Healthcare Matters

Novation just announced that it has surpassed the $1 billion mark in rebates paid to members participating in its “Standardization Program.” Programs-that-pay typically inspire customer loyalty, so at a pace of about $20 million paid in rebates per quarter, it’s not hard to understand why this program is a winner.

The company says its program is focused on driving standardization across common non-clinical preference items (i.e. generics, med/surg commodities and certain pharmaceuticals). And that’s all true. But it works because Novation’s private label brand, NOVAPLUS, has become close to a $2 billion business that can easily afford to pay back a portion of the cash it’s making. And it works because in terms of quality, NOVAPLUS products are the equal or better than their branded equivalents. In fact, a statistically significant percentage of them are probably coming from the same factories.

This isn’t your typical admin-fee driven business –and that’s why, among other reasons, several of the other largest GPOs claim they don’t like the business model. For example, how can you negotiate the best possible price from a branded manufacturer if you’re developing your own private label brand for the same products? Anyway, that’s what gets said…and it’s hard to swallow because the higher preference items aren’t being private labeled –just the commodities– and bundling is prohibited.

Whether Novation’s charter obliges it to redistribute the profits it generates under its private label isn’t the point. The point is; GPOs are a “natural” for private labeling and the pull to do it is proving too hard for them to pass up. Novation and Amerinet seem to have taken their bite of the apple in plain view while their competitors continue to grapple with how best to legally structure their private label interests so they remain/appear at arms length. I think it’s time for them to get over it.

In fact, I think it’s time for member-driven GPOs to fully disclose the pricing programs, including the rebate and discount arrangements that they are making with manufacturers, because 15% –20% savings on commodities being sourced from low cost countries while being a great incentive to standardize, is only the tip of the iceberg when it comes to the real savings that are available.

—Tom Finn