Having a reliable supply chain is paramount to the successful operation of any health system or hospital, perhaps now more than ever.

Despite the importance of maintaining stock and availability of myriad products—from the critical to the mundane—those charged with keeping the supply lines up and running face constant and unprecedented pressure to reduce costs. And of course, these tensions come at a time when it’s easy for practitioners to be distracted by new technology—with new price tags as well.

Where We Are Now

One of the most significant effects of technology on the healthcare industry in recent years has been to increase the availability of benchmark pricing information. In the age of the Internet, group purchasing organizations (GPOs) no longer can hold this information close to their collective vests. In response, manufacturers in recent years have developed complicated rebate structures to offer customers significant discounts—provided all the conditions are met. However, this approach also has the effect of masking the real price of supplies.

Sudhi Rao

“The sources still have a higher price, but the rebate structure brings the net cost of the product lower,” says Sudhi Rao, managing director with FTI Consulting, New York. “And that is definitely affecting how healthcare supply chain contracts are being managed now.” 

Because it is so easy to make a misstep along the rebate pathway, Rao says it is very important that healthcare providers’ legal departments and supply chain managers use great caution in how they source supplies and services and what kind of contracts they sign.

“The complexities of contract management are something the industry has always had trouble with, especially in the healthcare supply chain,” Rao says. Part of the reason has been the difficulty in finding good contract management software, but Rao notes the past few years have seen great improvement in the contract management modules for various enterprise systems.

More healthcare providers also are using software to draft requests for proposals as well as to help sort out complicated proposals and provide value analysis. Meanwhile, manufacturers and suppliers are employing a variety of software tools of their own.

Where We're Going

Pam DaigleA wealth of new and upgraded products are being introduced into the supply chain mix, many with built-in intelligence and communications. This influx has highlighted the need for evaluation of care based on current recommendations and professional guidelines, according to Pam Daigle, vice president of strategic sourcing and performance groups at Charlotte, N.C.-based Premier Inc.

“There needs to be a continued evaluation of care delivery based on what the evidence is and what guidelines say around particular care,” Daigle says. “When suppliers for value-based contracting make a claim—for example, that if you use their product, patients will have a better outcome—it is essential to then go back and examine the evidence to validate these claims.”

Daigle also advocates for clinically driven formularies that are selected based on both quality and cost data. “The real purpose behind formularies is to create more opportunity to reduce variation and standardize care,” she says. “Any time you can drive standardization, you’re going to drive improved care.”

Another example: offering a manageable number of standard kits for certain types of patient care versus stocking myriad individual components. “Using a clinically approved, standardized kit will support the established protocols throughout an institution,” Daigle says. “This practice also creates more negotiating leverage with suppliers, as more volume on fewer items can lead to further price concessions.” 

Some cost-conscious health systems and hospitals are instituting more open communication to engage staff to adopt cost containment and reduction measures.

“There needs to be a link between clinical utilization and supply chain workers responsible for managing supplies,” says Rao. With 40 to 45 percent of a typical health system’s total spend related to supply chain, it’s an area with great potential for savings.

“When you look at the supply chain on its own, the relatable analytics that come from the supply chain generally are not as robust as they need to be,” Rao says. But organizations that manage to link to utilization data being collected by electronic health records and correlate those data with how supplies are being consumed go a long way toward better understanding their costs. 

“Many organizations struggle because they don’t know their costs, and it may be because they haven’t spent enough resources or energy to create that link,” Rao says. “Without the data, how can a healthcare leader tell a story with dashboards and visualization through the analytics to explain the value that is being created?”

Although the concept is easy to appreciate in the clinical arena, Rao says there is another aspect of the supply chain budget that frequently does not get the attention it deserves: purchased services. Including necessities as diverse as landscaping, laundry, and elevator maintenance, to name but a few, this portion of the supply chain budget is handled by many different entities or business owners within the provider organization. Budgeting these items frequently consists of a blanket purchase order based on prior spending.

“It is extremely difficult to go after cost savings in purchased services,” Rao says, “and the reason for that is there are no benchmarks out there. For example, how much does elevator maintenance cost? Well, it depends on the age of the elevator, the number of rides taken, how many times it has been maintained, and so on.” For healthcare finance leaders who choose to initiate a more focused review of purchased services, Rao suggests beginning with this question: “What kind of metrics do I need to create to manage these purchased services?”

What You Need to Know

  • Constantly evaluating products and sharing what is learned can help providers base care on real-world evidence, obtain better pricing, and improve outcomes.
  • Educating physicians about the cost of supplies enables them to exercise good financial stewardship and drive efficiency in the delivery of care.  
  • Health system and hospital leaders should spend less time worrying about pricing around commodity supplies, like gloves and gowns, and invest labor and resources to focus on delivering value around the more complex, expensive supplies.
  • When good analytics are available, a clear direction from the C-suite makes it easier for the supply chain department to go after cost savings.