Industries in transition often have many winners and losers. There is no bigger industry in transition at the moment than the U.S. healthcare industry. At approximately 18% of GDP, and on an unsustainable cost curve, the industry has to find ways to better manage costs. In addition to the cost issue, there is a wide variation in the quality of care. This is partially because, in the past, providers had no real monetary incentive to improve quality. With healthcare reform, many new incentives are in place for providers to better manage costs and quality. One big winner to emerge from this transition is likely to be hospital supply chain executives.
Businesses in transition and under financial pressure often turn to the supply chain as a source of savings as well as strategic advantage. A high-performing supply chain and procurement organization should be able to take substantial costs out through smarter sourcing strategies, and creative ways to manage parts of the value chain. Having worked in procurement in a Fortune 50-business and studied procurement transformations, I saw first hand the impact that a well performing supply chain and procurement capability can have on a business.
In healthcare, it’s not as if providers haven’t been under financial pressure or trying to improve their supply chain. This has been an ongoing process. I can remember twenty-plus years ago when I worked in a hospital. At that time, managing suppliers and costs was a big focus. What is different now is that the payment system and incentives are finally beginning to get aligned around better managing cost, quality, and customer satisfaction. These are typical metrics that any well-run business has incentives to focus on. In a normal market, not performing well on costs, quality, or customer satisfaction usually means that you eventually go out of business. The old healthcare market was largely protected by a lack of aligned incentives on quality as well as a cost-based, fee for service payment system that encouraged more activity.
As we look forward to the next decade, hospital supply chain executives should be one of the big winners and a major force. There are five reasons behind this argument:
- Pressure on costs: Given the U.S. debt, fiscal issues, and demographic trends, there will likely be continued pressure on reimbursement rates. This will translate into further cost pressures. When businesses are under significant cost pressures, they naturally turn to suppliers as one area of opportunity.
- Focus on quality, customer satisfaction, and outcomes: The payment system finally provides incentives to improve quality and patient satisfaction. Parts of the CMS (Centers for Medicare and Medicaid Services) payment are now tied to patient satisfaction or items like readmission penalties. It is at least a start to align payment to quality. Suppliers have the potential to have a meaningful impact on these metrics – positive or negative. Therefore, supply chain executives should play a critical role in helping to impact these metrics.
- Better aligned physician incentives: Whether it is through hospital employment of physicians, gain-sharing programs, bundled payments, or other mechanisms, hospitals and payers are finding ways to better align the interests of physicians to help the provider better manage costs and quality. This means the enormous task for materials management executives of aligning purchasing decisions should get a little easier.
- Evidence-based purchasing: The majority of hospitals now have some form of value analysis committees (VAC) or teams set-up for many service lines. These teams are evaluating the cost and performance of suppliers’ solutions. Because of the overall movement to evidence-based medicine, the teams are using data to make decision. As one head of materials management said to me, “I show the physicians the variation in prices for medical devices from different suppliers as well as clinical outcome data which is similar – and then ask why should we be paying so much more for a particular device, when outcome are the same?”
- Disrupt parts of the value chain and service lines: New disruptive competitors are entering the market to gain share of specific service lines. Also, hospitals have been on a steady path of outsourcing non-core functions like housekeeping, food services, etc. Supply chain executives should play a critical role in helping the provider find new and different ways to create value through disrupting the value chain, outsourcing, or finding new partners to further the provider’s mission.
All of these signs point to a rising supply chain and materials management influence and pressure on med tech companies who have disorganized pricing, unclear value propositions, or poor evidence of value. Med Tech companies that have traditionally sold to the user buyer (physicians and clinicians) and have avoided or had a confrontational approach to the supply chain and materials management department should be worried.