THE MISSISSIPPI LEGISLATURE

The Joint Committee on

Performance Evaluation and Expenditure Review

Report # 552

An Analysis of Selected Procurement Decisions of the University of Mississippi Medical Center

Executive Summary

Introduction

Problem Statement

In 2009 and 2010, complaints arose about the University of Mississippi Medical Center’s procurement of building automatic controls systems.1 The complainants believed that because the medical center was a member of the University HealthSystem Consortium (UHC)/Novation2 group purchasing organization (GPO), some bidders were unfairly excluded from competing for the medical center’s building automatic controls systems equipment and installation services. Also, the complainants were concerned that items that the University of Mississippi Medical Center (UMMC) purchased through the UHC GPO were more expensive than they would have been if not purchased through a GPO.

To address the complaints, PEER commenced a review of UMMC’s procurement of building automatic controls systems through the UHC GPO. However, PEER subsequently determined that UMMC’s use of the GPO agreement was not a significant factor in its building automatic controls purchase decision.

Therefore, PEER addressed the larger issue of whether UMMC’s participation in the UHC GPO has enabled it to procure quality products at a lower price in an efficient manner. PEER also sought to determine whether UMMC complied with legal or regulatory requirements and best practices for its procurement of building automatic controls systems.

Scope and Purpose

Concerning UMMC’s use of the UHC GPO, PEER addressed the following questions:

• Is it good public policy for UMMC to participate in health care group purchasing organizations such as UHC?
• Has UMMC taken steps to assure the price benefits of its participation in the UHC GPO?

UMMC participates in at least one other health care GPO (Med Assets), but only the medical center’s agreement with the UHC GPO was within the scope of this review.

Concerning complaints regarding UMMC’s procurement of building automatic controls systems, PEER addressed the following question:

• Did UMMC comply with legal or regulatory requirements and best practices for its procurement of building automatic controls systems?

Background

A health care group purchasing organization contracts with health care product suppliers to obtain set pricing for products based on an expected level of commitment and in return, members are able to purchase from the suppliers for the GPO’s contracted prices instead of having to negotiate the prices individually. In 1996, the Legislature gave UMMC the legal authority to enter into group purchasing agreements.

UMMC chose to enter into a group purchasing organization in order to gain additional buying power as well as a way to simplify the procurement process. UMMC purchases most of its hospitals’ and clinics’ commodity items through UHC, but does not utilize the GPO to purchase commodities for its academic and research programs.

In CY 2010, UMMC spent approximately $126 million for commodities purchased through the UHC GPO. For that year, UMMC’s expenditures for commodities through the UHC GPO represented 90% of UMMC hospitals’ and clinics’ total commodities expenditures.

UMMC’s Use of Health Care Group Purchasing Organizations

Is it good public policy for UMMC to participate in health care group purchasing organizations such as UHC?

PEER’s review of the literature from the first decade of the 2000s on the performance of group purchasing organizations yields a mixed bag of research and a significant lack of consensus on the effectiveness of health care group purchasing organizations. Thus PEER believes that the ultimate decision of whether it is good public policy for UMMC to continue to participate in GPOs will depend chiefly on the quality of the medical center’s future contract provisions and performance measures. Under the current contract, these accountability elements are not adequate for effective decisionmaking.

Has UMMC taken steps to assure the price benefits of its participation in the UHC GPO?

UMMC’s accountability system does not contain the elements needed to help ensure that UHC secures the best products at the best prices and avoids anti-competitive practices because UMMC does not have measures in place to examine the comparative differences in GPO prices versus market prices. Also, UMMC and UHC have not complied with the contract provision regarding the establishment of performance measures.

UMMC’s Procurement of Building Automatic Controls Systems

Did UMMC comply with legal or regulatory requirements and best practices for its procurement of building automatic controls systems?

While UMMC projects funded through appropriations or bonds must comply with Department of Finance and Administration (DFA) regulations, projects utilizing self-generated funds may be contracted without significant control by DFA.

While UMMC did not violate any law or regulation regarding procurement of building automatic controls systems in the circumstances PEER reviewed, UMMC could improve its management of the process for procuring such systems to allow for greater competition among vendors.

UMMC did not conduct a formal cost-benefit study or medical safety risk assessment prior to making its decision to remain with Johnson Controls as the sole-source provider for building automatic controls systems for its medical and research facilities.3 As a result, UMMC did not assure that it did not restrict competition among potential vendors and thus could potentially be paying more than is necessary for its building automatic controls systems.

UMMC sought quotes from two vendors (as required by DFA) for building automatic controls systems for one of its non-medical, non-research facilities, even though two additional controls vendors have been attempting to compete for UMMC’s business. Therefore, although UMMC followed DFA’s guidelines for procuring the systems, UMMC did not take advantage of an opportunity to assure that it obtained the lowest and best price.

Recommendations

UMMC’s Use of the UHC GPO

1. UMMC should identify and consider all reasonable alternatives in procuring products and managing its supply chain. UMMC’s decision to move forward should be based on a cost-benefit analysis that fully assesses and documents UMMC’s supply chain needs and the costs and benefits of each proposed supply chain solution. The cost-benefit analysis should include, but not be limited to, assessment of each of the following:
• the direct pricing of purchases associated with each procurement option (e. g., open competitive solicitation to obtain pricing for a sample of products UMMC typically purchases under the GPO to compare to GPO pricing);
• the costs of contracting associated with each procurement option, including the staffing costs associated with each procurement option;
• the beginning-to-end procurement time associated with each procurement option and the effects the time differences may have on the supply chain; and,
• the oversight costs associated with each procurement option.
2. If UMMC chooses to stay in a GPO, UMMC should consider taking the following steps to increase its oversight of the GPO’s performance.
• UMMC should amend its group purchasing agreement with UHC to include a net costs measurement figure (potentially subject to inflation) for all products purchased under the GPO as opposed to, or in addition to, the cost savings figure that UMMC currently uses to track product savings for products in which savings occur.
• UMMC should review the prices of products purchased under the GPO to assess where GPO prices were held steady year-over-year, where product prices increased at the rate of inflation, and where product prices increased at a rate above the rate of inflation.
• UMMC should establish a system to ensure that its group purchasing agreement is successful in delivering lower prices than the market in which UMMC would compete. Such a system would monitor the GPO’s performance by comparing the GPO prices for a sample of products purchased through the GPO to market prices available outside the GPO (either via self-contracting, market basket study, or some other means) in order to provide adequate oversight. When comparing product prices, UMMC should compare the net price for products (rather than just unit prices) in order to account accurately for all applicable manufacturer rebates, GPO patronage dividends, or other available discounts that could be tied to the purchase of the product.
• Using the above-referenced sample pricing study as a guideline, UMMC should consider increased opportunities to purchase outside the GPO when financially beneficial.
• As a condition of its GPO contracts, UMMC should require that its GPOs provide it with annual independent audits to ensure that the amount the GPO retains to cover its costs is reasonable and thus that GPO members are maximizing their patronage dividend returns.
• In assessing the value of continued participation in a GPO, UMMC should calculate the value of the GPO’s value-added services (net any costs associated with the provision of such services) and the cost avoidance potential resulting from UMMC not having to bid all the products.
• UMMC and UHC should comply with provisions of the contract that require establishing measures of success and benchmarks to track the GPO’s progress of goals and objectives. Performance measures (beyond the financial incentives addressed in the contract), including supply chain services, should be developed to measure the success of the GPO under the contract.
  
  For example, under the Supplier Diversity Program and Local and Small Business Commitment, a performance measure might be “UHC will work with UMMC to add X number of women, minority, small business, and veteran-owned business to UMMC’s list of customized contracts for each product segment in which UMMC procures products under the GPO.” For product standardization, a performance measure might be “UHC will work with UMMC and its clinical and supply chain staff to increase product standardization by reducing product variation within non-clinically preferred categories by X%.”

UMMC’s Procurement of Building Automatic Controls Systems

3. UMMC should consider all reasonable alternatives in procuring, operating, and overseeing its building automatic controls system environment for its medical and research facilities. For example, in order to perform such an assessment, UMMC should talk to potential providers about the options available (including sole source, dual source, or multi-source) in terms of supplying the hospital with a technically feasible, cost-effective, secure building automated controls system that meets UMMC’s needs in both the short term and the long term.
   
   Given the capabilities of the potential options, UMMC should conduct a documented risk assessment to determine whether there is an increased risk to patient care by maintaining a multiple-source system. If an increased risk to patient care exists in maintaining a multiple-source system, UMMC should consider whether the increased risk could be adequately addressed through a back-up plan.
   
   UMMC should then conduct a cost-benefit analysis to assess fully the costs associated with maintaining a sole-source system (including the effects of sole-source pricing, the costs of maintaining multiple providers’ parts, and the overlap of such systems) versus maintaining a multiple-source system.
4. While UMMC may only be required to solicit proposals from no less than two contractors for its non-medical and non-research facilities, UMMC should attempt to obtain building automatic controls systems for the best value, including making an effort to seek proposals from all bidders that meet documented, justified bidding qualifications and which have sought an opportunity to compete to provide UMMC with products or services.

1  A building automatic controls system is a computerized, intelligent network of electronic devices designed to monitor and control the mechanical and lighting systems in a building. Building automatic controls system functions include keeping the building climate within a specified range, providing lighting based on an occupancy schedule, monitoring system performance and device failures, and providing e-mail and/or text notifications to building engineering staff.

2  University Healthsystem Consortium/Novation is a group purchasing organization that includes capital equipment and installation services as well as surgical/medical supplies.

3  The medical and research facilities would include the hospitals and any facility in which sensitive research is conducted (e. g., sensitive to temperature or air pressure). UMMC believes that medical and research facilities could face a risk in the event of a breakdown in the building automatic controls system infrastructure.

4  The non-medical, non-research facilities would include academic buildings (classrooms, professors’ offices, and non-sensitive research), administrative buildings, student housing, student union, and the Ronald McDonald House.

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