Evaluating group purchasing through a prime vendor

Abstract

Use of a prime vendor by a drug-purchasing group representing 17 community hospitals is described and evaluated for cost effectiveness. The group was formed in 1981 by 15 hospitals in Minnesota and one each in Wisconsin and Iowa. The group solicited bids to select one drug wholesaler (distribution center). Drug-product manufacturers submitted bids to the group, and contracts were awarded to low bidders who agreed to use the distribution center. All 17 hospitals were evaluated for differences in inventory value and inventory turnover before (1980) and after (1982) initiation of the prime-vendor system; hospitals in the group were paired with control hospitals to eliminate environmental bias. A detailed analysis of inventory and operating costs was conducted in one of the hospitals. The hospitals in the purchasing group reduced drug inventory value by 30.1%, increased inventory turns by 55.3%, and purchased 72.8% of all their pharmaceuticals (based on dollar value) through the distribution center. The group obtained a distribution center service fee reduction of 39.2%. Hospitals in this group showed greater decreases in inventory value and increases in inventory turnover than the controls. The detailed analysis at a single hospital showed that cost savings included direct savings on inventory investment and order handling and indirect savings from elimination of inventory carrying costs and costs of processing checks and purchase orders. Operating costs were reduced by group purchasing of drug products from a prime vendor. Inventory control and purchasing practices improved.