The integrated supplier: key to cost management and multi-franchise capitation contracting

Capitation...most healthcare providers do not work under it, comprehend it, or even want it, yet supply capitation contracting seminars are popping up everywhere creating the feeling that the bandwagon is leaving, and it might be time to get on board. Not true. Supply capitation is not for all organizations. Capitation contracting is not easy and there are not many successful models to help the uninitiated. If a panacea is sought for reducing supply costs, capitation is only one component of a systematic strategy to reduce materiel costs. This article suggests a direction using the Group Health Materiel Management (Group Health Cooperative of Puget Sound, WA) experience as a point of reference. It advocates a systematic approach that focuses on expense reduction in: cost of goods, holding cost of inventory, labor cost associated with all materiel processes, distribution cost (transportation and par stock pick, pack, and replenishment), product utilization, variation in product standards, and waste stream byproducts. At Group Health (GH) these issues are primarily addressed through the use of: information systems, supplier certification/selection processes, group purchasing compliance, supply channel management, supply capitation contracting programs, standardization, and utilization management. Because of managed care organizational structure, Group Health Cooperative supply capitation contracting, as performed at GH, is discussed not as a quick fix solution but in the spirit of sharing our experience with others who may be considering it as a cost savings tactic in the context of a broad-based materiel management strategy. This article highlights the experiences of GH beginning with materiel management's business process assumptions toward multiple-franchise supply capitation.