Novation, the largest volume group purchasing organization in the health care field, has reached tentative agreements with two national distributor organizations for its document management needs. Novation facilities could buy more than $1 billion annually in the categories covered by the contracts.

American Solutions for Business headquartered in Glenwood, Minn., and International Business Solutions Alliance (IBSA), Bowling Green, Ky., are finalizing contracts with Novation that will take effect Jan. 1, 2005. In addition, Relizon, Dayton, Ohio, is the only national direct-selling company to be awarded a tentative contract.

Moore Wallace and Relizon have contracts with Novation that expire Dec. 31. This means that RR Donnelley, which owns Moore Wallace, will no longer have a contract with the largest GPO in the medical industry. The E-Weekly has learned that both Moore Wallace and Standard Register submitted RFPs to Novation.

Contracts run for three years with the possibility of two one-year extensions. Novation is owned by VHA and University HealthSystem Consortium members. VHA and UHC also own HealthCare Purchasing Partners International (HPPI), a GPO that outsources its contracting to Novation.

The long-awaited announcement by Novation gives American and IBSA a highly sought-after entrée into hospital accounts and other medical facilities. Some hospitals--especially larger ones--have been difficult to penetrate since health care GPOs began issuing contracts to the majors several years ago. Officials with IBSA and American are thrilled by the news.

"I think [winning the contract] really validates the distributor side of the business and where we are today," says Wayne Martin, American's director of strategic operations support and vendor relations.

"We're pretty excited about the opportunity," says Craig McLain, chief operating officer for American. Like other distributors, American has stayed close to Novation hospitals clients it had before Moore and Relizon signed contracts several years ago. He notes reps have picked up some business in those accounts. But, he says, "It's going to be a real pleasure [to have a contract] instead of fighting against that."

"We have built IBSA specifically for this type of enterprise," says Paul Keith, founder, owner, president and CEO of IBSA. "This legitimizes us to the industry." He notes Novation facilities now "have incentives to purchase from us. The doors are open, the people are receptive. It's a much shorter sales cycle [than without a contract] and a tremendous opportunity, and we plan to take full advantage of it."

In a press release, Mark McKinney, founder, owner and executive vice president of IBSA, said IBSA "gives the national account the means to deal with a locally owned company in its own backyard."

Both American and IBSA are benefiting from the experience of former Relizon/Reynolds & Reynolds managers. American Sales Associate Dennis Lindblad, Tucson, Ariz., will be a national health care account manager. As a rep at Reynolds, Lindblad helped the company win the contract with Novation five years ago, according to American officials. IBSA has Rodney White on board in Dallas as vice president of health care national account sales. IBSA hired White, a former high-level Reynolds health care executive, out of retirement, says Keith.

"I am extremely proud of Larry Zavadil [American founder, president and CEO] and his crew at American Solutions for Business, and Paul Keith and his crew at IBSA," says Peter Colaianni, CAE, executive vice president of DMIA. "Both organizations are DMIA members, which is the reason for some of my pride, but more importantly I think we all can take pride in the knowledge that independents have come such a long way. These companies clearly demonstrate that independents are industry leaders."

While American and IBSA--and their manufacturers--will benefit from the contracts, it's unclear how other distributors will fare. After all, for the last several years, distributors have told hospitals they can offer better pricing than the majors and better coverage in rural areas. They have touted their independence from captive plants. Now that two distributor organizations are finalizing contracts, the marketing message by other independents may need to be tweaked.

The Contracting Process
From the outset, Novation aimed to award contracts to vendors who could provide VHA and UHC members, as well as HPPI, with products in 12 main categories: custom forms and labels; custom printing, which Novation defines as flat sheet work; commercial printing, such as "high-end marketing pieces"; envelopes; filing products; stock medical labels; stock paper; high-density filing systems; patient ID systems; electronic print and mail solutions; document destruction devices; and automated data collection. The tentative agreements with American and IBSA include endorsements in all 12 categories, the companies said. Barry Campbell, senior product manager for Novation, declined to comment on how many categories the Relizon agreement covers.

Vendors winning contracts will not be limited to those categories, however. For starters, once Novation decided which vendors it would offer contracts to, the GPO let those companies add "non-bid alternate" categories, says Campbell. Vendors picked those categories from a list of six selected by Novation officials. Both American and IBSA added promotional products to their agreements, which will give them an edge over Relizon, which did not. Additionally, contract suppliers can try to sell other products to Novation facilities, such as office products. Such products simply are not part of the document management contract. In fact, Campbell's next big project is to work on obtaining bids for an office products contract.

The document management contract process wasn't organized only by product line. When Novation began the process, it asked potential vendors to choose one of three categories in which to compete. Group 1 was designed for vendors who wanted to serve mid to large size hospitals. The majors and "large dealer organizations" were among those competing in this level, Campbell said. Group 2 was designed for vendors who would focus on small to mid-size hospitals and non-acute care facilities, including physician practices and nursing homes. Both American Solutions for Business and IBSA submitted RFPs for Group 2. Finally, Group 3 vendors had to choose a specific product category in which to compete, such as envelopes.

Campbell segmented the contract this time because, "We didn't want to have somebody like American or IBSA have to compete against someone like Relizon," he says. "For one, it would have been tough to compete." Selfish reasons, though--not kindness to distributors--sparked the change, says Campbell, who notes Novation contracts are available to more than 20,000 non-acute care customers.

"We want to be able to provide as many members as possible with aggressive pricing under a Novation contract with quality suppliers," says Campbell. "We felt that going with this type of supplier [those competing in Group 2], we were in a better position to go after the non-acute care market and the smaller hospitals than we had been in the past."

Now that the contracts have been awarded, the distinctions among the levels won't be as obvious to Novation facilities as they were during the contracting process, according to Campbell. In other words, all of the vendors finalizing agreements with Novation can sell to any size facility.

In addition to agreements with American, IBSA and Relizon, Campbell says Novation is finalizing agreements for one or two product categories with Consolidated Graphics; Enterprise Group, a Weyerhaeuser Business; FedEx Kinko's; HSM of America; Jeter Systems; NewBold (Addressograph); Peak Technologies; Ris Paper; Spacesaver; TimeMed Labeling Systems; and Unisource Worldwide Printing and Imaging Division. These companies tend to have limited offerings. "Pretty much whatever they have to offer we have under contract," Campbell explains.

Why the Contracts Matter
Campbell says it is too soon to know how much Novation facilities will buy through the contracts. However, he believes these facilities spend about $1.5 billion annually on products and services in the 12 main product categories. American's Martin says the contract has the potential to double American's sales volume. Keith, meanwhile, says IBSA plans to add about 85 affiliates in the next three months and 25 to 30 suppliers.

The contracts themselves do not guarantee business from GPO participants. GPO officials are quick to point this out, especially since the industry has come under scrutiny by the media and the U.S. Senate in recent years for its contracting practices. Generally, though, GPO participants benefit from annual rebates based on their participation with contract suppliers. This, in turn, often results in senior management at health care facilities dictating that employees order primarily from those suppliers.

Novation participants receive rebates issued by contract suppliers, as well as those given by VHA and UHC based on participation in contracts, according to Kristin Lucido, Novation's public relations director. (The GPO industry eschews the term rebates. VHA prefers the term "cooperative return," which is in the form of cash and patron's equity, outstanding equity that can be used to purchase VHA services or redeemed for cash in the future.) In addition, hospitals that participate in committed contracts are eligible for greater discounts, Lucido says. Committed contracts come with a mandatory participation level. Campbell says to be eligible for the guaranteed savings aspect of the document management contracts, facilities will need to make "a commitment over time and volume." He declined to provide further details about that aspect of the contracts.

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