard said.

In addition to purchasing, AHS’ 45 employees operate a venture capital fund that invests in health-care products companies, an insurance company that offers self-insurance options to member hospitals and a national research and educational institute.

While its membership list includes more than 30 hospitals in Southern California, its only affiliated hospital in San Diego County is Paradise Valley, a member of the Adventist Health System.