Attack Of The Health Care Colossus

If Premier's hospitals buy together, its clout will be frightening

These are times that test even the faith of Sister Monica Heeran, CEO of PeaceHealth, operator of five Catholic-sponsored hospitals in Bellevue, Wash. Under pressure from government, business, and consumers to cut costs while maintaining quality care, Heeran has watched nervously as many of PeaceHealth's nonprofit brethren nationwide succumb to the temptations of selling out to deep-pocketed health-care companies such as Columbia/HCA Healthcare Corp. But these days, Heeran is hopeful that her team can take on Wall Street. "In the scheme of things, we're a small organization, but now, we'll have the leverage of a large one," she boasts.

Why the newfound confidence? PeaceHealth is getting that newfangled religion. During the past nine months, three of the nation's largest hospital cooperatives--including the one that contained PeaceHealth--have joined forces to form Premier Inc., a financial behemoth of 1,757 hospitals that hopes to leverage its size in bulk purchasing of medical supplies. While health-care purchasing groups have existed for at least two decades, Premier's is by far the largest ever, with nearly a third of the nation's U.S. hospitals and some $10 billion in annual purchasing volume. Already, the neophyte alliance has pushed prices down on many medical and surgical supplies. And analysts say Premier, which negotiates group contracts with manufacturers on behalf of its hospitals, could cut some $2 billion from the nation's health-care costs by 2000.

"REAL TEST." Suppliers are getting twitchy over the purchasing colossus. "Our other customers aren't getting anywhere near the prices they're getting, but I'm sure they'll start trying," frets an executive at one Premier supplier. "But frankly, this is not a contract we can afford to lose."

Even as Premier's buying power grows, its toughest challenge to date is nearing. On May 13, the alliance will try to get its hospitals to sign an agreement to purchase the bulk of their medical supplies and drugs though the cooperative. "No doubt, they have become a powerhouse overnight," says Mark Banta, a health-services analyst at Salomon Brothers Inc. "But getting compliance with contracts from their hospitals is the real test."

Premier, whose hospitals generate $89 billion in annual revenues, is already starting to flex its muscle. In separate deals announced in late March, Premier won savings of 30% over current costs for dye used in medical imaging from Mallinckrodt Group Inc. and locked in 25% savings on medical-imaging film from Sterling Diagnostic Imaging. Robert O'Leary, Premier's chief executive, says the group is negotiating with Glaxo Wellcome for steep discounts on a broad range of supplies. "Suppliers know they'd better sharpen their pencils or risk losing out to someone bidding more aggressively," O'Leary says. "If we can't get market leaders to talk turkey, we'll do the deal with smaller players."

Industry analysts say Premier's nascent market leverage could stymie growth at for-profit hospital chain Columbia HCA, which grows primarily by buying hospitals that have been weakened by out-of-control costs. Dan Moen, president of Columbia Sponsored Network Group, a unit of the giant, says Columbia can get better deals because it is acting on behalf of wholly owned hospitals. "I don't even think they come close," Moen says. "We get the best price of anyone on supplies." But O'Leary insists his cooperative will give Columbia a run for its money.

BIG SQUEEZE. Fairview Hospital & Healthcare Services, a $600 million network of hospitals in Minneapolis, is one Premier member hoping O'Leary is right. Fairview has been grappling with how to trim the $50 million a year it spends on medical and surgical supplies and the $50 million it spends on processing and administration. Says Richard A. Norling, Fairview's president and CEO: "We're expecting Premier to help us achieve at least a 10% cost savings" on its outlays for medical supplies and administration.

For now, Premier must successfully promote the benefits of climbing on its bandwagon. And some constituencies may not be an easy sell. While physicians don't sweat about swapping products such as stethoscopes for cheaper models, they resist when it comes to switching supplies such as catheters and prosthetics--changes that often require retraining. "There are certainly going to be some strong preferences expressed by physicians," says John N. Klees, corporate vice-president for materials management at Legacy Health Systems, a Premier member that operates four hospitals in Portland, Ore. But if Premier has its way, doctors and everyone else at its hospitals will soon be singing from the same hymnbook as PeaceHealth.

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