$30 million back on hospital books as part of new purchasing model

At yesterday’s Central East LHIN The Scarborough Hospital (TSH) was asked to treat $2 million it thought it had coming back from Plexxus as “bad debt.”

Plexxus is a not-for-profit owned by 11 GTA hospitals, including TSH. A group-purchasing company, it uses the size of the 11 hospitals to negotiate better pricing on goods and services used by these hospitals. Many of the people who do purchasing for Plexxus are still employed by the 11 hospitals, some of them members of OPSEU.

As one of the 11, the question is, how could TSH write off bad debt essentially owed to itself, especially when the decisions on how this money got stranded was made by the group of hospitals?

David Yundt, President and CEO of Plexxus says he prefers not to call it bad debt, which suggests Plexxus is not paying back what it owes to its member hospitals.

The reality is financing for Plexxus’ projects is usually done through the hospitals given Plexxus does not have any assets to borrow against.

In the past, hospitals were charged essentially what amounted to retail prices on the good and services it acquired through Plexxus, and then at the end of the year received a rebate based on the actual price Plexxus was able to negotiate. That rebate would be minus Plexxus’ costs, including the financing for special projects.

As of April 1st the hospitals are on a less complex business model – one where the goods and services are passed on at the cost that Plexxus negotiates for them. In return the hospitals pay a fixed annual fee to keep Plexxus running.

In the transfer to the new business model costs of IT systems to make everything run had to be repatriated to the member hospitals. These IT costs were supposed to be recovered over time from the rebates. Without the rebates, $30 million in IT costs have to be placed back on the books of the hospitals.

According to Plexxus’ website, last year $8.8 million of savings were returned to the hospitals. With savings directly passed on to the hospitals, Yundt says it could be as high as $25 million this year. With hospitals feeling the pinch of a provincial funding freeze, anything more than can squeezed from this arrangement is bound to look attractive.

For The Scarborough Hospital, with a $17 million deficit, the LHIN is hoping the $2 million in costs can be amortized over several years. Had the business model not changed, essentially would have happened ordinarily through the rebates.

Plexxus’ membership includes: Holland Bloorview Kids Rehabilitation Hospital, Lakeridge Health, Mount Sinai Hospital, North York General Hospital, Rouge Valley Health System, St. Joseph’s Health Centre, The Scarborough Hospital, Sunnybrook Health Sciences Centre, Toronto East General Hospital, University Health Network and Women’s College Hospital.

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